Taxation in India: History, Types, Articles, Features | Tax System in India

By BYJU'S Exam Prep

Updated on: November 14th, 2023

Taxation in India is a system composed of three main participating organs – central government, state government, and local municipal body. Each of these parties and majorly the government collects taxes from the general public in order to run the country from all fronts. Therefore, we can say that taxation in India is a well-structured system consisting of a three-level federal system. The federal government, state governments, and local municipal entities make up the tax system in India.

Taxes are the major income source for the government and therefore it becomes a national duty for all citizens to pay their dues as and when required with complete honesty. There are mainly two types of taxes when it comes to taxation in India – Direct taxes and Indirect taxes.

Taxation in India

Tax is the main and greatest source of funding for the government. The government is allowed to levy these taxes on the public as per the provisions of the Indian Constitution. The government uses tax money for a variety of programmes designed to advance the nation. The Indian tax system is effectively structured with a three-tier federal framework.

Taxation in India is a payment transfer that the government of the nation collects from people or any other taxable entity for the growth and security of the country. They are typically an unavoidable tax, fine, or other charge placed on people or businesses to pay for government operations.

What is a Tax?

A tax is a compulsory payment or fee which is charged by the government on the income of the general public which includes business profits as well. The term ‘tax’ is derived from the Latin word ‘taxare’ or ‘taxo’ which means determining the worth of an entity. Taxes are also levied on the cost of some goods and services or certain transactions.

Taxation in India is a concept that works towards the betterment of society, providing all basic amenities and facilities to the people. These taxes are utilized to accomplish all public works such as building schools or roads. They can be levied on an individual or a large corporation.

History of Taxation in India

The Central and State governments impose taxes on the income of the people in order to provide them with all the basic amenities. The money collected via taxes is used by the government for a variety of purposes such as education, public welfare schemes, etc.

The system of taxation in India was introduced by Sir James Willson in 1850. He was designated as the Finance Minister of India under British rule.

The Indian Income Tax Act which was introduced in the year 1860 basically marked the turning point in the taxation system in India. The reason for the introduction of this act was to balance the losses that the British government had incurred after the famous revolt of 1857.

Articles on Taxation in India

The constitution of India provides for the taxation system in India. Various provisions have been made in the Indian constitution to facilitate the tax system. Taxes are a major source of revenue for the government and therefore necessary to be levied in lieu of the various public facilities.

Articles 265 to 289 of the Constitution of India are reserved for the tax provision. Everything related to the tax regime and taxation system in India has been mentioned in the 7th Schedule of the Indian constitution. Let us know about a few important articles and what they mean:

  • Article 265 – The article mentions that there should not be any imposition of tax outside of the purview of the taxation laws and should be within the power of the legislature.
  • Article 266 – This particular article touches on the subject of consolidated funds and Public accounts of the states and India.
  • Article 270 – Here, the article concerns the taxes imposed and divided between the states and the union. This excludes Article 268, Article 269 and Article 269 A.
  • Article 273 – As per this article, the CFI or the Consolidated Fund of India will be charged in case of grants being provided under the export duty. This export duty will be levied on the Jute products in Orissa, Assam, Bihar, and West Bengal.
  • Article 275 – This article deals with the grants provided to the State by the Union government for various schemes, also concerning the benefit of the Scheduled Caste and Scheduled Tribes, and the development of the administrative sector of Assam district.

Features of the Indian Taxation System

Capital or money is needed to run the administration of a country as large as India. It is necessary for all the citizens of the nation to follow the tax rules and duly pay taxes as a duty towards the government. The government collects these taxes in a variety of ways. There are many important features of the Indian taxation system as follows:-

  • The main feature of the Indian tax system is the presence of a variety of taxes. There are different types of taxes levied separately by the Central and the State governments. Taxation in India is structured around two different types of tax which are Direct and Indirect Taxes.
  • Indirect taxes interestingly possess a high amount of share as compared to the direct taxes in the Indian tax system.
  • The revenue collected from the taxes is not enough in the Indian tax system as compared to other countries.
  • The tax incidence is irregularly divided in the system of taxation in India. It is higher in the urban areas as compared to the rural areas owing to less income in the rural areas.
  • The tax base in India is very low as there is a huge gap in the range of income. Taxation in India covers only a limited number of people who come under the slab of direct tax.
  • The Indian taxation system is composed of several flaws. Due to the complex tax laws in the Indian system of taxation, it is easy for people to evade taxes by finding loopholes.

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Types of Taxes in India

The taxation system in India is a well-designed structure based on a three-tiered feral structure which includes the central government, state government & the local municipal bodies. There are two main types of tax that are levied on the people of India by the Central and State governments which are:

  • Direct Tax – This is the kind of tax which is imposed directly on the income of the individual. Therefore it can be said that the burden of the tax is completely borne by the taxpayer and not by any third party. The rate of the direct tax keeps increasing simultaneously with the income of the taxpayer. Examples are – Income Tax, Wealth Tax, Corporate Tax, Property Tax, etc. Check the merits and demerits of direct taxes here.
  • Indirect Tax – The indirect tax is the type of tax which is levied on the expenses of an individual in place of their income. This tax is imposed on the money that an individual spends on goods and services. Contrary to the direct tax, this tax can be transferred from one party to another. A few examples of indirect tax are – sales tax, service tax, value-added tax (VAT), customs duty, etc.
  • All of the above-mentioned indirect taxes were levied on the public until 2017. Since 1st July 2017, a common tax named Goods and Services Tax or GST was introduced which has replaced all these indirect taxes. GST is levied on all the goods and services consumed by the customers.

Define Double Taxation in India

Double taxation in India is a concept that is mainly concerned with income tax. It refers to the practice of the income tax being levied two times on the same income source. This happens in the case of the income tax being imposed on an individual’s income on a corporate level as well as a personal level.

Double taxation also finds its occurrence in investments or trade happening on an international level. This usually happens when the income of the concerned individual is being taxed in two separate countries.

Benefits of the Tax System in India

Money is needed to handle a state’s business and administer its government. Therefore, the government levies taxes in many different ways on the revenues of people and businesses. The benefits of taxation in India are as follows.

  • Infrastructure funding for the public sector
  • Projects for development and welfare
  • Defence spending
  • Public insurance based on scientific research
  • Employees of the state and government are paid a variety of salaries.

How Tax is Calculated in India?

Taxation in India is based on a well-defined structure which is three-tiered. As discussed, the direct tax is levied on the income of the individual directly. Income tax is the most important direct tax levied on an individual’s income and a set pattern is followed with respect to the payment of this tax. The tax burden in this case is directly borne by the concerned individual.

The income tax paid as per the taxation system in India follows a set procedure and there is a fixed deadline for the same. If one misses the deadline, one will have to pay an additional penalty. There are different tax slabs and the rate of income tax is decided by these. The tax is calculated on the basis of the tax bracket, under which an individual’s income fits. There are a few simple steps to be followed while calculating your income tax:-

  • Calculate the gross income
  • Further, calculate the net taxable income excluding all deductions
  • Once you arrive at the desired net income or total income, you need to calculate the tax on the basis of the tax slabs.
  • The tax rate will be charged on the income as per the tax slabs
  • Check and combine the complete amount of tax to be levied on your income

Learn how the measurement of national income is done by clicking on the provided link.

Taxation in India UPSC

Taxes are the main source of income for the government and thus all citizens need to be honest and responsible with their due payments. Taxation in India is a necessary topic for all UPSC aspirants and thus requires complete attention. It is an extremely important topic with respect to the Indian economy in the UPSC syllabus & should be well-read in order to better understand the tax system in India. Here, we have provided some important facts about taxation in India important for the preparation for the upcoming UPSC exam:

  • The world’s first tax system was established in Egypt.
  • In ancient India, a tax known as the Yatravedana was imposed on pilgrims.
  • Jizya is the name for the religious tax levied under Sultan’s rule.
  • The Income Tax Act took effect on April 1st, 1962.
  • The tax known as excise tax is the main source of revenue for the central government.
  • The primary source of revenue for the state government is sales tax.
  • The Value Added Tax was introduced in India on April 1st, 2005.
  • The toll tax is intended to be charged for the transportation of vehicles over bridges and roads. Typically, the toll is collected via bridges and roads constructed with the assistance of the private sector.
  • The tax imposed against polluting factories is known as the carbon tax. The first country to implement this tax is New Zealand (2005).
Important Notes for UPSC
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