Tax Structure in India

Taxes in India are levied by the Central Government and the state governments. Some minor taxes are also levied by the local authorities such the Municipality or the Local Council .

The authority to levy a tax is derived from the Constitution of India which allocates the power to levy various taxes between the Centre and the State. An important restriction on this power is Article 265 of the Constitution which states that "No tax shall be levied or collected except by the authority of law." Therefore each tax levied or collected has to be backed by an accompanying law, passed either by the Parliament or the State Legislature. In 2010-11, the gross tax collection amounted to 7.92 trillion, with direct tax and indirect tax contributing 56% and 44% respectively.

The power to levy taxes and duties is distributed among the three tiers of Government, in accordance with the provisions of the Indian Constitution.

The main taxes/duties that the Union Government is empowered to levy are:-
Income Tax (except tax on agricultural income, which the State Governments can levy)
Customs duties
Central Excise and Sales Tax
Service Tax.

The principal taxes levied by the State Governments are:- 

Sales Tax (tax on intra-State sale of goods)

Stamp Duty (duty on transfer of property)

State Excise (duty on manufacture of alcohol)

Land Revenue (levy on land used for agricultural/non-agricultural purposes)

Duty on Entertainment and Tax on Professions & Callings. 

The Local Bodies are empowered to levy tax on properties (buildings, etc.), Octroi (tax on entry of goods for use/consumption within areas of the Local Bodies), Tax on Markets and Tax/User Charges for utilities like water supply, drainage, etc. 

Financial Relations between Centre and States

• India possesses a federal structure in which a clear distinction is made between the Union and the State functions and sources of revenue. Our constitution provides residual powers to the Centre. Article 264 and 293 explain the financial relations between the Union and State Government.
• Although the States have been assigned certain taxes which are levied and collected by them, they also have a share in the revenue of certain union taxes and there are certain other taxes which are levied and collected by the Central Government but whole proceeds are transferred to the States.
• The Constitution provides residuary powers to the Centre. It makes a clear division of fiscal powers between the Centre and the State Governments.

(A) List – I of Seventh Schedule of the Constitution enlists the Union Taxes which are :

• Taxes on income other than agriculture income.
• Corporation tax.
• Custom Duties.
• Excise Duties except on alcoholic liquors and narcotics not contained in medice preparations.
• Estate and succession duties other than on agricultural land.
• Taxes on the capital value of assets except agricultural land of individuals and companies.
• Rates of stamp duties – on financial documents.
• Taxes other than stamp duties on transactions in stock exchanges and future markets.
• Taxes on sales or purchases of newspapers and on advertisements therein.
• Taxes on railway freight and fares.
• Terminal taxes on goods or passengers carried by Railways Sea or air.
• Taxes on the sale or purchase of goods in the course of interstate trade.

(B) List – II of Seventh schedule enlists the taxes which are within the jurisdiction of the States:

• Land revenue.
• Taxes on the sale and purchase of goods, except newspapers.
• Taxes on Agricultural Income.
• Taxes on land and buildings.
• Succession and estate duties on agricultural land.
• Excise on Alcoholic Liquors and Narcotics.
• Taxes on the entry of goods into a local area.
• Taxes on the consumption and sale of electricity.
• Taxes on mineral rights (subject to any limitations imposed by the Parliament).
• Taxes on vehicles, animals and boats.
• Stamp duties except those on financial documents.
• Taxes on goods and passengers carried by board or inland water – ways.
• Taxes on luxuries including entertainments, betting and gambling.
• Tolls.
• Taxes on professions, trades, callings and employment.
• Capitation taxation.
• Taxes on advertisements other than those contained in newspapers.

(C) Apart from taxes levied and collected by the States, the Constitution has provided for the revenues for certain taxes on the Union List to be allotted, partly or wholly to the States. These provisions fall into various categories:

• Duties which are levied by the Union Government but are collected and appropriated by the States. These include stamp duties, excise duties on medical preparations containing alcohol or narcotics.
• Taxes which are levied and collected by the Union, but the entire proceeds of which are assigned to the states, in proportion determined by the Parliament.These taxes include:
  • Succession and Estate duty.
  • Terminal Taxes on goods and passengers.
  • Taxes on railway freight and fares.
  • Taxes on transactions in stock exchanges and future markets.
  • Taxes on sale and purchase of newspapers and advertisements therein.

• Central Taxes on income and union excise duties are levied and collected by the Union but are shared by it with the States in a prescribed manner.
• Proceeds of additional excise duty on mill – made textiles, sugar and tobacco which are levied by the Union since 1957 in replacement of State sales taxes on these commodities are wholly distributed among the States in a manner as to guarantee their former incomes from the displaced sales taxes.

In 1991, the government set up a special committee, the Raja Chelliah Committee on Tax Reforms, to review the country's tax system. Its mandate was to make recommendations to make the tax system more elastic and broad based, and to suggest means required for simplifying existing laws and regulations to facilitate better enforcement and compliance. The recommendations made by this committee envisaged simplified procedures and a rationalised rate structure.

The table below gives a list of the major direct and indirect tax laws and authorities responsible for administering these laws.

List of Taxes : 

Direct Taxes 

•  Income tax (Personal) 
• Corporate tax 
• Banking Cash Transaction Tax (BCTT) - Banking Cash Transaction Tax (BCTT) has been withdrawn with effect from April 1, 2009.
• Securities Transaction Tax (STT) - levied on every purchase or sale of securities that are listed on the Indian Stock Exchange.
• Wealth Tax - Wealth tax, in India, is levied under Wealth-tax Act, 1957. Wealth tax is a tax on the benefits derived from property ownership. The tax is to be paid year after year on the same property on its market value, whether or not such property yields any income. Wealth tax is not levied on productive assets, hence investments in shares, debentures, UTI, mutual funds, etc are exempt from it. The assets chargeable to wealth tax are Guest house, residential house, commercial building, Motor car, Jewellery, bullion, utensils of gold, silver, Yachts, boats and aircrafts, Urban land and Cash in hand (in excess of Rs 50,000 for Individual & HUF only). 
• Capital Gains Tax -A capital gain is income derived from the sale of an investment. A capital investment can be a home, a farm, a ranch, a family business, work of art etc.

 Different kinds of taxes relating to a company/corporation

• Minimum Alternative Tax (MAT) -  its a tax that has to be paid by the companies that are enjoying tax benefits or tax exemption under various schemes.The concept of Minimum Alternate Tax (MAT) was introduced in the direct tax system to make sure that companies having large profits and declaring substantial dividends to shareholders but not paying tax to the Govt by taking advantage of the various incentives and exemptions provided in the Income-tax Act, pay a fixed percentage of book profit as minimum alternate tax.
• Fringe Benefit Tax (FBT)-Fringe Benefit Tax (FBT) is fundamentally a tax that an employer has to pay in lieu of the benefits that are given to his/her employees.A new tax was imposed on employers by India's Finance Act 2005 was introduced for the financial year commencing April 1, 2005.

        The following items were covered under FBT:

1. Employer's expenses on entertainment, travel, employee welfare and accommodation. The definition of fringe benefits that have become taxable has been significantly extended. The law provides an exact list of taxable items.
2. Employer's provision of employee transportation to work or a cash allowances for this purpose.
3. Employer's contributions to an approved retirement plan (called a superannuation fund).

• Dividend Distribution Tax (DDT) - Dividend distribution tax is the tax levied by the Indian Government on companies according to the dividend paid to a company's investors.

 Direct Tax Code

 The direct tax code seeks to consolidate and amend the law relating to all direct taxes, namely, income-tax, dividend distribution tax, fringe benefit tax and wealth-tax so as to establish an economically efficient, effective and equitable direct tax system which will facilitate voluntary compliance and help increase the tax-GDP ratio. Another objective is to reduce the scope for disputes and minimize litigation. 

It will eventually pave the way for a single unified taxpayer reporting system.The salient features of the code are: Single code for direct taxes ,use of simple language,reduced scope for litigation,flexibility and stability.

 Indirect Taxes 

•  Sales tax 
• Central Sales Tax (CST)-Central Sales tax is generally payable on the sale of all goods by a dealer in the course of inter-state trade or commerce or, outside a state or, in the course of import into or, export from India. 
• Value Added Tax (VAT)-VAT is a multi-stage tax on goods that is levied across various stages of production and supply with credit given for tax paid at each stage of Value addition. Introduction of state level VAT is the most significant tax reform measure at state level. The state level VAT has replaced the existing State Sales Tax.      
• Excise Duty-Central Excise duty is an indirect tax levied on goods manufactured in India.
• Customs Duty-Custom or import duties are levied by the Central Government of India on the goods imported into India. 
• Service Tax -Service tax was introduced in India way back in 1994 and started with mere 3 basic services viz. general insurance, stock broking and telephone.  
  

Roadmap towards GST

The Empowered Committee of State Finance Ministers has been entrusted with the task of preparing a roadmap for the introduction of national level goods and services tax with effect from 01 April 2007.The move is towards the reduction of CST to 2 per cent in 2008, 1 per cent in 2009 and 0 per cent in 2010 to pave way for the introduction of GST (Goods and Services Tax).

What is GST?

It is an indirect tax that will lead to the abolition of all other taxes such as octroi,central sales tax,excise duty, service tax ,state-level sales tax,and value-added tax (VAT). Both the state and the central governments will impose GST on almost all goods and services produced in India or imported into the country.It will replace all indirect taxes levied on goods and services by the Indian Central and State governments. It is aimed at being comprehensive for most goods and services with few tax exemption.

India is a federal republic, and the GST will thus be implemented concurrently by the central and state governments as the Central GST and the State GST respectively.

What categories are exempt from GST?

Exports will not be subject to GST. Direct taxes, such as income tax, corporate tax and capital gains tax will not be affected.

How will GST benefit the economy?

It will simplify India's tax structure, broaden the tax base, and create a common market across states. This will lead to increased compliance and increase India's tax-to-gross domestic product ratio. According to a report by the National Council of Applied Economic Research, GST is expected to increase economic growth by between 0.9 per cent and 1.7 per cent. Exports are expected to increase by between 3.2 per cent and 6.3 per cent, while imports will likely rise 2.4-4.7 per cent, the study found.

How will GST benefit corporates?

It will be beneficial for India Inc. as the average tax burden on companies will fall. Reducing production costs will make exporters more competitive.  

Will goods and services become costly? 

The highest rate of taxation under GST will be around 15 per cent in the first year, and eventually come down to 12 per cent in the second year. By comparison, the current rate of the various indirect taxes levied in India amounts to roughly 20 per cent. Goods deemed necessary or of basic importance will be taxed at a lower rate.

Will state governments lose out?

 Some states fear that a uniform tax rate, if lower than their existing rates, will dent collections. The central government is likely to compensate states for the potential revenue loss. Also, instead of an earlier proposal for a uniform GST rates across the country, the Union Government has agreed to have a floor rate of taxation with a narrow band.

Can states decide to opt out of GST?

 In a deviation from its earlier stand, the government has agreed for a phased roll-out of GST. States will also have the flexibility to opt out of GST.

What's the latest on GST? 

Three sub-committees have been formed to resolve all outstanding differences and submit their reports in three months. i) One will look at the issue of integrated GST for inter-state movement of goods and VAT on imports. ii) The second will decide on a revenue neutral rate on GST - one that is not too high for the traders and not too low for states. iii) The third will look for a mechanism so that traders have to coordinate only with one agency - centre or state. This committee will also decide on a common exemption list and threshold for levying GST.

How will it become a reality? 

The GST can be implemented only through a Constitutional Amendment Bill, which means it needs to be approved by not less than two-thirds of the members present and voting in each House of Parliament. The GST must also be ratified by the legislatures of at least one-half of the states.

The GST is expected to foster increased efficiencies in the economic system thereby lowering the cost of supply of goods and services. Further, in the Indian context, there is an expectation that the aggregate incidence of the dual GST will be lower than the present incidence of the multiple indirect taxes in force.  Consequently, the implementation of the GST is expected to bring about, if not in the near term but in the medium to long term, a reduction in the prices of goods and services. The expectation is that the dealers would start passing on the benefit of the reduced tax incidence to the customers by way of reduced prices. As regards services, it could be that their short term prices would go up given the expectation of an increase in the tax rate from the present 10% to approximately 14% to 16%.

The 13th Finance Commission headed by Dr. Vijay Kelkar constituted the Task Force of Goods and Services Tax (GST), which has released its Report on 15.12.2009 and suggested the total GST rate of 12% – 5% at the Centre and 7% at the State levy .

Advantages of GST

The merits of GST are well-known.

(i) It will re-distribute the burden of taxation equitably between manufacturing and services bringing about a qualitative change in the tax system.
(ii)With the minimisation of exemptions, it will broaden the tax base and lower the tax rates.
(iii)By switching to the destination principle, the distortions will be reduced fostering a common market across the country.
(iv)The compliance cost will come down and our trade and industry will become more competitive leading to an increase in exports and lower prices for domestic consumers.

 Finance Commission of India

Finance Commission is constituted to define financial relations between the Centre and the States. Under the provision of Article 280 of the Constitution, the President appoints a Finance Commission for the specific purpose of devolution of non – plan revenue resources. The functions of the Commission are to make recommendations to the President in respect of :   

1.  The distribution of net proceeds of taxes to be shared between the Union and the States and the allocation of share of such proceeds among the States.
2. The principles which should govern the payment of grants – in – aid by the Centre to the States.
3. Any other matter concerning financial relations between the Centre and the States.

 Imp. Info : Click Here & Here  

Taxes

What is Tax ?

A tax (from the Latin taxo; "I estimate") is a financial charge or other levy imposed upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many administrative divisions. A tax is a "pecuniary burden laid upon individuals or property owners to support the government,it is a payment exacted by legislative authority." It "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name.

Simple definition is , tax is a fee charged ("levied") by a government on a product, income, or activity.

• tax is ‘compulsory.’
• a tax is a ‘contribution’
• all taxation is imposed on ‘persons.’ Taxation of commodities falls on the consumers or other persons connected with the taxed articles, and a similar analysis will apply to other forms of taxation. The truth, though often forgotten, yet always holds good that a tax must ultimately be paid by some one.
• taxation is levied for ‘service’ or ‘benefit.’
• taxation is for the ‘public powers,’ i.e. it has to meet the wants of both central and local governments.

In Montesquieu's opinion, ‘the revenues of the State are the portion of his property that each citizen gives in order to have security for the remainder, or to enjoy it in comfort.’

‘Taxation is an exchange in which the State gives services and the contributor money.’ Hardly distinguishable is the belief that taxation is the insurance premium against the risks of social disorder set forth

In Mirabeau's proposition that ‘Taxation is only an advance to obtain protection for social order.’ 

Types of Taxes :

One of the most widely known and frequently used divisions of taxation is, ‘direct’ and ‘indirect’.Taxes are either direct or indirect. A direct tax is one, which is demanded from the very persons who, it is intended or desired, should pay it. Indirect taxes are those which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another.

A natural result has been that practical financiers have adopted a different basis of distinction, and regard those taxes as direct which are levied on permanent and recurring occasions, while charges on occasional and particular events are placed under the category of indirect taxation. On either method the income tax would be ‘direct,’ and the excise and customs ‘indirect’

Another division is that into ‘taxes on revenue’ and ‘taxes on capital,’ or, perhaps better, on ‘property.’ The former are paid out of the annual national production; the latter encroach on the accumulated wealth of the society.

Taxes are often said to be either ‘real’ or ‘personal,’ and attempts have been made to distribute them into two classes on this basis. Personal taxes are those in which the person is taken note of in assessment. They require lists of the tax-payers. Real taxes are assessed on objects other than persons, and without direct reference to the owners or possessors. Capitation and income taxes are ‘personal’; taxes on land,houses, or goods are ‘real.’

In respect to the mode of assessment taxes may be either ‘rated’ or ‘apportioned.’ In the former class the charge per unit is fixed, but the total yield is always uncertain, depending as it does on the number of units that pay. An apportioned tax is one the total amount of which is fixed the shares being apportioned among the objects that are charged.

Further classification of taxes :

A. Taxes on Income

It is a tax on the money people earn or on the profits companies make.Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive.A personal or individual income tax is levied as a percentage of a person's wages and salaries When the tax is levied on the income of companies, it is often called a corporate tax.A capital gains tax is levied on profits from the sale of capital assets (e.g., real estate, machinery, stocks, bonds, art, commodities). 

B.Taxes on Property

(a) imposed on property, real or personal
(b) in proportion to its value or other reasonable method of apportionment Ex. Real estate tax
Many jurisdictions impose estate tax, gift tax or other inheritance taxes on property at death or gift transfer. Some jurisdictions impose taxes on financial or capital transactions.

A property tax (or millage tax) is an ad valorem tax levy on the value of property that the owner of the property is required to pay to a government in which the property is situated.Vehicle and boat registration fees are subsets of this kind of tax.

Wealth tax is a direct tax, which is charged on the net wealth of the assessee. It is a tax on the benefits derived from ownership of property. The tax is to be paid year after year on the same property on its market value, whether or not such property yields any income.wealth(net worth) tax is generally conceived of as a levy based on the aggregate value of all household assets, including owner-occupied housing; cash, bank deposits, money funds, and savings in insurance and pension plans; investment in real estate and unincorporated businesses; and corporate stock, financial securities, and personal trusts.A wealth tax is a tax on the accumulated stock of purchasing power, in contrast to income taxes which is a tax on the flow of assets (a change in stock).

More Info - Click Here 

C.Taxes on goods and services

Value added tax - A type of consumption tax that is placed on a product whenever value is added at a stage of production and at final sale.

Sales tax - A tax imposed by the government at the point of sale on retail goods and services . It is collected by the retailer and passed on to the state.

Difference between VAT and Sales Tax - Click Here

1.VAT is levied on both the producer and consumer while a sales tax is levied on only the end consumer.

2.VAT involves tricky accounting while sales tax involves simpler accounting.

3.VAT is applied at the various stages of production while sales tax is applied on the total value of the purchase.

4.VAT efficiently avoids evasion of taxes while a sales tax is unable to deal with this.

Excises - Unlike an ad valorem, an excise is not a function of the value of the product being taxed. Excise taxes are based on the quantity, not the value, of product purchased.Central Excise duty is an indirect tax levied on those goods which are manufactured in India and are meant for home consumption. The taxable event is 'manufacture' and the liability of central excise duty arises as soon as the goods are manufactured. It is a tax on manufacturing, which is paid by a manufacturer, who passes its incidence on to the customers.It is different from customs which is a tax that a buyer pays when he imports goods from other countries. As such, excise duty is an inland tax. This is an indirect tax which implies that the manufacturer sells it at a higher price than was incurred on production thereby recovering the tax paid on its manufacture. Excise is always in addition to VAT which is paid by the end consumer.

If the manufacturer does not sell and uses the good himself, he does not have to pay any excise duty. But since he sells it as a higher price, he has to pay the excise tax. VAT is not paid by the vendor who purchases the goods from the manufacturer but by the end consumer in the chain. The vendor has already paid excise duty to the manufacturer who deposits it to the government.

Customs duty - Customs Duty is a type of indirect tax levied on goods imported into India as well as on goods exported from India. Taxable event is import into or export from India. Import of goods  means bringing into India of goods from a place outside India. India includes the territorial waters of India which extend upto 12 nautical miles into the sea to the coast of India. Export of goods means taking goods out of India to a place outside India. 

Duty is levied upon goods only, whereas tax is levied on both goods and individuals.Duty is generally a tax levied on good going out or coming inside a country. Duties are sometimes referred to as border taxes.

Excise is a tax levied by the government on goods manufactured inside the country while customs duty is a tax levied by the government on goods produced outside the country and upon arrival in to the country.Excise tax is payable by the manufacturers while custom duty is payable by the importers of goods which means they are just buyers

D. Classification based on-who bears the burden

1) Direct -the tax is imposed on the person who also bears the burden thereof Ex. Income tax, community tax, estate tax,corporate tax,securities transaction tax,etc.
2) Indirect- imposed on the taxpayer who shifts the burden of the tax to another Ex. VAT, specific tax, percentage tax, customs duties.

E. Classification of taxes based on - purpose of taxation

1) General, fiscal or revenue - imposed for the general purpose of supporting the government
Ex. Income tax, percentage tax
2) Special or regulatory - imposed for a special purpose, to achieve some social or economic objectives
Ex. Protective tariffs or customs duties on imported goods intended to protect local industries

F. Classification based on method of taxation :

1) Specific tax imposed and based on a physical unit of measurement, as by head, number, weight, length or volume Ex. Tax on distilled spirits, fermented liquors, cigars
2) Ad Valorem - tax of a fixed proportion of the value of property with respect to which the
tax is assessed; requires intervention of assessor. Ex. Real estate tax, excise tax on cars, nonessential
goods

G. Classification of taxes - based on authority imposing the tax

1) National - imposed by the national government Ex. National internal revenue taxes, custom duties
2) Municipal or local - imposed by the municipal corporations or local governments Ex. Real estate tax, occupation tax

H. Classification based on - graduation of rate (Three systems of taxation)

1) Proportional - based on a fixed percentage of the amount of the property, income or other basis to be taxed Ex. Real estate tax, VAT, percentage tax
2) Progressive or graduated - tax rate increases as the tax base or bracket increases
Ex. Income tax, estate tax, donor's tax
3) Regressive - tax rate decreases as the tax base increases
4) Degressive - increase of rate is not proportionate to the increase of tax base

Progressive taxes

A progressive tax is a tax imposed so that the tax rate increases as the amount subject to taxation increases. In simple terms, it imposes a greater burden (relative to resources) on the rich than on the poor. It  can be applied to individual taxes or to a tax system as a whole. Progressive taxes attempt to reduce the tax incidence of people with a lower ability-to-pay, as they shift the incidence disproportionately to those with a higher ability-to-pay. People with higher incomes pay a larger percentage of their incomes in taxes, while people with lower incomes pay a lower percentage in taxes. The result is people with more disposable income pay a higher percentage of that income in tax than do those with less income.Some people argue that progressive taxation is fair, because low-income people cannot afford to pay taxes as much as high-income people can. Others argue that progressive taxation discourages a strong work ethic because people do not want to work hard to become wealthy if they have to give more money away in taxes.

Regressive Taxation

Regressive taxation takes a higher percentage of taxes from low-income people and a lower percentage of taxes from high-income people, according to the IRS. Although it seems intuitively unfair to tax people more when they make less, some people feel that regressive taxation is fair because the actual amount of taxation will be closer to equal across all income levels. It may also encourage people to work harder and move up to higher income brackets. Many people, however, do not think it makes sense or is morally right to tax poor people more.

Proportional Tax

A proportional tax is one that imposes the same relative burden on all taxpayers—i.e., where tax liability and income grow in equal proportion. In simple terms, it imposes an equal burden (relative to resources) on the rich and poor. Proportional taxes maintain equal tax incidence regardless of the ability-to-pay and do not shift the incidence disproportionately to those with a higher or lower economic well-being.

List of taxes

Ad valorem
Capital gains tax
Carbon tax
Carucage
Consumption tax
Corporate tax (including the Excess profits tax, Windfall profits tax)
Corvée
Custom
Danegeld
Development Impact Tax
Direct tax
Duty
Excise (e.g. fuel excise, use tax, blank media tax, natural resources consumption tax)
FairTax
FICA tax
Franchise tax
Gabel
Impost
Income Tax
Indirect tax
Inflation tax
Inheritance tax (cf Allodial, Pigovian tax, Estate tax (United States), Inheritance Tax (United Kingdom).)
Land value tax
Payment in lieu of taxes
Payroll tax
Poll tax
Property tax
Sales tax
Scutage
Seigniorage
Sin tax
Stamp Duty
Subsidy
Tallage
Tariff
Tax Farming
Tithe
Tobin tax
Toll bridge
Toll road
Toll tunnel
Transfer tax
Tribute
Value added tax
Vehicle excise duty
Wealth tax