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Home / IAS Preparation / Taxation In India

Taxation In India - Types, Stakeholders Involved, Importance for UPSC Exam!

Last Updated on Nov 01, 2023
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Taxation in India is the prerogative of centre, state and local governments. This power to levy and collect taxes has been attributed to the Constitution of India. Further, taxes can only be levied with the approval of the parliament or legislature of the country backed by a law. Taxes in India are further subdivided under two major heads, i.e., Direct Tax and Indirect Tax.

in India is important from the perspective of UPSC IAS Examination, and it falls under the General Studies Paper 1 (preliminary) and General Studies Paper 3 (Mains) under the Indian Economy Section. For further information and an explanation of the topic, visit UPSC CSE Coaching here!

In this article, we shall discuss Taxation in India while discussing the different types of Taxes. We shall also have an insight into the central and state taxes and exemptions on deductions under the Indian tax system.

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What is a Tax?

The word Tax is derived from the Latin word ‘taxo’, which means ‘to assess the worth of something’. Tax is a mandatory contribution the individual makes to the government in response to the basic services and amenities provided to the country's residents. Taxes provide revenue to the government and provide strength to the economy. This helps a country undertake developmental projects and thus propel growth, thereby leading to economic prosperity.

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Historical Background of Taxation in India
  • The mention of taxes can be found in Manusmriti. However, the Formal Taxation system existed in India during the Mauryan Dynasty, where it was levied to the tune of one-sixth of the produce. Thereafter, the Mughal Dynasty brought the Jizya system to prominent in India.
  • The evolution of the modern taxation system in India can be traced back to the Colonial period when Britishers introduced a taxation system to compensate for the losses suffered by them during the revolt of 1857.
  • Further, the Income Tax Act was passed in 1866, and the taxation in India has since been evolving with multiple revisions. Post World War I, the Income Tax Act was passed in 1918 to compensate for the effects of the war. However, it was short-lived as it was replaced by the Income tax Act 1922, which remained in operation till 1961.
  • It was in 1961 that the modern Taxation system was introduced in India based on the recommendation of Law Commission & Direct Taxes Enquiry Committee.

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Latest Updates, Facts and Figures about Taxation In India
  • There has been more than 80% growth in the number of returns filed in the last four financial years, and tax-to-GDP ratio rose to 5.98% in FY 2017-18.
  • The share of Indirect taxes has increased by up to 50 percent of the gross tax revenue in FY2019.
  • India’s tax-to-GDP ratio is 16.6% against the OECD average of 34%.

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Types of Taxation in India

The taxation system in India has been divided into two categories: Direct Tax and Indirect Tax.

Fig: Taxes in India

Direct Tax with Detailing Examples

  • Direct tax is levied directly on the individual whose impact and incidence cannot be transferred.
  • Direct taxes are progressive.
  • The Central Board of Direct Taxes overlooks direct taxes.
  • The important types of direct taxes are Income tax, Corporation tax, Capital Gains tax, Securities transaction tax, etc.

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Indirect Tax with Detailing Examples

  • Indirect taxes are taxes levied on considerations and impact and incidence of which can be transferred to some other individual.
  • Indirect taxes are regressive in nature.
  • Central Board of Indirect Taxes overlooks them.
  • Some indirect taxes include Sales tax, Customs duty, and Toll tax, etc.

Eligibility (Individual, Organization) of Taxation in India

The taxability of an individual depends on his residential status, which is defined on the basis of his physical presence in India as per the Income Tax Act. The taxability of an organization (Company or Limited Liability Partnership) depends on the residential status of the company, i.e., where the effective management is in India or outside India.

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Taxation in India

Taxation in India is a three tier federal structure which consists of the Centre, State and local bodies. The power to levy taxes has been provided for in Article 256 of the constitution, which states that ‘No taxes can be levied or collected except by the authority of law’.

Fig: Taxes In India

State Taxes

  • Taxes levied and collected by the states vary from state to state. These are levied and collected by the state governments.
  • Some examples of state taxes are:
    • Professional tax: This tax is levied on any person who earns income by profession.
    • Stamp duty: It is levied on official documents like registration of marriage, and the amount of this tax depends on the value of the transaction.
    • Entertainment tax is usually levied on movie tickets, exhibition or amusement parks.
    • Luxury Tax: It is levied by the hotels or any establishments that provide accommodation to the individuals.

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Central Taxes

  • Taxes levied by the central government are called central taxes.
  • These taxes may be wholly attributed to the central government or divided between the central and the state governments.
  • Examples of central taxes are:
    • Excise duties: These are levied on goods manufactured in India.
    • Gift tax: It is levied on gifts whose value exceeds Rs 50,000.
    • Income tax: It is levied on the income of the individual.

Stakeholders Related to Taxation in India

The stakeholders involved in taxation in India are:

Ministry of Finance

  • The Ministry of Finance serves as the treasurer in India and is responsible for economic decisions in the country.
  • It consists of various departments that assist in the country's economic management by formulating policies and programmes.
  • The various departments under the Ministry of Finance, playing a key role in the economic decisions of the country are:
    • Department of Revenue
    • Department of Financial Services
    • Department of Economic Affairs

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Income Tax Department

  • It functions under the Department of Revenue, Ministry of Finance.
  • The main function of the Income Tax Department is to collect direct taxes in India.
  • The Central Board of Direct Taxes heads the income tax department.

Central Board of Indirect Taxes and Customs

  • The Central Board of Indirect Taxes and Customs has been renamed post rollout of GST.
  • It assists the government in formulating policies concerning GST.

Taxation in India: Income Types

The types of Income, as per Section 14 of the Income Tax Act, can be classified as under:

  • Salaries.
  • Income from house property.
  • Profits and gains of business or profession.
  • Capital gains.
  • Income from other sources.

Taxation in India: Exemptions on Deductions
  • Exemption on taxes are deductions which lead to lowering of tax liability.
  • These deductions are subtracted from the total tax liability to ascertain the total amount of tax payable.
  • Various types of deductions available are:
    • House Rent Allowance: HRA exemption is availed in case of rented accommodation.
    • Medical Insurance Deductions: This is available on the premium paid for any medical policy.
    • Section 80C: Availed for any investment made.
    • Section 80CC: Deduction for premium paid for Annuity plan of LIC.
    • Section 80CCD(1): Availed for contribution to pension account.

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Taxation in India : Cryptocurrency
  • In Budget 2022-23, the central government has proposed a specific tax regime on the taxation of virtual digital assets.
  • This came into effect from April 1, 2022, and is levied under Section 115BBH of the Income Tax Act.
  • The virtual assets would be taxed at the rate of 30%.
  • Further, the central government has clarified that no deduction would be allowed regarding any expenditure made or loss incurred during the transaction of such assets.
  • Also, gifts of virtual assets would be taxable in the hands of the recipient.

Impact of Taxation on Cryptocurrency

The imposition of taxation on cryptocurrency had mixed impacts.

  • The imposition of taxes has led to a decrease in the trading volumes of cryptocurrencies. Trading volumes on WazirX and CoinDCX dropped by at least 80 per cent.
  • The traders of cryptocurrency have now shifted to other international exchanges to bypass the heavy TDS.
  • Many Startups are considering shifting to crypto friendly countries to execute their operations.
  • Further, it has also resulted in a positive impact on investors and has reduced speculation and manipulation in the crypto industry.
  • It has reduced the tendency of fraudulent activities.

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Role of Taxation in Economy

The importance of taxation in India is:

  • It provides funds for infrastructure development in the country.
  • Progressive taxes act as automatic stabilizers in the economy and thus reduce inequalities.
  • It helps in creating a vicious cycle of growth in the economy.
  • It provides the government the much-needed funds to carry out welfare activities.
  • Taxes can be used as a medium to control inflation in the economy during periods of boom.

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Goods and Services Tax
  • Goods and services tax was implemented on July 1, 2017.
  • It is a multi stage, consumption based tax.
  • Under it, tax is charged on each stage of the supply chain.
  • It removes the cascading effect of taxes.
  • It subsumed various kinds of taxes prevalent in the economy and simplified the country's tax structure.
  • It has three components: CGST, SGST, and IGST.

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Concluding Remarks

Taxes play a key role in ensuring the prosperity of the nation. By providing the government with the ready availability of funds, it ensures development of infrastructure in the country and also helps reduce inequality by means of welfare activities that the government can undertake due to funds availability, thereby leading to the realisation of Sustainable Development Goals.

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UPSC Previous Year Questions On Taxation In India

1.2017Explain the rationale behind the Goods and Services Tax (Compensation to States) Act of 2017. How has COVID-19 impacted the GST compensation fund and created new federal tensions?

2.2017Enumerate the indirect taxes which have been subsumed in the goods and services tax (GST) in India. Also, comment on the revenue implications of the GST introduced in India since July 2017.

3.What is the meaning of the term ‘tax expenditure’? Taking the housing sector as an example, discuss how it influences the budgetary policies of the government.

We hope all your doubts regarding the Taxation in India are addressed after going through this article. Testbook provides comprehensive notes for different competitive examinations. It has always assured the quality of its product like content pages, live tests, Gk and current affairs, mocks and so on. Ace your UPSC preparation with the Testbook App!

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Taxation in India FAQs

Tax is a compulsory payment made by an individual to the government. It forms an integral part of promoting growth and development in the economy.

Direct taxes are levied directly on the individual and its incidence cannot be shifted on some other individual whereas indirect taxes are levied on consideration, incidence of which can be shifted on some other individual.

The tax slabs for individuals are up to Rs 2,50,000 the tax rate in Nil. For income more than Rs 2,50,000 and less than 5,00,000 the tax rate is 5% above ₹ 2,50,000. For income between ₹ 5,00,001 - ₹ 7,50,000 the tax rate is ₹ 12,500 + 10% above ₹ 5,00,000. For income between ₹ 7,50,001 - ₹ 10,00,000 the tax rate is ₹ 37,500 + 15% above ₹ 7,50,000 and henceforth.

ITR can be filed through the following methods: Online Mode – through e-Filing portal. Offline Mode – through Offline Utility.

GST was implemented on July 1, 2017.
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