TAXATION IN INDIA by Ashish Bhalerao

India has a well developed tax structure with a three-tier federal structure, comprising the Union Government, the State Governments and the Urban/Rural Local Bodies.

The power to levy taxes and duties is distributed among the three tiers of Governments, in accordance with the provisions of the Indian Constitution. The main taxes/duties that the Union Government is empowered to levy are Income Tax, Customs duties, Central Excise and Sales Tax and Service Tax.

The principal taxes levied by the State Governments are Sales Tax (tax on intra-State sale of goods), Stamp Duty (duty on transfer of property), State Excise (duty on manufacture of alcohol), Land Revenue (levy on land used for agricultural/non-agricultural purposes), Duty on Entertainment and Tax on Professions & Callings.

The Local Bodies are empowered to levy tax on properties (buildings, etc.), Octroi (tax on entry of goods for use/consumption within areas of the Local Bodies), Tax on Markets and Tax/User Charges for utilities like water supply, drainage, etc.

 Since 1991 tax system in India has under gone a radical change, in line with liberal economic policy and WTO commitments of the country.

 Some of the changes are:

Ø  Reduction in customs and excise duties

Ø  Lowering corporate tax

Ø  Widening of the tax base and matching up the tax administration

WHAT IS A TAX?                                                                             

A compulsory contribution made by the assesse to the government from his earnings.

HOW MANY TYPES OF TAXES ARE THERE?

There are two types of Taxes in India

Ø  Direct Taxes

Ø  Indirect Taxes

The Taxes whose burden falls directly on the Tax payers are the “Direct Taxes” like Income Tax, Wealth Tax etc.

The taxes in which the burden is passed on to a third party are called “Indirect Taxes” like Service Tax, VAT etc.

DIRECT TAXATION IN INDIA

Direct taxation in India is taken care by the Central Board of Direct Taxes (CBDT). It is a division of Department of revenue under Ministry of Finance.CBDT is given the authority to create and control direct taxes in India.

In India the tax structure is divided amongst the central government and state government.

Central government levies tax	State government levies tax
Income, custom duties, central excise and service tax.	State excise, stamp duty, VAT (Value Added Tax), land revenue and professional tax.

Direct taxes are charged on the basis of residential status and not on the basis of citizenship.

The assessee are charged based upon the following factors

• Resident
• Resident but not ordinary resident.
• Nonresident.

Direct Taxes Reform
The system of direct taxes was very much complex and inefficient because of the combination of high marginal rates of personal income and wealth taxation and high rates of corporate profits. It had a major impact on economic policies, creation of savings and the trend of investment.

 INDIRECT TAX SYSTEM INDIA

The Constitution gives the permission to levy a large number of indirect taxes. But the most important ones are customs and excise duties charged by the Central government and sales tax excepting inter state sales tax to be charged by the state government.

The indirect taxes levied by the centre like customs, excise and central sales tax and the major indirect taxes levied by the states and civic bodies like passenger and goods tax, electricity duty and Octroi.

Since they are less observable than income tax, politicians are tempted to increase them to generate more state revenue.

Indirect Taxes Reforms

·         The indirect tax rule in India is still in the early stages of growth. Both the Central and State governments charge a multitude of indirect taxes. The central government charges tax on goods at the point of import (Customs duty), manufacture (Excise duty), interstate sales (Central sales tax or CST) and on provision of services (Service tax).

·         The state governments charge tax on goods sold within the state (Sales tax/Value Added Tax or VAT), and on the goods that enter the state (Entry tax).

·         In the present scenario corporate would have to analyze the tax cost involved in a transaction, have enough backup documentation to support their tax positions and keep looking for ways for tax maximization.