The origin of the tax system in India dates back to the prehistoric times when farmers and artisans paid their taxes as agricultural produce, silver and gold. The modern tax system that we know today was established by the British rule in the year 1860.

Being the largest source of income for government bodies, the tax system in India is very well-structured. The money collected through taxes has contributed to the overall growth and development of the nation. According to Article 256 of our constitution, an accompanying law backs up every tax that is collected.

Let us see the role of the government bodies in the tax structure in India.

Role of the Central and State Government

The tax structure in India has clearly specified roles for the Central Government and the State Government. The Central Government levies taxes such as Income Tax, Customs Duty, Service Tax and Central Excise Duty. The State Government levies taxes such as State Excise Duty, VAT, Professional Tax, Land Revenue and Stamp Duty and tax on Agricultural Income. Some minor taxes are also levied by the local authorities such as the Municipality and the Local Governments.

Now that we are aware of the tax-collecting bodies and the taxes they collect, let us know about the types of taxes.

Types of taxes: Direct taxes & Indirect taxes

  1. Direct Tax:

    Direct taxes are levied on individuals and corporate entities. These taxes cannot be borne or transferred to another individual or corporate entity than on which it is levied. A few of these taxes are income tax, capital gains tax and wealth tax. The most well-known tax among all these is the income tax.

    • Every assessee whose total income exceeds the maximum exempted limited has to bear Income Tax. The Union Budget annually prescribes the structure and the rates for the tax. The income is calculated based on various factors such as house property, salaries, capital gains, business and profession and other sources. The income levels are categorized into different slabs. This includes Individuals, Hindu Undivided Families, Companies, Firms, Trusts and Co-operative Societies.
  2. Indirect Tax:

    Indirect taxes do not involve direct payment to government authorities. These taxes are levied on goods and services and are collected by intermediate bodies who sell these goods or offer services. Some of these are listed below:

    • Customs Duty- This tax is levied on imports from foreign countries into India.
    • Service Tax: This tax is levied on service providers.
    • Octroi Tax- This tax is levied on goods which move from one state to another, and it differs from one state to another depending on the state government.
    • Value Added Tax- This tax is levied on the goods sold in a particular state.

Now let us have a look at the current situation of tax structure in India.

Goods and Service Tax (GST)

On the 1st of July 2017 Goods and Services Tax or GST was implemented into the tax structure of India. This tax comprises various direct and indirect taxes which are collected by both the central and state governments of India. Let us have a look at the taxes which have been replaced by GST:

  • Sales Tax
  • Central Excise Duty
  • Entertainment Tax
  • Octroi
  • Service Tax
  • Purchase Tax

GST comprises of three components:

  1. CGST- This stands for Central Goods and Services Tax. This is collected by the central government on intra-state supply of goods and services.
  2. SGST- This stands for State Goods and Services Tax. This is collected by the state government on intra-state supply of goods and services.
  3. IGST- This stands for Integrated Goods and Services Tax. This is collected by the central government on the inter-state purchase of goods and services.

GST has brought about simplification of the tax structure in India and this is one of its major benefits. It is levied on every stage of the supply chain starting from the purchase of the raw material to the sale of the finished product to the consumer. In every stage, there is a transfer of ownership and value addition takes place. Therefore, it is also known as a multi-stage destination-based tax. It is known as destination-based because the place where the goods are finally purchased is where the tax will be collected. For example, if a product is manufactured in Chennai but sold in Mumbai, the GST will be collected by the State Government of Maharashtra.

The tax structure in India has been modified several times over the course of years. A major change is the simplification of governing laws and the standardization of income tax rates. This has greatly enhanced the ability of the common man to understand these laws well. As a result, it has brought about ease in the payment of taxes, better compliance and improved enforcement of laws.

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