Tax Structure in India, Explained

Aug 20, 2018 | 1 year ago | Read Time: 5 minutes | By iKnowledge Team

Indian Tax Structure

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”. Hence, each and every tax that is collected needs to backed by an accompanying law.

Interestingly, the tax system in India traces its origin to the prehistoric texts such as Arthashastra and Manusmriti. As proposed by these manuscripts, the taxes paid by farmers and artisans in that era would be in the form of agricultural produce, silver or gold. Based on these texts, the foundation of the modern tax system in India was conceptualised by the Sir James Wilson during the British rule in India in the year, 1860. However, post-independence the newly-established Indian Government then soldered the system to propel the economic development of the country. After this period, the Indian tax structure has been subject to a host of changes.

Types of Taxes - Aegon Life

Tax System in India:

The tax system in India allows for two types of taxes—Direct and Indirect Tax.

Tax Structure in India - Aegon Life

The tax system in India for long was a complex one considering the length and breadth of India. Post GST implementation, which is one of the biggest tax reforms in India, the process has become smoother. It serves as an all-inclusive indirect tax which has helped in eradicating the cascading effect of tax as a whole. It is simpler in nature and has led to upgraded the productivity of logistics.

Direct Tax:

Direct Tax is levied directly on individuals and corporate entities. This tax cannot be transferred or borne by anybody else. Examples of direct tax include income tax, wealth tax, gift tax, capital gains tax.

Income tax is the most popular tax within this section. Levied on individuals on the income earned with different tax slabs for income levels. The term ‘individuals’ includes individuals, Hindu Undivided Family (HUF), Company, firm, Co-operative Societies, Trusts.

Indirect Tax:

Indirect taxes are taxes which are indirectly levied on the public through goods and services. The sellers of the goods and services collect the tax which is then collected by the government bodies.

  • Value Added Tax (VAT)– A sales tax levied on goods sold in the state. The rate depends on the government.
  • Octroi Tax– Levied on goods which move from one state to another. The rates depend on the state governments.
  • Service Tax– Government levies the tax on service providers.
  • Customs Duty– It is a tax levied on anything which is imported into India from a foreign nation.

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Tax Collection Bodies:

The three bodies which collect the taxes in India have clearly defined the rules on what type of taxes they are permitted to collect.

  • The Central Government:income tax, custom duties, central excise duty.
  • The State Governments:tax on agricultural income, professional tax, value- added tax, state excise duty, stamp duty.
  • Local Bodies: property tax, water tax, other taxes on drainage and small services.

GST:

In India, the three government bodies collected direct and indirect taxes until 1 July 2017 when the Goods and Services Act (GST) was implemented. GST incorporates many of the indirect taxes levied by states and the central government. What does the GST mean for your money?

Some of the taxes GST replaced include:

  • Sales Tax
  • Central Excise Duty
  • Entertainment Tax
  • Octroi
  • Service Tax
  • Purchase Tax

It is a multi-stage destination-based tax. Multi-stage because it is levied on each stage of the supply chain right from purchase of raw material to the sale of the finished product to the end consumer whenever there is value addition and each transfer of ownership.

Destination-based because the final purchase is the place whose government can collect GST. If a fridge is manufactured in Delhi but sold in Mumbai, the Maharashtra government collects GST.

A major benefit is the simplification of taxation in India for government bodies.

GST has three components:

  • CGST-Stands for Central Goods and Services Act. The central government collects this tax on an intrastate supply of goods or services.
    (Within Maharashtra)
  • SGST:Stands for State Goods and Services Tax. The state government collects this tax on an intrastate supply of goods or services.
    (Within Maharashtra)
  • IGST:Stands for Integrated Goods and Services Tax. The central government collects this for inter-state sale of goods or services.

(Maharashtra to Karnataka)

Other Government Bodies:

For a smooth implementation of the Indian tax system, there are bodies dedicated to it. Popularly known as the revenue authorities.

  • CBDT:The Central Board of Direct Taxes is a part of the revenue department under the Ministry of Finance. It has a two-fold role. One, it provides important ideas and inputs for planning and policy with regard to direct tax in India. Second, it assists the Income Tax department in the administration of direct taxes.
  • CBEC:The Central Board of Excise and Customs deals with policy formulation with regard to levy and collection of customs and central excise duties and service tax.
  • CBIC: Post GST implementation, the CBEC has been renamed as the Central Board of Indirect Taxes & Customs (CBIC). The main role of CBIC is assisting the government in policy-making matters related to GST.

Benefits of Taxes:

While paying taxes may not be a pleasant feeling, however, it is prudent to understand that tax paid by every single individual contributes towards the country’s administration and resources required for its economic progress.

  • It promotes savings as well as investments. If an individual makes certain set of investments, a part amount of the same would be tax exempted, thereby enabling him or her to pay reduced amount of taxes.
  • Paying tax also works as a proof that you are not only disciplined in filing your tax returns but also helps at the time of loan application. This is because at the time of purchasing a home loan, the bank requires proof of whether the applicant has filed his or her taxes regularly.

Want to know your taxes? Access our easy to use tax calculator, and plan your finances.

Get a detailed explanation on tax sections under 80C, 80CCC & 80CCD here. Know about the interest imposed due to late filing of income tax return under section 234A, B & C here.

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