Introduction:
The system of taxation is the backbone of a nation’s economy which keeps revenue consistent, manages growth in the economy, and fuels its industrial activity. India’s three-tier federal structure consists of Union Government, the State Governments, and the Local Bodies which are empowered with the responsibility of the different taxes and duties, which are applicable in the country. The local bodies would include local councils and the municipalities. The government of India is authorized to levy taxes on individuals and organisations according to the Constitution. However, Article 265 of the Indian constitution states that the right to levy/charge taxes hasn’t been given to any except the authority of law. The 7th schedule of the constitution has defined the subjects on which Union/State or both can levy taxes. As per the 73rd and 74th amendments of the constitution, limited financial powers have been given to the local governments which are enshrined in Part IX and IX-A of the constitution.
Definition of Tax:
A tax may be defined as a monetary burden rested upon individuals or people with property to help add to the government’s revenue. Tax is, therefore, a mandatory contribution and not a voluntary payment or donation which one decides on one’s own. It is a payment exacted by the legislative authority. It may be direct tax or indirect tax. Revenue growth which may be a little faster than GDP (Gross Domestic Product) can result from revenue mobilization with an effective tax system and measures.
The government uses this tax to carry out functions such as:
Social welfare projects like schools, hospitals, housing projects for the poor, etc.
Infrastructure such as roads, bridges, flyovers, railways, ports, etc.
Security infrastructure of the country such as military equipment Enforcement of law and order
Pensions for the elderly and benefits schemes to the unemployed or the ones below the poverty line.
Characteristics of a good tax structure:
A good tax system as a whole should be equitable and be fairly leading to equal distribution of wealth in the community.
It should be effective and yield the required revenue for the government.
The collection of taxes is a major task and it should be economical.
The development of trade and industry should not be hampered by the burden of taxes.
The taxes levied should give a clear picture to the government of its revenue.
The tax system should be based on comprehensive and up-to-date statistical information enabling accurate forecasting.
The tax system should also be simple and elastic so that it can respond to the new needs of the State.
While distributing the burden of taxes, the ability of the tax-payers should be considered.
Taxation system in India:
India’s tax system is a three-tier federal structure which is made up of the following:
1. Union List (List 1 of the 7th schedule to the Constitution of India) contains those matters on which the Central Government has the power to make laws [Article 246(1)].
2. The State List has only those matters on which the State Government has the power to make laws [Article 246(3)].
3. The Concurrent List has those matters on which both the Central and State Governments have the power to make laws [Article 246(2)].
Law made by Union Government prevails whenever there is a conflict between the Centre and state concerning entries in the concurrent list. But if any provision repugnant to earlier law made by parliament is part of law made by the state, if the law made by the state government gets the assent of the President of India, it prevails.
Distribution of powers of taxation:
List 1 in the 7th schedule to the constitution has the powers of the Central Government listed in Entries 82-92B.
List 2 in the schedule has the powers of the State Government listed in Entries 45-63.
As regards list 3, it doesn’t deal with taxation and hence both centre and state do not have any concurrent powers of taxation.
Entry 97 of List 1 in the 7th Schedule contains residuary powers of taxation belonging only to the centre.
Types of Taxes in India:
The two types of taxes in India are Direct and Indirect taxes. One of the biggest and most successful tax reforms in India is the GST (Goods and Services Tax). It assists as a comprehensive indirect tax which helps in eliminating the flowing effect of tax as a whole.
Direct tax:
It is a tax imposed on corporate units and individual people. It is a type of tax that can’t be moved or accepted by anyone else. Direct tax examples are wealth tax, income tax, gift tax, etc. In the Ministry of Finance, the Central Board of Direct Tax (CBDT) is a part of the revenue department. This board has a two-fold role that gives important ideas, significant inputs of planning, and policies to be implemented regarding direct tax in India. The management of direct taxes which is done by the Income Tax department is helped by the Central Board of Direct Taxes in doing so.
Indirect tax:
Taxes that are indirectly imposed on the public through goods and services are called indirect taxes. The government bodies collect taxes from people who sell goods and services. When a good or product is sold in a state, then a sales tax is levied on it and its rate is decided by the government, this is called Value Added Tax (VAT).
Formulation of the policy regarding duty, collection of custom excise duty and service tax is dealt with by the Central Board of Excise and Custom (CEBC)
The Central Board of Excise and Custom was given a new name which was the Central Board of Indirect tax and Custom (CBIC) after GST came into force. Its key role is to help the government in formulating policies related to GST.
Custom Duty:
The customs duty is collected on all goods entering the country to ensure that they are taxed and paid for. It is levied on both export and import of goods and is important in regulating trade as well as being a source of revenue to the government.
Excise Duty:
This is a commodity tax in the true sense as it is levied on the production of goods and not on its sales. It is levied by the Central Government but for alcohol/liquor and narcotics/drugs. Unlike custom duty, this applies only to goods produced in India. It is also called the Central Value Added Tax (CENVAT).
Service Tax:
Here the product taxed is a service. In India, service tax was initially on the services of telephone, share broking, and general insurance. This circle includes far more services since then and now it has been replaced by a consolidated Goods and Service tax.
Value Added Tax:
This tax was introduced because of India’s indirect tax structure being weak that created quite a stir. Value Added tax has a self-monitoring means which makes the administration of this tax simple. VAT is applicable in India in All-Union Territories and States except for the Union Territories of Andaman and Nicobar and Lakshadweep.
GST:
After GST came into force, direct and indirect taxes were collected by the three bodies of the government until 1 July 2017. Various indirect taxes which were imposed by the central and state government are incorporated by GST. Both the central and state government collect indirect tax through the intrastate supply of goods and services.
Constitutional Provisions Regarding Taxation in India:
The roots of every law in India lie in the Constitution, therefore understanding the provisions of the Constitution is foremost to have a clear understanding of any law.
1. Article 301 which states that trade, commerce and inter-course are exempted from any taxation throughout India except for the provisions mentioned in Article 302, 303, and 304 of the Indian Constitution, 1949.
2. Article 302 empowers the parliament to impose restrictions on trade and commerce in view of public interest.
3. Article 303-Whenever there is the scarcity of goods this article comes in play. Discrimination against the different State Governments is not permitted under the law except when there is a scarcity of goods in a particular state and this preference to that state can be made only by the Parliament and in keeping with the law.
4. Article 304- permits a State Government to impose taxes on goods imported from other States and Union Territories but it cannot discriminate between goods from within the State and goods from outside the State. The State can also exercise the power to impose some restrictions on freedom of trade and commerce within its territory.
Conclusion:
India is a big country with people belonging to different communities and different wealth groups and income.
Taxation to all cannot be the same. This is the reason for the tax system in India being a complicated one for long. India has been grappling with the problem of tax evasion which seems to be making our taxation system hollow from the core. India has a high tax rate but a low yield of direct taxes. So, over the years the government has made an attempt to reduce the taxes. Also, for a nation to prosper its tax collection system has to be strong and efficient even if the tax rates are not high else its coffers will be depleted and developmental programmes truncated. One of the biggest problems faced by India’s taxation system is the power of the government to make retrospective amendments regarding the tax statues. The practice began with the judgement given by the supreme court in the case of Chhotabhai Jethamal Patel & Co v. UOI & Others after which an amendment bill was passed for retrospective levy of excise duties.
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Author Gaurav Barak is a 3rd-year LL.B. student at Lovely Professional University,
