Taxes in India are levied by the Central Government and the State Governments by virtue of powers conferred to them from the Constitution of India. Some minor taxes are also levied by the local authorities such as the Municipality.
The authority to levy a tax is derived from the Constitution of India which allocates the power to levy various taxes between the Union Government and the State Governments. 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. Nonetheless, tax evasion is a massive problem in India, ultimately catalyzing various negative effects on the country.
What is Taxation?
Taxation refers to the practice of the government collecting money in the form of Taxes from its citizens to finance public services. The primary objectives of taxation are to generate revenue for the government to fund public goods and services, ensure economic stability, and promote social equity.
What is Taxation System in India?
The Taxation System in India refers to the organized structure by which a government collects and manages taxes from individuals and businesses within its jurisdiction. It comprises various types of taxes, principles, and mechanisms that determine how much tax is levied, collected, and utilized.
What is Tax?
Taxes are involuntary fees levied on individuals, businesses, or corporations that are enforced by a government entity, whether local, regional, or national. Thus, they are compulsory levies payable by an entity to the government. Taxes are the basic source of revenue for the government which is utilized by the government for its various expenses such as Healthcare, Education, and different infrastructure facilities like roads, dams, highways, etc.
CLASSIFICATION OF TAXES
Taxes are divided into two categories:
1. Direct Taxes
2. Indirect Taxes
DIRECT TAXES
A Direct tax is a kind of charge, which is imposed directly on the taxpayer and paid directly to the government by the persons (juristic or natural) on whom it is imposed. A direct tax is one that cannot be shifted by the taxpayer to someone else. The individual or organization upon which the tax is levied is responsible for the fulfilment of the tax payment. Examples of direct taxes include income tax, corporate tax, wealth tax, and property tax. These taxes are typically based on the income, profits, or assets of the taxpayer. Examples of direct taxes include income tax, corporate tax, wealth tax, and property tax. These taxes are typically based on the income, profits, or assets of the taxpayer.
INDIRECT TAXES
An indirect tax is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the customer). An indirect tax is one that can be shifted by the taxpayer to someone else. An indirect tax may increase the price of a good so that consumers are actually paying the tax by paying more for the products. Example the wholesaler can pass it on to retailers, who then pass it on to customers. Therefore, customers bear the brunt of indirect taxes. The Central Board of Indirect Taxes and Customs (CBIC) governs and administers indirect taxes.
Advantages And Disadvantages Of Direct Tax
| Direct Taxes | |
| Advantages | Disadvantages |
| Individuals with lower incomes pay lower taxes than people with higher incomes, i.e, progressive in nature. | Fraudulent practices through which taxpayers often pay lower taxes or avoid taxes. |
| Curbs inflation and reduces inequalities. | The documentation process can be complex and time-consuming |
| Sense of certainty as both the government and taxpayer are aware of what and when to be paid. | The burden cannot be transferred to any other in the chain. |
Impact of Tax
- In the context of Taxation System, the “Impact of Tax” refers to the initial economic burden of the tax i.e. who is directly responsible for paying it to the government.
- For example, in the case of Sales Tax, the seller bears the first responsibility of paying the tax to the government. Thus, in the case of Sales Tax, the seller is the Point of Impact.
Incidence of Tax
- In the context of Taxation System, the “Incidence of Tax” refers to the final economic burden of the tax i.e. who ultimately bears the cost of the tax.
- For example, in the case of Sales Tax, although the seller bears the first responsibility of paying the tax, the tax is ultimately paid by the consumer. So, here, the seller is the Point of Impact and the consumer is the Point of Incidence.
Conclusion
The taxation system in India is a comprehensive framework designed to generate revenue for the government to fund public services and infrastructure development. It includes both direct taxes, such as income tax and corporate tax, and indirect taxes like Goods and Services Tax (GST) and customs duties. The Indian tax system has undergone significant reforms, particularly with the introduction of GST, aimed at simplifying the tax structure, promoting transparency, and ensuring ease of compliance While the system strives for equity and efficiency, challenges such as tax evasion, administrative complexities, and regional disparities remain. Ongoing reforms are necessary to further enhance tax collection, broaden the tax base, and ensure that the system remains fair and conducive to economic growth.
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Author: Aashima Srivastava | BBALLB Student | Lovely Professional University
