THE BHOPAL SCHOOL OF SOCIAL SCIENCES
INTRODUCTION TO INDIAN TAX SYSTEM
INTRODUCTION
The most important aim of the Government of any country is to achieve economic growth
and equitable distribution of its wealth. Economic growth of every nation basically depends
upon its sources of revenues. Every Government has various sources of income, out of which
revenues generated through public returns, called Taxation is the biggest source of income for
them. It is an important means for attaining a proper technique for resources allocation,
distribution of income and wealth, alleviation of poverty and achieving economic stability.
Although a tax-payer is not entitled to claim any direct return against payment of taxes, yet
modern taxation policy aims at the fulfilment of the objectives of social welfare and evenly
dissemination of benefits of economic development among its populace.
In the present circumstances revenue generated through tax is a major source of income being
required for meeting expenditure which are to be incurred on various public utility services
and welfare schemes by the government. The payment of taxes to the government is a
fundamental duty and compulsory obligation of every citizen. Tax may be charged on their
personal income, property and tax is also to be paid at the time of manufacturing, selling or
purchasing a goods. From 1 July 1994 tax is now levied on services as well in India.
MEANING OF TAX
The word „Tax‟ for the first time appeared during 14th century in English language. The word
tax has been derived from the Latin word „Taxare‟ or „Taxo‟ which means „to assess the
worth of something‟. Tax is a compulsory payment levied on the persons or companies to
meet the expenditure incurred on conferring common benefits upon the people of a country.
Tax represents the amount of money we pay to the government at predefined rates and
periodicity.
In a simple word Taxes are essential contributions being charged by the government upon its
citizens in order to meet its general expenses incurred for the common good, without any
guarantee for corresponding benefits to the individual tax payer. If a person fails/denies the
payment of tax, he may be punished in the court of law as per the respective statute.
Definition
1. Adam Smith: “A tax is a contribution from citizens for the support of the state.”
2. P. E. Taylor: “A compulsory payment to Government without expectation of direct return
in benefit to the taxpayer is known as tax”.
3. Seligman: “A tax is compulsory contribution from the person to the Government to defray
the expenses incurred in the common interest of all, without reference to special benefits
conferred”.
In simple words we can say that, tax is a compulsory payment made by the citizen to its
government without any expectation of specific return for his own benefit.
*Edited & Compiled for Students by:
DR. NEETU JAIN
Assistant Professor
Department of Commerce
The Bhopal School of Social Sciences
THE BHOPAL SCHOOL OF SOCIAL SCIENCES
INTRODUCTION TO TAX
CHARACTERISTICS OF TAX
1. Tax is a Compulsory Payment: Tax is not an optional payment by a citizen but it is a
payment having legal enforcement behind it. It only means that no one can refuse to pay a
tax, on the general ground that he doesn‟t derive any benefit from certain state services. To
refuse to pay tax is an offence and it does not have any relation with the willingness of the
person to pay it or not. Tax is one sided thing to be decided only by the Government and no
one has a right to challenge the power of the Government to levy the tax.
2. Tax is Imposed by Authoritative Institutions: Ifpayments are made by people to each
other or by Government to the people, it does not fall within the purview of tax. For instance,
if the management of any religious institution makes it compulsory for every family of that
particular religion to pay a specified sum every year, it will never be termed as a tax. It
simply means that taxes are imposed only by authoritative institutions like – Central
Government, State Government and Local bodies e.g., Municipal Corporation and Gram
Panchayats etc. Thus, taxes are compulsory payment by the citizen only to the Government.
3. Personal Obligation: In India payment of tax is the personal responsibility of an
individual although it may be imposed on income, goods and services as well. Prof. Lutz has
rightly point out that the obligation to pay tax is a personal responsibility of every taxpayer.
This personal obligation to contribute to the states support is universal in nature and applies
to all including individuals, firms, companies etc.
4. Legal Provision: The imposition of tax by the Government is always based on certain
laws related to its taxation policy. The Government of India derives its authority to levy tax
from Indian constitution. Article 246 of Indian constitution, has allocated legislative powers
including taxation, between the Parliament and state legislature. The constitution does not
provide any taxation powers to Local Bodies, however the states on their own many assign
any of taxes in State list (List II) to the local bodies. These legal provisions grant authority to
the state to impose tax legally and a person failing to pay them is liable to face adverse legal
consequences.
5. No Element of Quid-Pro-Quo: A tax payer may get some benefit on the amount of tax
being paid by him, yet there is no guaranteed by the Government to provide him the benefits
directly or in the same proportion of amount of tax paid by him. As the amount of tax is not
fixed with reference to the exact benefit which a taxpayer receives from public service.
Hence there is no element of quid-pro-quo in the payment of tax in India.
6. Sacrifice and Common Welfare – Along with the legal compulsion an element of
sacrifice on the part of tax payer is also associated in the payment of taxes. In modern
democratic countries an enlightened tax payer pays taxes in public interest not for his
personal gain and benefit. It is a fact that benefit of public welfare facilities provided by the
Government, are enjoyed even by those people who have never paid taxes. Thus, even a „non
tax payer‟ is also the recipient of the services provided by the Government for welfare of
common masses.
7. Multiplicity of Tax Structure: In modern times Government imposes different type of tax
on different activities of public. India is having a broad based and extensive tax structure. Its
main feature is the existence of multiplicity of taxes. There are union government taxes and
state government taxes including both direct and indirect taxes. Although with the
introduction of GST from (First July2017) the Indian tax structure has been simplified to a
great extent.
THE BHOPAL SCHOOL OF SOCIAL SCIENCES
INTRODUCTION TO TAX
PURPOSE OF LEVY OF TAX
Initially, governments used to impose taxes for three basic purposes i.e., to cover the cost of
administration, maintaining law and order and for defence. At present Government‟s
expenditure pattern has changed and now the funds are required for incurring expenditure on
- public health, employment, pension, housing, sanitation and other public services.
Following are the general objectives of imposing taxes in India -
1. Generation of Revenue: The fundamental objective of taxation is to finance Government
expenditure. The Government is expected to implement various development and welfare
schemes for the masses. For fulfilling this expectation, the Government needs huge amount
of funds. The Government acquire these much-needed funds by imposing various taxes upon
its citizen.
2. Removal of Inequalities: The Indian Government has adopted progressive tax system and
has given stress on canon of equality so as to remove inequalities in the distribution of
income and wealth among its common people. Tax is imposed on persons according to their
income level. High tax rates are imposed upon high income group through progressive tax
system. This prevents concentration of wealth in a few hands. So, narrowing the gap between
rich and poor is another prominent objective of tax.
3. Ensuring Economic Stability: Taxation affects the level of consumption and production
in the country. Thus, it can be used as an active tool for achieving economic stability. Now a
days Government do use taxation as a means to control inflation and deflation occurring in
their economy. Tax serves as an instrument for promoting economic growth, stability and
efficiency. The government controls or expands the economic activities of the country by
providing various concessions, rebates and other facilities. The effective tax system is a
useful instrument in the hands of the Government to boost the economy.
4. Removal of Regional Imbalances: Regional disparity has been a chronic problem for the
developing countries. Tax is one of the ways through which regional disparities can be
minimized. The government provides tax exemptions or concessions for industries
established or activities carried out in backward and interior regions of India. This will help
increase economic activities in those areas and ultimately regional disparities can be brought
down to the minimum level.
5. Accumulation of Capital: Thegrowth of secondary sector largely depends upon the
capital investment incurred for establishing new industrial set up. Hence, the tax concession
or tax rebates provided by the Government for savings or investment in provident funds, life
insurance, investment in shares and debentures etc. will lead to large amount of capital
accumulation, which is an essential requirement for the industrial development in the country.
6. Creation of Employment Opportunities: Industries established in remote parts or
industries providing more employment are given tax holiday, tax rebate and subsidies. As a
result, the unemployment problem can be reduced to a great extent through these liberal tax
policy measures. TheGovernment can also increase the level of employment in the country by
giving tax concession or exemptions to small entrepreneurs, labour intensive industries and
start-ups in India.
7. Rationale Utilisation of Scarce Resources – Many a timesGovernments on one hand
impose heavy tax on production and sale of luxury items in order to discourage the producers
of such goods and on the other hand give tax rebate or exemption on production of essential
THE BHOPAL SCHOOL OF SOCIAL SCIENCES
INTRODUCTION TO TAX
goods. This step of the Government diverts the manufacturer‟s attention on the production of
essential goods and enables the country to utilize its limited resources optimally.
8. Improvement in Standard of Living: The Government after generating revenue through
its taxation policy utilise the same to play an effective role in enhancing the living standard of
its people. The government spends tax money on various schemes, including healthcare,
education, social security, and others. The government also offers assistance programs to
people in the form of subsidies, like food, fertilizer, and LPG subsidies.
TAX SYSTEM IN INDIA
The tax system in India traces its origin to the prehistoric text such as Manusmriti. Manu, the
ancient sage and law-giver stated that the king could levy taxes, according to Sastras. The
wise sage advised that taxes should be related to the income and expenditure of the subject.
As mentioned in these manuscripts, taxes were paid in the shape of gold-coins, cattle, grains,
raw-materials and also by rendering personal service. However, it is Kautilya'sArthasastra,
written in 300 B.C. which deals with the system of taxation in a real elaborate and planned
manner. According to the Arthasastra, each tax was specific and there was no scope for
uncertainty.
Based on these texts, the foundation of the modern tax system in India was conceptualised by
Sir James Wilson during the British rule in India in the year, 1860. However, post-
independence the newly-established Indian Government levied the taxes on its citizen to
generate income for undertaking projects to boost the economy of the country and to raise the
standard of living of its citizens.
Tax structure in India is a three-tier federal structure. The Central Government, State
Governments, and Local 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”. Each and every tax that is collected needs to backed by an accompanying
law. The Indian Constitution under Article 246 enlists different taxations in the country
between the Centre and the State. The Parliament passes laws to approve taxes collected by
the Central Government. In the case of the State Governments, the State Legislature holds
this power. The local governing and civic bodies too have the right to levy certain taxes
approved by their respective state legislature.
PURPOSE OF LEVY OF TAX IN INDIA
Taxes are the basic source of revenue to the government using which it provides
various kind of services to the tax payers.
The tax revenue is employed for executing various projects. It provides funding for
several important government welfare schemes.
Taxes also help to reduce economic inequality in society through redistribution of
wealth.
It helps the government to build roads, schools, health care institutes and finance law
enforcement and the judicial system.
THE BHOPAL SCHOOL OF SOCIAL SCIENCES
INTRODUCTION TO TAX
SALIENT FEATURE OF INDIAN TAX SYSTEM
1. Three Tier Tax System: Indian constitution has made a provision for the introduction of
federal tax structure. The constitution has made a detailed provision for the imposition of
various types of taxes by the Central Government, State Governments and Local bodies. The
Central Government of India levies taxes such as Income tax, Custom Duty, Excise Duty,
Corporation Tax, Central Goods & Services Act (CGST) and Integrated Goods and Services
Tax (IGST). The state governments are empowered to levy Value Added Tax (VAT), State
Goods & Services Act (SGST), Stamp Duty and Registration. The local bodies are allowed to
collect octroi, property tax and other taxes on various services like drainage and water supply
etc.
2. Multiplicity of Taxes: Themain feature of Indian tax system is the existence of multiple
taxes. There taxes are levied by Union Government, State Government taxes and local bodies
which are bifurcated as direct and indirect taxes. Among the direct taxes imposed in India,
the most important is income tax. The other prominent direct taxes are corporate tax, capital
gain tax and wealth tax. The indirect taxes in India now consists of GST and custom duties.
3. Progressive and Proportional. The tax system of India is perceived as progressive
because taxes are levied at increasing rates to increasing brackets of income and revenue. The
tax system is termed as proportional because the rate of tax levied is in proportion to the
amount of income or revenue it is being levied upon. The direct tax is framed in such a way
that as tax base increases, tax rate also rises sharply.
4. Narrow Base: The tax base is the total amount of income, property, assets, consumption,
transactions or other economic activity subject to taxation by a tax authority. Tax collections
in India are very low given the size of the economy. Tax revenues are low because only a
small proportion of Indians pay direct taxes and the tax base has grown very slowly in recent
years. In a reply to a question in Lok Sabha Anurag Singh Thakur, MoS, Ministry of Finance,
informed that, only one percent of the Indian population pays income tax only 5.78 crore
income tax returns were filed by individual tax payers for the financial year 2018-19 till
February 2020. Out of this, only 1.46 crore individual taxpayers filed returns declaring
income above Rs. Five lakh.
5. Integration between Central and State Revenue: During British period, there was no
integration between Centre and State revenue. But after independence, financial structure of
the Central and State Government has considerably changed. Now, there is a coherent
machinery for the collection, distribution and expenditure of the revenue keeping in view its
social justice and welfare aspect. In this way, Indian tax system is better organized and
capable to yield sufficient revenue to meet the requirements of development plans in the
country.
6. Revenue Authorities: The two important tax collecting authorities in India are – The
Central Board of Direct Taxes and The Central Board of Excise and Customs. The Central
Board of Direct Taxes (CBDT) is a part of the Department of revenue under the Ministry of
Finance, which provides inputs for policy and planning of direct taxes and is also responsible
for administration of direct tax laws through the Income Tax Department. The Central Board
of Excise and Customs (CBEC) is also a part of the Department of Revenue under the
Ministry of Finance. In India CBEC is the nodal national agency responsible for
administering customs, central excise duty and service tax. After the introduction of GST
THE BHOPAL SCHOOL OF SOCIAL SCIENCES
INTRODUCTION TO TAX
regime, the CBEC has been is now renamed as the Central Board of Indirect Taxes &
Customs (CBIC). The CBIC assist the government in framing policies related to GST and is
continuing with its previous role as well.
7. Tax Evasion: Tax evasion at a large scale is a negative feature associated with Indian tax
system. The public do not pay taxes honestly due to the high rate of taxes along with multiple
taxation. The psychology of Indian tax payer is to evade tax, which creates black money and
encourages corruption. Although due to the curtailment of tax rates and introduction of GST
the chances and habit of tax evasion in recent years is on decline trail and the tax payers are
now paying taxes honestly.
CLASSIFICATION OF TAXES
From income tax to custom duty, there are a variety of taxes applicable to Indian citizens
under the nation‟s taxation system. However, almost all taxes under the Indian taxation
system can be primarily distinguished under two broad categories viz. direct and indirect
taxes.
Direct Tax:
The meaning of direct tax can be derived from its name which implies that this tax is paid
directly by the taxpayer to the Government. These forms of taxes are levied directly on the
taxable income generated by individuals and corporations. The most common examples of
this type of tax in India are Income tax, Corporate Tax, Capital Gain Tax and Wealth tax.
From the Government‟s perspective estimating tax earnings from direct taxes is relatively
easy as it bears a direct correlation to the income or wealth of the registered taxpayers. In
India, the Central Board of Direct Taxes or CBDT is the Governing Authority on direct
taxes.
Indirect Taxes:
The indirect taxes are not levied directly on a taxpayer‟s income but rather indirectly when
they avail or purchase goods and services. These taxes are collected by the producer or
retailer from the supply chain and is paid to the Government hence the term „indirect‟. In
India, a consumer earlier paid several indirect taxes including sales tax, services tax, central
excise duty, additional customs duty, state-level value added tax and octroi tax, among
others. With the implementation of the Goods and Services Tax (GST) from 1st July 2017,
almost all the indirect taxes, have been subsumed under GST. Now, all these taxes are paid as
one tax called the GST. However, there are some indirect taxes which have not been brought
under the radar of GST. Customs duty, security transaction tax, building and welfare cess and
electricity duty levied by local authorities and state governments are some of them. The
Central Board of Indirect Taxes and Customer (CBIC) is the governing authority on indirect
taxes.
REFERENCES:
❖ Shripal Saklecha and CA. Anit Saklecha. (2020-21), Income Tax Law & Practice. Satish
Printers and Publishers, Indore.
THE BHOPAL SCHOOL OF SOCIAL SCIENCES
INTRODUCTION TO TAX
❖ Dr. H. C. Mehrotra and Dr. S. P. Goyal. (2020), Income Tax Law & Practice. Sahitya
Bhawan Publications, Agra.
❖V. P. Gaur and D. B. Narang. (2020-21), Income Tax Law & Practice. Kalyani Publishers
❖Taxation, Study Material , ICSI (2020)
