The Taxation system of India is one of the most well defined and well-structured systems in India. Taxes are the largest source of income for the government so we can say that tax plays an essential role in the development of our country. For a country like ours which is large and populated, the cost to run the entire nation is ginormous; here the taxes assist the government to run functions and duties smoothly. These include infrastructure projects, Public welfare initiatives and schemes and Public Institutions.
The Indian taxation system has rooted back from the time of Manu Smriti and Arthasastra. Based on these manuscripts, the present taxation system in India was conceptualised by Sir James Wilson for the first time in 1860. Although after independence the newly formed government made a new defined system in order to excel our economic growth, the Income Tax Act, 1961 was passed. Since 1962 several amendments have been made in the Income Tax Act by the Union Budget every year.
Taxation System in India
Taxation system in India is a three tier federal system consisting of the central government, state governments, and local municipal bodies like municipal corporations.
Article 256 No one can levy or collect the tax without the permission of law.
- The central government of India Imposes taxes such as Income tax, Custom Duties, Excise Duty, and Corporation Tax.
- The State government imposes taxes such as Land revenue, Taxes on agriculture income, Stamp Duties, Tolls, State excise duties, Taxes on profession, trades, and employment.
- Local bodies can collect octroi and impose property taxes and taxes on various services like water and drainage.
Types of Taxes
Government imposes taxes in two ways: Direct Tax and Indirect Tax
As the name suggests Direct taxes are imposed directly on the taxable income of an individual or organisation. They are paid directly to the government. An important fact to know here is that it is the taxpayer’s responsibility to submit these tax amounts.
Type of Direct Tax:
1. Income Tax: This tax is imposed by the government on the income of its citizens. Income tax is collected by the central government. The government can change the rate slabs every year in the union budget.
2. Corporate Tax: It is levied on the net income or the profit of a corporate organisation. It is imposed on both domestic and foreign companies. As per the provisions of the Income Tax Act, 1961, the rate of tax is imposed and is known as the Corporate rate tax.
3. Property Tax: It is imposed by the government on all the real estate an individual owns. These could include residential buildings, office buildings and premises rented out to third parties.
4. Capital Gain Tax: It is imposed when an individual sells his assets such as real estate, business, patent, trademark or stocks. Based on the holding period taxes are classified as:
- Short Term assets: Any asset excluding securities, which is sold within 36 months from the time they are acquired comes under short term assets.
- Long term assets: An asset that is held for more than 36 months.
Indirect taxes are the taxes that are imposed on goods or services. It is not directly imposed on the income of an individual but indirectly imposed on the expenses incurred by an individual. For example, if a tax is collected by a retail store from a customer who pays the price of the purchased goods, this price includes tax too then the retail store later files the tax return and forwards the tax to the government.
Type Of Indirect Tax:
1. Sales Tax: It is imposed on the selling and purchasing of a product within India. This tax is imposed on the seller of the product who then transfers it onto the purchaser by adding sales tax on the price of the said product. Sales tax is imposed by central as well as state governments.
2. Value-added Tax (VAT): It is a tax that is imposed on products repeatedly at every point of its sale at which value has been added.
3. Octroi Tax: It is imposed on goods that move from one place to another. The rate of tax depends on the State government.
4. Custom Duty: It is imposed on goods on transferring them to international borders.
5. Good And Services Tax (GST): It is imposed on the supply of Goods and Services. GST is a comprehensive, multistage, destination-based tax that is imposed on every value addition. GST is the single domestic indirect tax law for the entire nation. It was passed in the parliament on 29th March 2017 and came into effect on 1st July 2017.
GST has replaced many taxes such as Service Tax, Duties of excise, Central excise duties, ceases and surcharge, additional duties of excise, and additional duties of custom etc.
Types of GST
There are four types of GST which are as follows:
1. State Goods and Service Tax (SGST): The state government levies SGST on Intrastate goods and services transactions.
2. Central Goods and Services Tax (CGST): The Central government levies CGST on interstate goods and services transactions and is governed by CGST Act, 2017.
3. Integrated Goods and Services Tax (IGST): When the supply of goods and services happen between the states also called inter-state transactions then IGST is charged. As per the GST bill both central and state share revenue collected through IGST.
4. Union Territory Goods and Services Tax (UGST): It refers to Taxes imposed on intra union territory goods and services transactions.
GST Rate In India
The GST rate slab is decided by the GST council. The GST rate for various goods and services are divided into 4 slabs – 5%GST, 12%GST, 18%GST and 28%GST. For luxury products the GST rate is usually high and low for essential products. The GST rates are revised by the GST council periodically.
Difference Between Direct and Indirect Tax
Summing up all the major differences in Direct and Indirect tax:
|BASIS||DIRECT TAX||INDIRECT TAX|
|Imposed on||Income and Profit||All goods and services|
|Nature||Progressive, because the direct tax rate of tax increases as the taxpayer income increases.||Regressive, because indirect taxes affect people irrespective of their income.|
|Tax evasion||Possible||Not possible|
|Inflation||Helps in reduces inflation||Contributes in inflation|
|Shifting of a tax||Cannot be shifted||Can be shifted to other person|
|Example||Income tax, Wealth tax||GST, Excise Duty|
Tax deduction is reducing income that lowers one’s tax liability. It is a kind of tax benefit that helps in saving tax. Deductions are expenses incurred during the year then it can be subtracted from one’s total income in order to get how much tax one needs to pay. There are many ways in which deduction can be availed from life insurance funds to loans. Here are some common ways of tax deduction:
1.Public Provident Funds (PPF) – When one contributes to their PPF account, They can get tax deduction under Section 80C of the Income Tax Act,1961.
2. Life Insurance Premiums – One can get an Income tax deduction for paying premiums towards life insurance policies under Section 80C of the Income Tax Act.1961.
3. Bank Fixed Deposit (FD’s) – One can get a tax deduction by investing money in a fixed deposit for a tenure of 5 years, under Section 80C of the Income Tax Act. 1961.
4. Senior Citizen Saving Schemes (SCSS) – Senior Citizens can get a tax deduction by investing in this scheme. This scheme is eligible for tax deduction under Section 80C of the same act.
There are many other ways for tax deduction such as National Saving Certificate (NSC), Post office time deposit (POTD), Unit-Linked insurance plans (ULIP), Home loans EMI’s, Mutual Funds & ELSS, Stamp duty and Registration charges for a home, Retirement saving plan, Tuition fees, Medical Insurance Premium, Infrastructure Bonds, Charitable Contribution, Treatment of Disabled Dependents, Deduction for preventive health check-ups, Interest paid on education loans and Deduction on house rent paid.
Tax evasion is an illegal activity where the person deliberately hides or misrepresents their income from the authorities in order to get a reduction in tax. Tax evasion is a serious crime and comes under criminal offence and substantial penalties.
There is often confusion between tax evasion and tax avoidance, Tax avoidance is a legal way with which one can have a reduction in the percentage of their payable tax amount.
Tax evasion is majorly done by people with high incomes. The possible reasons for tax evasion can be Inflation, lack of clarity and reliability in tax legislation, Promotional regimes (tax incentives, exemptions and tax expenses), Corruption in the government sector, High rates and Tax pressure, Promotional schemes (tax incentives, exemptions and tax expenses), Inadequate communication on the usage of tax-funded resources, A lack of citizens and fiscal honesty, and Inefficiency of the Tax Administrations (AATT), etc.
Some of the common methods of tax evasion are:
- In order to avoid customs duties, import-export taxes or state taxes some people/businesses choose to smuggle their goods.
- False tax return: Intentionally submitting false tax returns in order to get a reduction on the tax which they are supposed to pay.
- Faking documents to claim exemptions: There are some financial benefits given to underprivileged people by the government. Some people who do not fall under these privileges try to get tax exemption by submitting fake documents.
- Sometimes people bribe the official to not make them pay tax or make it disappear.
- Maintaining bank accounts outside the country and hiding them from the income tax department.
Tax evasion is a Criminal offence. Chapter XXII of the Income Tax Act, 1961 states provisions related to the prosecution of such offences, failure to file a timely return, false information, deliberate attempt to evade tax, fabrication of numbers etc. The burden of proof in such cases lies on the accused.
Penalties for Tax Evasion
There are many penalties for a person/company who is found doing tax evasion. Some of these penalties are:
1. When income is not disclosed by an individual or company, collecting 100% to 300% of tax from them as per Section 271(C) of the Income Tax Act 1961.
2. If an individual fails to maintain their accounts properly as directed in Section 44AA, a penalty of Rs. 25,000 may be imposed.
3. The offender is given a penalty or punishment of minimum rigorous imprisonment to a minimum of 6 months to a maximum period of seven years and a fine if tax evaded exceeds 25 lakhs.
4. If a company fails to have itself audited or submit an audit report as required by Section 44AB, it must pay a penalty of either Rs 1.5 lakhs or 0.5% of their annual sales turnover, whichever is greater.
These are just some of the penalties that are levied by the income tax department, These penalties can be a heavy sum to pay.
For a country like ours which is growing and developing rapidly, Tax plays the most crucial role in it. India is a country where people belong to different communities and statuses and that’s the reason why the taxation system is long and complicated. India is suffering a lot from tax evasion. Only 1 per cent of the Indian population pays income tax and declares earnings above the non-taxable income. Only 5.78 crore income tax returns were filed by individual taxpayers for the financial year 2018-19 till February 2020. These tax defaulters make the whole taxation system hollow. There are some measures to fight tax evasions such as Minimising the corruption activities, Building trust among small groups, Changing in the punishment/legal provisions and Compulsory maintenance and audit of accounts.
Proper regulation of the taxation system in India and effective collection of tax will provide the government with an adequate amount of funds to improve the quality of life within the borders.
Paying tax may not be the best thing that one does, but it does pay for all the facilities, development and infrastructure that one enjoys.
This Article has been written by Mansi Mehta, 2nd Year BA.LL.B Marathwda Mitra Mandal’s Shankarrao Chavan Law College, Pune.