Indian Tax System- A three tier Federal Structure

Introduction 

A tax is a necessary payment made by the taxpayer to the government, to fund their government spending and various other regional, national, or local expenditures. So, who gives sovereignty to these governmental bodies to impose taxes? Well, it’s the Constitution that has dispensed this power to the center, state and local bodies. The Indian tax system tracks its origin way back to prehistoric texts like Arthashastra. Presently, there has been a lot of advancement in the Indian tax structure. Various undertakings have been made to simplify the procedure and thereby enhance the predictability and mechanization of the structure.

History of the Indian Tax System

With the base of the prehistoric texts, the modern Indian tax system was conceptualised during the British rule in India by Sir James Wilson. But there was a lot of elaborateness in its structure due to the presence of multiple taxes in the country. However, after the post-independence period, things took a major turn with a host of changes in the Indian tax structure, where many taxes were abolished and only the important ones were kept.

Scheme of Taxation in India

Indian constitution includes Article 246 which specifies the distribution of legislative powers between the State legislature and the Parliament of India. The Constitution comprises three lists that mention the areas of responsibility of the Indian Tax system under the various heads of the Government. 

1. List – I include the areas under which the Parliament of India makes laws.
2. List – II entails the areas that are under the heads of the state legislature.
3. List – III concerns the areas where both the state government and Parliament of India can work together. 

Indian Tax Structure 

The types of tax system in India is categorized under two sections namely, Direct and Indirect tax. On one hand, direct taxes are inflicted on the taxable earnings that are earned by the people and entities. Here, the pressure is on the assessor himself and not on the seller. But on the other hand, indirect taxes are imposed on the sale of goods and services. Here, the burden stays on the sellers and not the assessees. 

Interestingly, direct taxes under the Indian tax structure account for nearly 50% of the administration’s revenue. The taxes encompassed in this 50% are income tax, corporate tax and capital gains tax. One thing that is to be noted is the fact that not everyone is charged with the same tax percentages. The Income-tax Act separates the income into various groups and thereby charges different rates for the same. In India, we have merged all the complex indirect taxes of the Indian tax system into one simple tax, known as the Goods and Services tax. 

Goods and Services Tax

The GST system in India is a blend of all the indirect taxes that have been creating a lot of complexities over time. Certainly, this has facilitated things and now we only have to evaluate three taxes, compared to five or six indirect taxes. The list includes the State Goods & Services Tax (SGST), Central Goods & Services Tax (CGST) and Integrated Goods and Services Tax (IGST). For the case of CGST and SGST, both of them are levied when the sale comes about within the state. However, IGST is assessed when goods are sold between different states. 

The GST system in India makes GST rates for different products, which is announced by the GST council headed under the Central Board of Indirect taxes and Customs. Being a multi-stage destination-based tax, GST is imposed on each phase of the supply line, right from the beginning till the end whenever there is an extension in the value. The GST system in India has allocated the goods and services into five different tax slabs of 0%, 5%, 12%, 18%, and 28%. 

Benefits of Taxes in India

As a tool of economic development, the Indian tax system assists in the proper functioning of the community. Some of the benefits that you get from the payment of taxes are: 

1. Payment of taxes is helpful when in need of compensation, in cases of accidents and miss happenings.
2. Payments from taxes help the government in maintaining a standard of living for the people.
3. One can cover his life insurance up to 50 lakhs to 1 crore if he pays tax.
4. Payment of tax helps one get loans and credit cards easily, where the ITR return acts as an income proof of the person.

Tax Evasion & its Effects

The government’s inadequacy in expenditures is mainly due to the issue of tax evasion. In India, only 5% of GDP is counted under the head of tax. This is due to the lack of understanding about income taxation among the population of India. One of the main reasons behind tax evasion is bribery and corruption. Under this, people sponsor other people with black money, to augment their prosperity and thereby lessen the rate of surcharge on their income. 

The fact that black money exists with the people naturally leads to inflation in the economy. This hereby hinders the ability of the authorities to bring down the prices heightened by the force of inflation. Furthermore, this deflects the already insufficient resources into illegal activities. Unfortunately, it is the honest population that has to pay prices for it. 

Conclusion 

There are several views regarding the imposition and non-imposition of taxes in India. We should take care of the fact that the benefits from the payment of taxes will not be immediate, it is a gradual process where privileges will be experienced in the long term. At present, we don’t need an abrupt effect, but faster growth in earnings which arises from an elevated growth rate in the economy. A prominent part of the Government’s revenue gets lost between the tax exemptions provided by it. If there is a need to reform this institution, we should carry some ideas from the globe and then move ahead with it.