INTRODUCTION TO INDIAN TAXATION SYSTEM

Tax:  A Tax is a compulsory charge or payment levied or imposed by a public authority on an individual. It is levied to meet public spending incurred by the Government in general interest of the Nation.

The Taxation System in Republic of India is quite well structured and well developed with the authority to levy the Taxes is divided between the Union Government and the State Government.

Indian Constitution has made a provision for the introduction of Federal Tax Structure. The Constitution has made a detailed provision for the imposition of various types of taxes both by the Central Government and by the State Governments. The Constitution has made a provision for division of the power for levying taxes between Centre and the States in most unambiguous manner. The distribution of such legislative powers is specified in the Lists of Seventh Schedule (VII) to the Constitution i.e. Union List, State List and Concurrent List, which came into effect on 26/01/1950. List I -Article 246(1)- is union list which contains the matters in which power to make laws are with Parliament i.e. Central Government. List II-Article 246(2)- is State list which contains the matters in which power to make laws are with State Government. List III is Concurrent List which contains the matters in which power to make laws are with both Central and State Government.

The Union Government levies various Direct Taxes such as Income Tax(except on Agricultural Income), and also Indirect Taxes like Customs, Excise(except excise on liquor, opium, narcotics, Indian hemp), CST, Service Tax etc. So, the Tax on Incomes, Customs Duties, Central Excise and Service tax are levied by the Central Government. The States are empowered to levy State Tax like VAT/State Sales Tax apart from various Local Taxes like Entry Tax, Octroi etc. so, the State Government levies Agricultural Income Tax, VAT/Sales Tax, State Excise, Land Revenue, Luxury Tax and Tax on Profession. However, some of the taxes are even levied solely by the Local State Bodies or the respective Government of the different States. The Local Bodies have the authority to levy Tax on Properties, Octroi/Entry Tax and Tax for Utilities like water supply, drainage etc. Taxes which are in the purview of Central Government accounted for approx. 50 percent of revenue.

The Department of Revenue, Ministry of Finance, Government of India is responsible for the computation, levy as well as collection of most of the taxes in the country. Two Boards working under the Ministry of Finance, Department of Revenue, Government of India, administer Taxes in India ; Central Board of Direct Taxes (CBDT) for the administration of Direct Taxes and Central Board of Excise and Customs (CBEC) for administration of Indirect Taxes on behalf of Central Government. 

Constitutional Provisions relating to Taxation:

Article 265 of Constitution of India: No tax shall be levied or collected except by the authority of Law. Where any tax is collected in contravention of Article 265, the Government cannot retain such tax collected and must repay such illegal collected tax.

Article 246 of Constitution of India: Keeping in view the federal structure, the Constitution of India has empowered both Centre and States to enact laws relating to taxation. The authority to levy the Taxes is divided between the Union Government and the State Government.

Article 271 of Constitution of India: Parliament has a power to levy surcharge on any duty or tax and the proceeds of such surcharge shall go into the consolidated fund of India.

Overview of various Taxes in India

Excise Duty:

Excise Duty is an indirect tax, regulated by Central Excise Act, 1944, levied on excisable goods produced or manufactured in India @ specified in Central Excise Tariff Act, 1985.Excise is a duty on goods indigenously manufactured. Excise duty is levied only on goods, which are produced or manufactured in India, and such duty is charged by Central Government. The manufacturer pays the duty at the time of removal of goods from factory and charge from the buyer in the form of price of goods. The buyer charges it from subsequent buyer and so on. Ultimately it is to be borne by customer. As per Entry 84 of List I of Seventh Schedule to the Constitution, Central Government is empowered to collect and levy excise duty on tobacco and other goods produced/manufactured in India except alcoholic liquors for human consumption, opium, narcotics, but including medical and toilet preparations containing alcohol, opium or narcotics. Duties on products like alcoholic liquors for human consumption; opium, narcotics are within the power of State Government and not within the powers of Central Government.

Sales Tax:

It is an indirect tax levied on sale of goods in India. It is of two types:

1. Value Added Tax (VAT): VAT is levied on sale of goods within the State and regulated by State VAT Act of the respective State. It is charged by the seller from the buyer on the selling price of the goods at the time of intra state sales.
2. Central Sales Tax (CST): CST is levied on sale of goods in the course of inter State trade or commerce and regulated by Central Sales Tax Act, 1956. It is charged by the seller from the buyer on the selling price of the goods at the time of interstate sales.

Custom Duty:

Custom Duty is an indirect tax, regulated by Customs Act, 1962, levied on import or exports of goods in India or out of India as per Customs Tariff Act, 1975.

Service Tax:

Service Tax is an indirect tax, regulated by Finance Act, 1994, levied on value of taxable services provided by the service provider to the service recipient. 

Income Tax:

It is direct annual tax, regulated by Income Tax Act, 1961, levied on the total income of the person, earned during the previous year computed in assessment year, @ specified in Finance Act/Budget every year.

Octroi:

It is an indirect tax, a local tax levied by State Govt.  on various goods entering a State. Octroi is a local tax collected on various articles brought into the city for consumption.

Entry Tax:

It is a local tax imposed by the State Govt. it is levied on the movement of goods from one State to another and is levied by the recipient State.

Luxury Tax: is a tax levied on luxury goods.

Stamp Duty: is a tax levied on legal documents like cheques, receipts, sale deed etc.

Road Tax: is a tax on motor vehicles before using it on public roads.

Entertainment Tax :

It is a tax charged by local and regional government on services which are designed to provide leisure activities to the consumers like movies etc.

Taxes on lotteries, betting and gambling.

Purchase Tax: is a tax on first purchase of certain goods like sugar cane when purchased for first time within the State/

Property Tax:

It is a direct tax assessed on real estate by Local Govt. Such tax is based on value of the property which owner has to pay. Revenue from such tax is mainly used by municipality for repairing roads/ buildings/ schools etc. It is ad valorem tax.

Toll Tax:

It is a direct tax levied by Municipal authority or City authority collected to help recuperate the cost of road construction and maintenance. It is a charge for using a specific road. It is enacted by the State or Local authority etc. for right or privilege to use road/ bridges.

Types of Taxation:

ON THE BASIS OF RELATIONSHIP BETWEEN TAX BASE AND TAX RATE:

Proportional Taxes:

Taxes in which the rate of tax remains constant, though the tax base changes, are called proportional taxes. The tax base may be income, money value of property, wealth or goods. In a proportional tax system, taxes vary in direct proportion to change in income.

Progressive Taxes:

Taxes in which the rate of tax increases are called progressive taxes. Thus in a progressive tax, the amount of tax paid will increase at higher rate than the increase in tax base or income. Example is Income Tax.

Regressive Taxes:

 When the rate of tax decreases as the tax base increases, the taxes are called regressive taxes. It must be noted that in regressive taxation, though the amount of tax increases on higher income  but the rate of tax decline on higher income.

Digressive Taxes:

Taxes which are mildly progressive but not very steep, so that the high income earners do not make a due sacrifice on the basis of equality. In digressive, a tax may be progressive up to a certain limit, after that it may be charged at a flat rate.

ON THE BASIS OF METHOD OF ASSESSMENT:

Specific and ad-valorem taxes:

1. Taxes which are based on certain attributes of goods like weight, number, or volume of the commodity are specific.
2. The taxes which are levied entirely on the basis of money value of goods are called ad -valorem taxes like sales tax on the selling price of goods.

ON THE BASIS OF INCIDENCE AND IMPACT OF TAXES:

DIRECT AND INDIRECT TAXES:

Difference between Direct and Indirect Tax

Present Indirect Tax System In India --It’s Limitations

Present structure of indirect taxation in India can be divided into Central levies & State levies. Central levies mainly comprise of Excise Duty, Custom Duty & Service Tax. State levies mainly comprise of VAT, CST, State excise on alcohol and other levies like Entry Tax, Entertainment Tax, Luxury Tax, etc. Power to levy said duties flows to the Government from the Constitution of India. Excise Duty is levied on manufacture of goods vide entry no. 84 of List – I of Schedule VII. Custom Duty is levied on imports & exports of goods vide entry no. 83 of List – I of Schedule – VII. Service tax is levied on provision of service under Residuary Entry no. 97 of List I of Schedule VII. VAT & CST is levied on transaction of sale under entry no. 54 of List II & 92A of List I respectively.

Shortcomings of Present Indirect Structure

a.Cascading effect: Current system of multiple levies distributed between Center & States results into cascading (i.e. tax on tax) effect. For instance, no credit of State VAT is allowed against Central Tax. CST credit paid in the originating State is also not allowed in the receiving State. Central Sales Tax (CST) is payable for every movement of goods from one State to other. Cascading effect of taxes cannot be avoided due to CST and Entry Tax. This results in the increase in the overall burden of tax in the hands of end customer and creates distortion in the market.

b. Lack of separate authority to administer CST: Central Sales Tax is an orphan. Hence, if there is any difficulty, there is no authority to sort it out and find solutions. This creates numerous problems in CST.

C. Lack of National market: India does not have a national market due to invisible barriers of central sales tax, Entry Tax and State VAT and visible barriers of check posts. Millions of man-hours and truck hours are lost at check posts. Besides, huge corruption is involved.

d.Lack of transparency: Under Excise & Service tax law, currently there is no mechanism to cross verify the claim of CENVAT credit made by the manufacturer/service provider. Even under State VAT laws, all the States in India do not have the mechanism to cross verify the credits.

e. Lack of uniformity in provisions and rates: Present VAT structure across the States lacks uniformity which is not restricted only to the rates of tax but also the credit provisions as well as procedures.

f. Multiplicity of Tax Structure and Multiple points of taxation: India is having a broad based and extensive tax structure. Its main feature is the existence of multiplicity of taxes. There are both taxes by Union Government and by State Government. The tax structure includes both direct and indirect taxes. Among the direct taxes imposed in India, the most important is income tax. Other prominent taxes are capital gains tax, corporate tax etc. The indirect taxes in India  consists of Excise Duties, Customs Du­ties, Service Tax, VAT ,CST etc. The important taxes levied by the Union government are Income tax, Corporation tax, Central Excise Duties,  Custom Duties etc. The State Governments main taxes are Land Revenue, Sale Tax, State Excise Duties, Entertainment Tax, Stamp and Registration Duties etc. In the case of States, indirect taxes play a dominant role, in the composition of tax revenue.Under the current system there are multiple points of taxation. Excise is levied when goods manufactured are cleared from the factory premises irrespective of the fact that the clearance is on account of sale or otherwise. State VAT is levied on sale of goods. Entry tax is levied on entry of goods in a particular State.

g.Complexity in determining the nature of transaction – Goods vs. Service

The distinction between goods and services found in the Indian Constitution has become more complex. Today, good and service are being packaged as composite bundles and offered for sale to customers under a variety of supply-chain arrangements. Under the current division of taxation powers in the Constitution, neither the Center nor the States can apply the tax to such bundles in a seamless manner. Each Government can tax only parts of the bundle, creating overlaps in taxation.

h.Narrow base: Due to different thresholds under different laws as well as numerous exemptions and concessions, the current tax base under indirect tax is narrow as compared to other countries.

i.Multiple administrations: Under the current system, businessmen are required to visit different tax offices according to the applicable laws to his business. These increases the compliance cost of businesses and breeds unnecessary complexity.

j. Complexity of Indian Tax Laws: With the intension of broad based tax system, a plethora of changes have been introduced in the tax structure. Both direct and indirect tax laws are highly complex, with a lot of loopholes which enable the people to avoid as well as to evade taxes. This has generated wide spread corruption in tax departments.