Concepts of Taxes in India - A Snapshot

Introduction

The Government takes primary responsibilities for the welfare of its citizens, as in the matters of health, education, employment, infrastructure, social security and other developmental needs. To facilitate these, Government needs revenue. Taxation is the primary source of revenue for the government for incurring such public welfare expenditures. Therefore, Government takes taxes from the public and incurs welfare expenditure for public at large. However, no one likes to pay his hard earned money in the form of taxes. Therefore, taxes are made compulsory and are the enforced contribution to the government revenue by the public. The Government levies taxes on income, business profit, cost of goods, services and transactions.

In short, Tax is a compulsory levy by the government on income, commodity, services, activities or transactions.

Basic reasons to impose taxation

1. To provide basic facilities for every citizens of the country;
2. To provide protection of life and wealth
3. To finance multiple government bodies

Administration of Taxes in India

Ministry of Finance, Government of India
Department of Revenue
Central Board of Direct Taxes (CBDT)
Central Board of Indirect Taxes & Customs (CBIC)

• Both Boards have been constituted under the Central Board of Revenue Act, 1963;
• CBDT deals with levy and collection of direct taxes; whereas CBIC deals with the levy and collection of indirect taxes.

Types of Taxes in India

• There are two types of taxes. Direct Tax and indirect tax
• Tax, of which incidence and impact fall on the same person, is known as Direct tax, such as Income tax, wealth tax etc. Direct tax is directly recovered from the assessee, who ultimately bear such tax.
• On the other hand, tax, of which incidence and impact fall on two different persons, is known as indirect tax, such as Goods and services tax (GST), Customs Act etc. Indirect tax is recovered from the assessee, who passes such burden to another person and is ultimately born by the consumers of goods and services.

Difference between Direct Taxes and Indirect Taxes

Concepts and Features of Indirect Taxes

• Tax on good and services: Indirect tax is levied at the time of manufacture, purchase, sale, supply, import or export of goods and services;
• Burden: Indirect Tax is paid by the seller or service provider and is recovered from the consumer or buyer of such goods or services. Thus burden of indirect taxes is shifted from seller to buyer and ultimately borne by the consumer of such goods and service;
• Inflationary in nature: Cost of goods and services is increased due to levy of indirect taxes. Thus indirect taxes are inflationary in nature;
• Social welfare: This tax also act as a useful tool to promote social welfare by levying higher rate of tax on harmful or sin goods;
• Wider tax base: Almost majority of goods or services are liable to indirect tax with very low threshold limit. Hence, tax base is much wider in indirect taxes as compared to direct taxes;
• Regressive in nature: all persons be it rich or poor, will bear equal wrath of tax on goods or services consumed by them irrespective of their ability. Indirect tax does not create any difference between rich and poor. If consuming the goods or services, poor persons are also required to pay same and equal indirect tax as to be paid by rich people. Hence it may increase disparities.

Constitutional validity of taxes

The Constitution of India is the supreme law of India. Any law or tax law which is not in conformity with the Constitution, is called ultra vires the Constitution and held as illegal and void. Article 265 of the Constitution lays down that no tax shall be levied or collected except the authority of law. Article 246 read with Schedule VII divides subject matter of law made by legislature into three categories:

1. List I: Union List (Only Central Government has the power of legislations on the matters listed in the union list.
2. List II: State List (Only State Government has the power of legislations on the matters listed in state list.
3. List III: Concurrent List (Both Central and State Government can pass legislations on the matters listed in concurrent list)

If a state law relating to an entry in list III is repugnant to Union Law relating to that entry, the Union law will prevail and the state law shall, to the extent of such repugnancy, be void. (Article 254)

Following major entries in the respective list enable legislature to make tax laws