The system of Taxation in any country is considered to be the backbone of its’s economy, hence we cannot say that this system is very simple, it is layered like an onion, complex as a jigsaw puzzle, that’s why this project will provide an overview of the Tax System specific to India.
Let us start with the meaning of the word ‘Tax’ it is a compulsory financial charge levied on the citizens of the states. One should pay tax, as the government use this money to provide public services. Exemption is also given in certain cases, if the citizen falls under the purview of exceptions.
Such complex system needs to have a spot in the law of the land, i.e. Indian Constitution, hence we are going to discuss various provisions regarding the Taxation system in India as per Indian Constitution.
Definition/Structure of Tax in India: –
Tax structure in India is a three-tier federal structure. The central government, state governments, and local municipal bodies make up this structure. Article 256 of the constitution states that “No tax shall be levied or collected except by the authority of law”.
The Tax structure in India consists of 3 federal parts:
- Central Government (Union List (List 1 of the 7th schedule to the Constitution of India) [Article 246(1)].)
- State Governments (The State List has only those matters on which the State Government has the power to make laws [Article 246(3)].)
- Local Municipal bodies (The Concurrent List has those matters on which both the Central and State Governments have the power to make laws [Article 246(2)].)
Taxes are determined by the Central and State Governments along with local authorities like municipal corporations. The government cannot impose any tax unless it is passed as a law.
Types of Taxes in India: –
Broadly we can classify the taxes in India into Two categories: –
1) Direct Taxes
2) Indirect Taxes
Direct Tax – As per the Indian tax system, direct taxes in India are the ones that are directly levied on an individual or taxpayer’s income. The Central Board of Direct Taxes (CBDT) overlook the direct taxes in India, and they cannot get transferred to any other individual or legal entity.
Different Types of Direct Taxes in India: –
- Income Tax – Income tax is a type of tax that governments impose on income generated by businesses and individuals within their jurisdiction. Income tax is used to fund public services, pay government obligations, and provide goods for citizens.
- Securities Transaction Tax – as defined under the Indian tax system, gets levied on the stock market and securities trading. This tax is imposed on the price of the share and the traded securities traded on the ISE (Indian Stock Exchange).
- Wealth Tax – Wealth tax was a charge levied on the total or market value of personal assets. Also known as capital tax or equity tax, wealth tax was imposed on the richer sections.
- Gift Tax – The Government introduced gift tax in April 1958 regulated by Gift Tax Act, 1958 (The GTA) with an objective to impose taxes on giving and receiving gifts under certain specific circumstances. Gifts in the form of cash, demand draft, bank cheques or anything having a value were covered.
- Estate Duty – a former death duty levied on property from 1889. It was replaced in 1975 by capital transfer tax and in 1986 by inheritance tax.
- Expenditure Tax – Expenditure tax, tax levied on the total consumption expenditure of an individual. It may be a proportional or a progressive tax; its advantage is that it eliminates the supposed adverse effect of the personal income tax on investment and saving incentives.
- Fringe Benefit Tax – Fringe benefit tax (FBT) was a form of tax that companies paid in lieu of benefits they offered their employees in addition to the compensation paid to them. It was included by the Finance Act 2005 with effect from April 1, 2006.
Indirect Tax – Taxes that get imposed on products and services when they are bought and sold are called indirect taxes in India. The sellers of the service or products collect these taxes under the Indian tax system. The tax gets levied as an addition to the original price of the product or service, which increases their cost. Following are the different types of indirect taxes in India.
Different types of Indirect Taxes in India: –
- Goods & Services Tax – Goods or Services Tax (GST) is aconsumption tax imposed on services and goods supply and has completely replaced the indirect taxes in India. The Indian tax system stipulates that every stage of the goods production process and value-added services is under the obligation to pay GST.
- Securities Transaction Tax – Securities Transaction Tax (STT) is a tax payable in India on the value of securities (excluding commodities and currency) transacted through a recognized stock exchange. As of 2016, it is 0.1% for delivery-based equity trading.
- Dividend Distribution Tax – The Dividend Distribution Tax is a tax levied on dividends that a company pays to its shareholders out of its profits.
- Property Tax – A tax levied directly on property.
- Professional Tax – It is a tax on all kinds of professions, trades, and employment and levied based on the income of such profession, trade and employment.
- Entertainment Tax – Entertainment tax also sometimes referred to as “amusement tax” is any tax levied on any form of commercial entertainment, such as movie tickets, exhibitions, sport events and more.
- Registration Fees, Stamp Duty, Transfer Tax – 1% of the total market or agreement value of the property or Rs. 30,000 whichever is lesser. 5% of the total market value of the property if it falls in Panchayet area. 6% of the total market value of the property if it falls under municipal areas.
- Education cess – Education cess is an additional levy on the basic tax liability. Description: Governments resort to imposition of cess for meeting specific expenditure.
- Entry Tax – Entry Tax is a tax on the movement of goods from one state to another imposed by the state governments in India. It is levied by the recipient state to protect its tax base.
- Road Tax and Toll Tax – Road tax is to be paid on a vehicle before it can be driven on a public road.
Constitutional Provisions Regarding Taxation in India: –
1) Article 256 – Only by the authority of law can taxes be levied, it states that – “Obligation of States and the Union The executive power of every State shall be so exercised as to ensure compliance with the laws made by Parliament and any existing laws which apply in that State, and the executive power of the Union shall extend to the giving of such directions to a State as may appear to the Government of India to be necessary for that purpose”
Case Laws – Tangkhul v. Simirei Shailei & Lord Krishna Sugar Mills v. UOI
2) Article 266 – Consolidated Funds and public accounts of India and of the States, money can only be taken as per directions.
3) Article 268 – It states that – “Duties levied by the Union but collected and appropriated by the States
(1) Such stamp duties and such duties of excise on medicinal and toilet preparations as are mentioned in the Union List shall be levied by the Government of India but shall be collected
(a) in the case where such duties are leviable within any Union territory, by the Government of India, and
(b) in other cases, by the States within which such duties are respectively leviable
(2) The proceeds in any financial year of any such duty leviable within any State shall not form part of the Consolidated Fund of India, but shall be assigned to that State”
3) Article 269(A) – This article gives the power of the collection of the GST
4) Article 270 – This article gives the provision regarding distribution of tax levied among Union and states. Case laws – T.M. Kanniyan v. I.T.O
5) Article 271 – This article provides the power to the parliament to increase an decrease the tax levied.
6) Article 273 – This grant is charged from the jute producing states such as assam and orissa, it is upon the government for how long the charge will be collected.
7) Article 275 – This grant is sanctioned by the parliament to thise states which are inn dire need. For example, a state suffering any natural calamity.
8) Article 276 – This article talks about the taxes levied by the state government.
9) Article 277 – Cess, fees, duty charge can continue to be levied. Case law – Hyderabad Chemical and Pharmaceutical Works Ltd. v. State of Andhra Pradesh
10) Article 279 – This article deals with the calculation of “net proceeds”11) Article 282 – It is normally meant for special, temporary or ad hoc schemes and the power to grant sanctions under it is not restricted. Case laws – Bhim Singh v. Union of India & Ors, MPLAD (Member of Parliament Local Area Development Scheme)
12) Article 286 – This article restricts the power of the state regarding Taxes.
13) Article 289 – State Governments are exempted from Union taxation as regards their property and income but if there is any law made by the parliament in this regard then the Union can impose the tax to such extent.
Tax related provisions: –
- Article 301
- Article 302
- Article 303
- Article 304
Article 366 – This article gives the definition of: –
- Taxes that are levied on the sale/purchase of goods
- Goods and service tax etc
India being the world biggest democracy and on top of that being a welfare state does affect the taxation system. This is also a reason why the tax systemin India is so complicated. The numbers cannot lie, Majority of the citizen of India does not give tax, as they think it is not important. Filing a simple ITR (Income Tax Return) is also so complicated and after so long time the BPL and illiterate public have now started using Banks. So, expecting from them to pay the tax is simply not practical.
But let’s not dwell into the political scenario of tax collection and focusing on the provisions present in our constitution we can say that the taxation system in India is the most complex but also it is rightly drafted cater to the needs of citizens, and keeping in mind the idea of a welfare state.
 (Indian Government, 2020)
 (Indian Government, 2020)
 (HDFC, 2020)
 (Indian Government, 2020)
 (HDFC, 2020)
 (Indian Government, 2020)
 (Tangkhul v. Simirei Shailei & Lord Krishna Sugar Mills v. UOI, 1960)
 (M/S. Kalpana Glass Fibre Pvt. Ltd. Maharashtra v. State of Orissa and Others, 2012)
 ( Gannon Dunkerley & Co. and others v. State of Rajasthan and others, 994)
 (T.M. Kanniyan v. I.T.O, 1968)
 (Hyderabad Chemical and Pharmaceutical Works Ltd. v. State of Andhra Pradesh, 1964)
 (Bhim Singh vs U.O.I & Ors on 6 May, 2010, 2010)