India’s Tax Structure

The Indian tax structure is important because it is the largest source of income for the government of India. The projects for the development of the nation are done with the help of money collected from the taxes. The Indian tax structure has a three-tier federal system. The tax structure consists of the central government, state government, and municipal bodies. Taxes are imposed on people by the government to generate finance for the development projects to boost the economy of the country which will help in raising the standard of living of the citizens. The payment of taxes has multiple benefits like better infrastructure, which will lead to the development of the nation, upliftment of society, and welfare activities for the nation.

The Types of Indian tax structure

The Indian tax structure is a well-organized three-tier tax structure consisting of the central government, state government, and local municipal bodies. It divides the tax structure into mainly two types, 1) direct tax and 2) indirect tax. Direct taxes are applied to your income and indirect taxes are applied to the expenditure.

Direct and Indirect taxes

Direct taxes are applied to individuals and corporate entities. For example, for an individual taxpayer, the most important direct tax is the income tax that we pay. It is mandatory to pay income tax to all citizens if that person’s income is above a certain limit.

In the taxation of India, direct tax contributes almost 50%. Other taxes under the direct tax in our Indian tax structure are,

1. a) Capital gain tax applies to sales from capital assets only. Capital gain is the factor on which the rate of tax depends. Capital gains are also of two types, short-term capital gains tax, and long-term capital gains tax.
2. b) Corporate tax applies to the businesses that file their return as a company. This also depends on the annual income or turnover of the firm or business.

Indirect tax in the Indian tax structure is the most consistent and largest source of revenue for the government. The type of indirect taxes service tax, Indian excise duty, value-added tax, customs daily, stamp duty, and entertainment tax.

Features of the Indian tax structure

The first feature of the Indian tax structure is the multiplicity of tax structure- the main feature of the Indian tax structure is the existence of a multiplicity of taxes. Union government taxes and state government taxes, both exist, and the tax structure includes both direct and indirect taxes.

The second feature of the Indian tax structure is that the indirect taxes hold a large share in our Indian tax structure. Indirect taxes dominate over direct taxes. According to research, because of the undeveloped economy and major inequality in income, the percentage of direct taxes is limited.

The third feature is the insufficient tax revenue. Although there is a rise in trend in tax revenue still the total tax revenue is still small compared to the developed countries. The GDP ratio is 8 to 9 per cent in India whereas in developed countries like the UK, and the USA the share has a range between 30 to 40 percent.

The fourth feature is the incidence of taxation. In the Indian tax structure, the incidence of taxation is much higher in urban areas than compared in rural areas because of the predominance of agriculture as an occupation in rural areas and less income in rural households.

The fifth feature of the Indian tax structure is its progressiveness of the tax structure. The Indian tax structure is framed to make sure that all indices of ability to pay are taxed. Depending on the type of commodity and consumer class excise duties are levied and collected discriminately.

The sixth feature is that the tax base is very narrow in India in both direct and indirect tax systems. The research shows that only one per cent of the working population of India comes under the preview of direct tax.

The seventh feature of the Indian tax structure is the complexity of Indian laws. With the intention of a broad-based tax system, a lot of changes have been introduced to the tax structure. There are many loopholes in the direction as well as indirect tax structure which provides a lot of loopholes to people to avoid tax.

Conclusion

In this article, we went through the definitions and understanding of the Indian tax structure, why it is necessary, what are its types, and what is a direct and indirect tax. We also looked at the features of the Indian tax structure which told us what problems are affecting the taxation in India. We also looked at the types of taxes based on the source of the taxpayer’s income and expenditure.