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Analyzing The Tax Structure In India

Tax is not a quid pro quo, it is a compulsory levy by the government that is to be paid by the people and resultantly helps in the overall development of the country. the historical background provides that even in the ancient period, the kings used to tax people as per their earnings and that as sufficient to govern the kingdom efficiently. The same pattern can be seen in the current way of taxation, that is done based on the income groups and hence, serves purpose of it.

The tax structure in India is three tier and is federal structure, where the tax can be levied by Central, State and Municipal bodies, where the taxes cannot be levied except it is promoted by the authority of law.[1] The taxation in India is not a new practice, we can trace this since ancient times where, the taxes were imposed on the people in various forms.[2]

Historical Outline
The taxation in India is rooted from the ancient times of Manusmriti and Arthshashtra, where it was provided that the taxes must be levied to the only extend that it is based on optimum social welfare.[3]

It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture from the Earth to give it back a thousand fold: By Kalidas

The origin of the word tax is from taxation which means an estimate. Manusmriti lays down that the king should charge the tax from the people in such a way that it should not pinch or stay heavy on the people. Kautilya in his Arsthshrastha mentioned that the tax is for a specific purpose and hence it shall not be charged arbitrarily and based on equity and justice principles.[4] In 1860, Sir James Wilson first introduced the concept of taxation to meet government expenditures and a full codified act was enacted in 1922 which was further amended in 1961-62.

The taxation helps in economic development of the country. Any country needs capital for the development and as the development is for the over all country, it is collected in parts from everyone. The rise in disposable income will lead to full employment and resultant would help in increase in development. When the taxes are fixed and to be paid, that would lead to price stability and also controlling cyclical fluctuations.

It decreases the income inequalities as the taxes are in such a way that it is based on the income of the people and also reduces the Balance of Payment difficulties of the Government.[5] The taxation regulates the income of the people and also encourages investment by the people.

As per AP Lerner, the taxation achieves the functional financial objective, where the person is left with less in hand and so he spends less. The objective of taxation is to regulate the inflow of the money in various efficient sources and thus it acts as incentive objective. Moreover, taxation promotes economic growth, equity and stabilisation.[6] The tax structure in India gives the promotion to the domestic industries and thus, would provide exemptions from taxes to the various domestic industries.

Tax Structure in India
The tax structure in India is divided into direct and indirect taxes. Direct taxes are levied on taxable income earned by individuals and corporate entities, the burden to deposit taxes is on the assesses themselves. On the other hand, indirect taxes are levied on the sale and provision of goods and services respectively and the burden to collect and deposit taxes is on the sellers instead of the assesses directly.[7]

Income tax, Corporation Tax, Dividend Tax, Capital gain tax, Wealth tax, Gift tax, land revenue, Agricultural Income Tax etc. are the examples of the direct tax. Whereas, Goods and services tax, customs duty, export duty, stamp duty, electricity duty, etc. are the examples of the indirect tax.

Whenever, there is direct effect of the tax on the taxpayer, or the taxpayer directly pays the tax, it is called direct tax as contrary to this, whenever the tax that firstly affects the traders or manufacturers and consequently it is shifted to the buyer of the goods is called indirect tax. The shifting of the burden of tax is difficult in direct tax, whereas the person who buys the goods would bear the burden in the case of direct tax.

Direct taxes are progressive taxes which reduce inequalities, whereas indirect taxes are regressive taxes which enhance inequalities. Direct taxes reduce inflation and indirect taxes increase inflation. Direct taxes are levied as per the tax bracket which would differ according to the income group of the people, whereas indirect tax are imposed irrespective of the income group and paying capacity of the person. Indirect tax help in reducing the consumption of the harmful goods and hence, that is a good levy.

Scheme of Taxation in India
The Constitution has authorised to levy and collect tax on Income under the Income Tax Act, 1961. The proceeds collected by this tax are to be shared and distributed amongst the Centre and the State and they have to be shared as per the Finance Commission. The Finance Act is published every year, popularly known as Budget and in accordance to that the previous years tax assessment is done. The income tax can be classified in two parts: Personal Income Tax and Corporate Income tax. The act also levies the tax on artificial entities such as body corporates, association of people, Hindu Undivided Family, Body of individuals, etc. [8]

The amount of tax payable depends upon the residential status and that can be classified into three categories, where the residential status has to be assessed as per the previous year and the non resident has to pay the tax on the income that is accrued in India.

There are majorly five heads upon which the tax is charged:
  1. Income from Salary
  2. Income from house property
  3. Profits & Gains of business and profession
  4. Capital Gains
  5. Income from other sources.
All the heads of the income are mutually exclusive and the income taxed under one head cannot be taxed under other head, which means that the income that is falling under one of these heads cannot fall under any other head, because it would be against the principle of fairness and equity, entirely on which the idea of taxation is based.

The tax structure in India is divided into two parts direct taxation and indirect taxation. The direct taxation is collected from the person who actually consumes it, but here, there are many ways where the tax can be evaded, on the other hand, indirect taxes are collected from the producer or the manufacturer by the government and consequently the burden is passed on. The indirect taxation is better in the way that such a tax cannot be evaded, the government does not become the ultimate sufferer.

As per a survey, there are more than 68,000 individuals earning above Rs.5 crores, but only 5000 pay a tax till that extent. Likewise, the number of people earning an income between Rs.1 crore to Rs. 5 crore is 10 times than the actual recorded.[9]

Thus, to make the entire scheme of taxation work, the government must take adequate measures and must ensure that each and every citizen must pay a tax. At the same pace, the rate of taxes should be less and more exemptions and promotions should be given in order to make people appreciate the efforts of the government and actually have a will to increase in the profit and income. If the government imposes high end taxes, it would neither benefit the citizens nor the people at large, as majority of them would find a way to surpass the tax.

Thus, the scheme of taxation should neither be blanket or unreasonable, the government should take into various factors while making a tax scheme and also implementing the already existing scheme. Thus, the tax structure in India is perfectly distributed. Thus, the factors considered should be for the same.

  1. India Const. Art.256
  2. iKnowledge Team, Tax Structure in India, Aegonlife, (Oct.2 2020, 8:00 PM),by%20the%20authority%20of%20law%E2%80%9D.
  3. Hemant Singh, History of Taxation in India, JagranJosh, (Oct.2, 2020 8:05 PM),the%20Military%20Mutiny%20of%201857.&text=The%20Income%20Tax%20Act%201961,force%20with%201%20April%201962
  5. Ritika Muley, Taxation Objectives: Top 6 Objectives of Taxation, ED, (Oct. 2 2020, 7:34 PM)
  7. Alagappan, S. M., Indian Tax Structure An Analytical Perspective (October 10, 2019). International Journal of Management, 10 (3), 2019, pp. 36-43, DOI:10.34218/IJM.10.3.2019/004, Available at SSRN:
  8. Vanita Rani, Taxation of income in India a study of Post Liberalisation Period, Shodhganga (Oct. 2, 2020 4:32 PM)
  9. Sumit Jha, Income tax evasion: How India's crorepatis dodge tax system, Financial Express, Jun. 10, 2019, at pg. no. 9.

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