ACADEMIA Letters

Indian Tax Structure

Jyoti Chaudhary, Savitribai Phule Pune University

1. INTRODUCTION: WHAT IS TAX?

Taxes are involuntary fees levied on individuals or corporations and enforced by a government
entity - whether local, regional or national - in order to finance government activities. Tax
collected is used to help build the economy of a country by meeting various public expenses.
Taxes are broadly divided into two categories: Direct and Indirect taxes

During the current economic meltdown, it is also felt that emerging countries
such as Brazil, Russia, India and China (BRIC) are expected to perform better
than the global average. ‖ V.N. Alok in Academia

2. EVOLUTION OF TAX SYSTEM IN INDIA

Interestingly, the tax system in India traces its origin to the prehistoric texts such as Arthashas-
tra and Manusmriti. As proposed by these manuscripts, the taxes paid by farmers and artisans
in that era would be in the form of agricultural produce, silver or gold. Based on these texts,
the foundation of the modern tax system in India was conceptualised by Sir James Wilson
during the British rule in India in the year, 1860. However, post-independence during the
newly-established Indian Government then soldered the system to propel the economic devel-
opment of the country. After this period, the Indian tax structure has been subject to a host of
changes.
India’s tax system has come a long way from a narrow and complicated system to one
that is efficient. That said, it is complex and needs transparency. It is imperative to codify one

Academia Letters, July 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0

Corresponding Author: Jyoti Chaudhary, [email protected]

Citation: Chaudhary, J. (2021). Indian Tax Structure. Academia Letters, Article 2163.
https://doi.org/10.20935/AL2163.

1
statutory enactment instead of having separate rules, circulars, bylaws, and guides. Article 265
of the constitution states that: No tax shall be levied or collected except by the authority of
law. Therefore, each and every tax which is collected needs to be backed by an accompanying
law. India has abolished multiple taxes with passage of time and imposed new ones. Few of
such taxes include inheritance tax, interest tax, gift tax, wealth tax, etc. Wealth Tax Act, 1957
was repealed in the year 2015.

3. CONSTITUTIONAL PROVISIONS FOR TAX

As per Part XII, Article 265 in The Constitution Of India 1949: No tax shall be levied or
collected except by authority of law.

4. CURRENT SCENARIO OF INDIAN TAX STRUCTURE

In the current scenario, India has a well-developed three tier federal tax structure with clearly
demarcated authority between Central and State Governments and local bodies. Central Gov-
ernment levies taxes on income (except tax on agricultural income, which the State Govern-
ments can levy), customs duties, Central Goods & Services tax (CGST) & Integrated Goods
& Services Tax (IGST). State Good & Services Tax (SGST), stamp duty, state excise, land
revenue and profession tax are levied by the State Governments. Local bodies are empowered
to levy tax on properties, octroi and for utilities like water supply, drainage etc. As per the
directives of the Indian tax system, the government collects taxes from its citizens to generate
income for undertaking public-works projects and improve the country’s economic footprint.

4.1 Direct Taxes in India

Direct Tax is levied directly on individuals and corporate entities. This tax cannot be trans-
ferred or borne by anybody else. Examples of direct tax include income tax, wealth tax, gift
tax, capital gains tax, out of these wealth tax, gift tax have been abolished and capital gain tax
is a part of income tax. Security transaction tax and dividend distribution tax are also parts
of Direct tax.

4.2 Indirect Taxes in India

Indirect taxes are taxes which are indirectly levied on the public through goods and services.
The sellers of the goods and services collect the tax which is then collected by the government
bodies.

Academia Letters, July 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0

Corresponding Author: Jyoti Chaudhary, [email protected]

Citation: Chaudhary, J. (2021). Indian Tax Structure. Academia Letters, Article 2163.
https://doi.org/10.20935/AL2163.

2
 It is a tax levied by the Government on goods and services and not on the income, profit
or revenue of an individual and it can be shifted from one taxpayer to another.
Earlier, an indirect tax meant paying more than the actual price of a product bought or a
service acquired. And there was a myriad of indirect taxes imposed on taxpayers.

• Customs Duty: It is an Import duty levied on goods coming from outside the country,
ultimately paid for by consumers and retailers in India.

• Central Excise Duty (replaced by GST): This tax was payable by the manufacturers
who would then shift the tax burden to retailers and wholesalers.

• Service Tax (replaced by GST): It was imposed on the gross or aggregate amount
charged by the service provider on the recipient.

• Sales Tax (replaced by GST): This tax was paid by the retailer, who would then shifts
the tax burden to customers by charging sales tax on goods and service.

• Value Added Tax (VAT- replaced by GST): It was collected on the value of goods
or services that were added at each stage of their manufacture or distribution and then
finally passed on to the customer.

4.3 Tax Collection Bodies

The three bodies which collect the taxes in India have clearly defined the rules on what type of
taxes they are permitted to collect. The Central Government:income tax, custom duties, cen-
tral excise duty. The State Governments:tax on agricultural income, professional tax, value-
added tax, state excise duty, stamp duty. Local Bodies: property tax, water tax, other taxes
on drainage and small services.

5. GST AS INDIRECT TAX

Goods and Services taxes known as GST brought a number of positive changes in the fiscal
domain of India. The various taxes that were mandatory earlier are now obsolete. GST is
making sure the slogan ฀One Nation, One Tax, One Market‖ becomes the reality of our country
and not just a dream. Cascading effect of tax is a situation wherein the end-consumer of any
goods or service has to bear the burden of the tax to be paid on the previously calculated tax
and as a result would suffer an increased or inflated price. Under the GST regime, however,
the customer is exempted from the tax they would otherwise pay as a result of the cascading
effect.

Academia Letters, July 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0

Corresponding Author: Jyoti Chaudhary, [email protected]

Citation: Chaudhary, J. (2021). Indian Tax Structure. Academia Letters, Article 2163.
https://doi.org/10.20935/AL2163.

3
 From 1 July 2017 when the Goods and Services Act (GST) was implemented many of
the indirect taxes levied by states and the central government were incorporated. Some of
the taxes GST replaced include:Sales Tax, Central Excise Duty, Entertainment Tax, Octroi,
Service Tax, Purchase Tax etc. A major benefit is the simplification of taxation in India for
government bodies.

5.1 Components of GST:

GST has three components:

• CGST-Stands for Central Goods and Services Act. The central government collects this
tax on an intrastate supply of goods or services.

• SGST:Stands for State Goods and Services Tax. The state government collects this tax
on an intrastate supply of goods or services.

• IGST:Stands for Integrated Goods and Services Tax. The central government collects
this for inter-state sale of goods or services.

6. OTHER GOVERNMENT BODIES TO IMPLEMENT TAX SYS-

TEM
For a smooth implementation of the Indian tax system, there are bodies dedicated to it. Pop-
ularly known as the revenue authorities:

• CBDT:The Central Board of Direct Taxes is a part of the revenue department under the
Ministry of Finance. It has a two-fold role. One, it provides important ideas and inputs
for planning and policy with regard to direct tax in India. Second, it assists the Income
Tax department in the administration of direct taxes.

• CBEC:The Central Board of Excise and Customs deals with policy formulation with
regard to levy and collection of customs and central excise duties and service tax.

• CBIC: Post GST implementation, the CBEC has been renamed as the Central Board of
Indirect Taxes & Customs (CBIC). The main role of CBIC is assisting the government
in policy-making matters related to GST.

Academia Letters, July 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0

Corresponding Author: Jyoti Chaudhary, [email protected]

Citation: Chaudhary, J. (2021). Indian Tax Structure. Academia Letters, Article 2163.
https://doi.org/10.20935/AL2163.

4
7. BENEFITS OF TAXES
While paying taxes may not be a pleasant feeling, however, it is prudent to understand that tax
paid by every single individual contributes towards the country’s administration and resources
required for its economic progress .It promotes savings as well as investments. Paying tax also
helps at the time of loan application. This is because at the time of purchasing a home loan,
the bank requires proof of whether the applicant has filed his or her taxes regularly.

8. DOUBLE TAXES AVOIDANCE AGREEMENT (DTAA)

India has signed various Double Taxation Avoidance Agreement with countries to provide tax
relief.

• DTAA Comprehensive Agreements - (With respect to taxes on income)

• DTAA Limited Agreements - With respect to income of airlines/ merchant shipping

• Limited Multilateral Agreement

• DTAA Other Agreements/Double Taxation Relief Rules

• Specified Associations Agreement

• Tax Information Exchange Agreement (TIEA)

9. CONCLUSION
While the tax department is technologically savvy, measures may need to be undertaken to
refine the administrative and procedural aspects. The tax authorities must disclose the infor-
mation and details that they have relied on. In international tax transactions, the statute needs
to prohibit departmental authorities and assessing officers from using information based on
unconfirmed, private sources. Because India is a high-tax jurisdiction, it is imperative that
foreign corporate entities exercise a
reasonable degree of caution before establishing a presence in India. Determining the type
of entity and the nature of operations, appointing distributors, and adopting an appropriate
mode of sales may need detailed consideration.

Academia Letters, July 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0

Corresponding Author: Jyoti Chaudhary, [email protected]

Citation: Chaudhary, J. (2021). Indian Tax Structure. Academia Letters, Article 2163.
https://doi.org/10.20935/AL2163.

5
REFERENCES
Tax notes international, October 13, 2018, by Sunil Thacker 2.

Indian Tax System - An Overview

Other internet search results

Academia Letters, July 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0

Corresponding Author: Jyoti Chaudhary, [email protected]

Citation: Chaudhary, J. (2021). Indian Tax Structure. Academia Letters, Article 2163.
https://doi.org/10.20935/AL2163.