The Indian Tax System

Constitutional Assignment of Expenditures-Union, States and Concurrent

Article 246 of the Indian Constitution, distributes legislative powers including taxation, between the Parliament of India and the State
Legislature. Schedule VII enumerates these subject matters with the use of three lists;
 List - I Union list; entailing the areas on which only the parliament is competent to make laws, this include key areas like railways,
defense, atomic energy, post and telegraph, national highways, foreign exchange, interstate trade etc..
 List - II State list; entailing the areas on which only the state legislature can make laws, this include public health, education,
irrigation and agriculture, forests, fisheries etc..
 List - III Concurrent list; listing the areas on which both the Parliament and the State Legislature can make laws upon concurrently.
This include social legislations, economic and social planning, price control, criminal law, social security etc..
Assignment of Taxes to Various levels of Governments
Central government State governments
Land revenue, including the assessment and collection of revenue, the
Taxes on income other than agricultural income (List I, Entry 82) maintenance of land records, survey for revenue purposes and records of
rights, and alienation of revenues (List II, Entry 45)
Duties of customs including export duties (List I, Entry 83) Taxes on agricultural income (List II, Entry 46)
Duties of excise on tobacco and other goods manufactured or produced in
India except (i) alcoholic liquor for human consumption, and (ii) opium,
Indian hemp and other narcotic drugs and narcotics, but including medicinal Duties in respect of succession to agricultural income (List II, Entry 47)
and toilet preparations containing alcohol or any substance included in (ii).
(List I, Entry 84)
Corporation Tax (List I, Entry 85) Estate Duty in respect of agricultural income (List II, Entry 48)
Taxes on capital value of assets, exclusive of agricultural land, of individuals
Taxes on lands and buildings (List II, Entry 49)
and companies, taxes on capital of companies (List I, Entry 86)
Estate duty in respect of property other than agricultural land (List I, Entry
Taxes on mineral rights (List II, Entry 50)
87)
Duties of excise for following goods manufactured or produced within the
Duties in respect of succession to property other than agricultural land (List
State (i) alcoholic liquors for human consumption, and (ii) opium, Indian
I, Entry 88)
hemp and other narcotic drugs and narcotics (List II, Entry 51)
Terminal taxes on goods or passengers, carried by railway, sea or air; taxes Taxes on entry of goods into a local area for consumption, use or sale therein
on railway fares and freight (List I, Entry 89) (List II, Entry 52)
Taxes other than stamp duties on transactions in stock exchanges and futures
Taxes on the consumption or sale of electricity (List II, Entry 53)
markets (List I, Entry 90)
Taxes on the sale or purchase of newspapers and on advertisements Taxes on the sale or purchase of goods other than newspapers (List II, Entry
published therein (List I, Entry 92) 54)
Taxes on sale or purchase of goods other than newspapers, where such sale
Taxes on advertisements other than advertisements published in newspapers
or purchase takes place in the course of inter-State trade or commerce (List
and advertisements broadcast by radio or television (List II, Entry 55)
I, Entry 92A)
Taxes on the consignment of goods in the course of inter-State trade or Taxes on goods and passengers carried by roads or on inland waterways (List
commerce (List I, Entry 93A) II, Entry 56)
All residuary types of taxes not listed in any of the three lists (List I, Entry
Taxes on vehicles suitable for use on roads (List II, Entry 57)
97)
Taxes on animals and boats (List II, Entry 58)
Tolls (List II, Entry 59)
Taxes on profession, trades, callings and employments (List II, Entry 60)
Capitation taxes (List II, Entry 61)
Taxes on luxuries, including taxes on entertainments, amusements, betting
and gambling (List II, Entry 62)
Stamp duty (List II, Entry 63)
 The Indian Tax System
Centre
Income Tax
The Income Tax Act of 1961 imposes a tax on income of individuals and corporations. This
Act imposes a tax on income from house and property, from business and profession, from
salaries, from Capital gains, and from other sources.
In the central tax revenue, income tax is considered as the most important direct single tax
revenue. It is levied on the individuals, Hindu Undivided family (HUF), and other
unregistered firms. HUF refers to traditional Hindu joint families with one male head Karta.
HUF as a tax entity is entitled with several tax rebates and concessions. A certain proportion
of the personal income is exempted from the payment of income tax and those who cross
such exemption limit will have to pay the income tax. The tax is levied at progressive rate. ie,
the rate of income tax increases with the increase in taxable income. Tax buoyancy is a
measure of how rapidly the actual revenue from a tax rises (including that due to any change
in the tax law) as the tax base rises. It is based on the principle of ability to pay. It fulfills the
canons of equity and justice in the distribution of tax burden. It is thus a powerful instrument
in reducing inequalities. Income tax is often deducted at the time of salary payment, also
known as TDS (Tax Deducted at source)
Expenditure tax
Expenditure tax refers to tax which is levied on the basis of one’s expenditure rather than
income. It is a direct tax levied on the individuals with reference to the amount of
consumption expenditure. Earlier economists like J.S Mill(1851), Hobbes, Marshall, Pigou
and Fisher also argued in favor of expenditure tax on grounds of equity. Pro. Nicolas Kaldor
recommended expenditure tax as an alternative to income tax. In the light of this view, Govt
of India imposed expenditure tax in 1957 through the Expenditure tax act by the then finance
minister T. T. Krishnamacharya. It was later abolished in 1962. Expenditure tax is criticized
as it is difficulty to asses expenditure, windfall gains or gambling not considered, has no
slabs, may lead to unequal distribution of income and wealth, administrative difficulties and
unsuitability during depressions.
Corporation Taxes
Corporation tax is levied on the income earned by the joint stock companies or corporate
bodies which comes under the Companies Act 1956. This is calculated on the total income of
the company at a pre-specified rate. The corporate tax was imposed by the Companies Profits
Sur tax act 1964 (Surtax Act). The total corporation income is calculated by taking into
account the depreciation cost of assets and cost of trading into nontaxable income and the net
taxable income is calculated by deducing the same.
Corporate tax = dividend tax + sur tax on the net profits
The corporation pays a tax on its undistributed profits while the stock holders pay a tax on
the dividend income under the personal income tax. This is often criticized to be double
taxation.
Wealth Tax
Wealth tax was first of all levied from 1st Apr 1957 on the recommendation of Pro. Nicolas
Kaldor. He advised the levy of wealth tax on account of its merits taken by itself because it is
easy to administer and is based on the principle of equity and to check tax evasion and
retards unproductive hoarding. Tax evasion is the act of not paying taxes and it is illegal. It is
distinct form tax avoidance which is escaping from taxes using loopholes in tax system. The
wealth tax is imposed on the individuals depending upon the property one holds. The rate of
the wealth tax increases in the same way as of the income tax. ie with the increase of value of
property the rate is increased.
CENVAT
The govt of India in its budget for the year 2001-01 established a single rate Central Value
Added Tax (CENVAT) at the Centre. MODVAT scheme was restructured into CENVAT. In
2002 Kelkar committee proposed to replace all cental excise levies with CENVAT. A new set
of rules 57AA to 57AK, under The Cenvat Credit Rules, 2004, were framed. Under the
Cenvat Scheme, a manufacturer of final product or provider of taxable service shall be
allowed to take credit of duty of excise as well as of service tax paid on any input received in
the factory or any input service received by manufacturer of final product.
Customs Duties
Customs duties are levied on the export or import of any article. Customs Act 1962 imposes
duties of customs, counterveiling duties and anti-dumping duties on goods imported in India.
Import duties were prescribed as under the schedules I and II of Indian Tariff Act 1934 which
was later rationalized under the Finance act of 1965. Customs duties on various commodities
can be levied either according to the price of the commodity (ad-valorem duty) or according
to the quantity of the commodity (specific duty). The aim of levying import duties is to
protect the infant domestic industries from foreign competition. The aim of the export duty is
to discourage the export of essential goods and raw materials.
Service Tax
Service tax is a tax on services. Service Tax, imposed under Finance Act, 1994, taxes the
provision of services provided by service providers within India or services imported by
Indian from outside India. It is part of Central Excise in India. It is a tax levied on services
provided in India, except the State of Jammu and Kashmir. The responsibility of collecting
the tax lies with the Central Board of Excise and Customs. Pranab Mukherjee in his Budget
speech has indicated the government's intent of merging all taxes like Service Tax, Excise
and VAT into a common Goods and Service Tax. To achieve this objective, the rate of Central
Excise and Service Tax will be progressively altered and brought to a common rate.
States
Sales Tax
Sales tax constitutes a major source of income for the states. The tax is levied
on the sale of goods and services in the state. But certain restrictions have been
imposed by the central govt on certain goods entering into inter-state trade or
inter country trade. Some commodities have been declared essential by the
Govt of India. Sales tax has the advantage of wider coverage and hence an
effective fiscal instrument. However it is criticized to harm consumers and lays
more burden on large families. Generally sales tax are of two types General and
selective. Sales tax can also be demarcated in other ways like single point tax,
two point tax and multi point tax system. The selective items are chosen
depending upon the social urgency of the concerned goods. Sales tax is more on
the luxury goods in comparison with other necessities of life.
Land Revenue
Land revenue is collected annually just after the harvest season. It is based on
the principle of certainty, economy and convenience. It brings fixed income to
the state govts. The land revenue is paid by the agriculturalists after harvesting
and marketing. Land revenue has also been a subject of political dispute
because the farmers represent the biggest electorate group. Different states have
different rates of land revenue. It is determined on the basis of income in some
states whereas on the basis of production in other states.
Land revenue is generally deferred in the difficult circumstances or given
rebates in the case of floods, famines or natural calamities.
State Excise
State excise duty is levied on alcoholic liquors and narcotics. The state govt
levy excise duty on Ganja, Bhang, Charas, Opium and country- made liquor.
The state govts levy excise duty with the objective of increasing the revenue
and minimizing the use of intoxicants and harmful shrubs. In 1977 the ruling
party tried to observe prohibition. But it was strongly opposed by the state
govts as excise duty contributed a major share of the state revenue. Presently
some states have adopted partial prohibition while some others have adopted
total prohibition.
Motor Vehicle Tax
The motor vehicle tax was first imposed on all India bases in the form of fees
under the Indian Motor Vehicle Act 1914. The act deals primarily with the
regulation and control of motor traffic. Different fees are levied for registration,
permits, licenses etc. under Indian constitution it has been entered in the state
list in the seventh schedule which provides taxes on vehicles. Generally there
are three types of taxes to motor vehicles at the state level as motor vehicle tax,
passengers and goods tax, and local taxes like octroi, tools and wheel tax. the
basis of motor vehicle tax as well as rates vary from state to state.
Stamps and Registration
Stamps and registration fee is collected by the state govts and it is linked with
legal purposes. There are two types of stamps which are sold by the state govt
(1) court stamps (2) revenue stamps. The court stamps are required to pay
certain fee for those people who file suits in courts or go in for appeals and on
the other hand revenue stamps are affixed on commercial items which are
popularly known as a ‘pronote’. Judicial stamps are levied under the Court fees
Act 1870 while non-judicial stamps are regulated by Indian Stamp Act 1899
duly amended by govt of India from time to time. State govts also gets
considerable revenue from registration of properties in courts and tehsils.
Agricultural Income Tax
The tax is levied by the state govt on the net agricultural income of the farmers.
The John Mathai taxation enquiry committee of 1953 recommended this tax.
The K N Raj committee on Agricultural income and Wealth also endorsed it
over land revenue. To calculate the net agricultural income, the expenses made
on irrigation, local taxes and land revenue paid are deducted from the gross
agricultural income of the farmers. There is a slab system on various degrees of
agricultural income. More tax is levied on rich farmers whereas small farmers
are exempted to a greater extent.