In a State, the Government’s main objective is to work for the welfare of its citizens, to employ its citizens, to provide a proper health care system, education, infrastructure, and other important development programs. To furnish all these facilities, Government needs revenue. Taxation is a source to collect revenue from the public by the Government for incurring such public welfare expenditure. Taxation law is the law through which the essential revenue, Government could generate without excessive Government borrowing without dispiriting economic projects and without changing much from taxing systems from other countries. In India taxation law is governed by the “Income Tax Act, 1961 read with the Income Tax Rules.”
Challenges to form a tax system
India faces some forbidding challenges when it comes to establishing an efficacious tax system. In India the issuance of income trends is uneven. Most of the workers in India are usually employed in agriculture or a small, informal enterprise, without fixed wages or sometimes paid in cash, and maintaining, all these is a challenging task. Because of the informal structure of the economy, with fiscal limitations and slow statistical data, it is very difficult for authorities to generate well-defined statistics. Also, it is not so easy to create a well-organized tax administration without a well-educated, well-trained staff, low-paid tax officials.
Constitutional provisions related to taxation in India
Laws that conflict with the Constitution of India is considered to be illegal and void. India has a federal structure that comprises of Union Government, State Government, Local authorities. The right to collect taxes is distributed among these 3-tier of Government. Some of the provisions are provided below relating to taxation:
Article 265[i] states that “no tax shall be levied or collected except by authority of law”. The term authority of law means that the tax proposed to be levied must be within the legislative competence of the legislature imposing the tax. In Chhotabahi vs Union of India,[ii] it was contended that “the law providing for the imposition of tax must be a valid law, it shouldn’t be prohibited by any provisions of the constitution.”
Article 245 talks about the relationship between Union and States which states that “the power for approving the laws is conferred on the Parliament and the legislature of the state.”
Article 246 provides that “Parliament may make laws for the whole of India or any part of the territory of India, the state legislature may make laws for whole or part of the state.”
According to Article 254, whenever there is any inconsistency between laws made by Parliament or laws made by State Legislatures. The law made by Parliament shall prevail and the laws made by State Legislature shall be void. In Deep Chand vs the State of U.P,[iii] it was contended that “When both the Union law and the State law occupied the same field, the State law was void to the extent of repugnancy to the Union law.”
According to Article 248, “Parliament may make any laws concerning any matter which is not mentioned in the concurrent list or state list”.
The taxation system in India
India’s tax system is a three tire federal system as mentioned in “7th Schedule to Article 246 of the Indian Constitution”: -
1. Union list: - This list contains all those matters, where the absolute right to make laws is in the hands of the Central Government. Union list contains mostly national importance subjects such as defense, foreign external affairs, union duties, taxes, etc.
2. State list: - This list contains all matters in which State Government has all the rights to make laws. These contain subjects which are of local importance for example public health, police, agriculture, etc.
3. Concurrent list: - This list contains all those matters which is not mentioned in the Union List or the State list. Both Central Government and State Government have all the rights to make laws on the matters mentioned in this list. This list contains around 47 subjects.
Types of taxes in India
Laws made by the Union Government prevails whenever there is a conflict between the Central and State Government concerning entries in the concurrent list. In India tax has been imposed mainly in two ways:- (i) Direct Tax and (ii) Indirect Tax
According to their income, a tax is imposed on any corporate units and citizens known as a direct tax. Central Board of Direct Tax (CBDT) under the Ministry of Finance, manages the levying and collection of direct tax. Income tax, corporation tax, property tax, and gift tax are some examples of direct tax.
According to the Income Tax Act, the income is calculated according to the 5 heads of the income:-
1) Income from the salary:- Under this, all persons either privately employed or the Government employee is a table as per the different components of the salary.
2) Income from the House Property:- The annual value of any property comprising of buildings or lands appurtenant, which uses for the rental purpose by the owner, shall be covered under this head.
3) Income from the Capital Gains:- Any profits or gains arising from the transfer of a capital asset, which includes all the types of shares and securities, shall be charged under this head. It is mainly divided into 2 types short-term capital gain and long-term capital gain.
4) Income from the Profit or Gain from Business or Profession:- Income arising from the different business person either by conducting any of the business activity and the professional who provides the different type of the services to the society like Lawyers, CA, Doctors shall be covered under this head. This head provides the proper procedure for the computation of the Profit or gains other than different accounting approached.
5) Income from Other Sources:- Income that doesn’t cover any of the above mention heads will be covered under this head. This head has the highest tax percentage. It especially consists of the income generated from horse racing, gambling, lottery, etc.
Taxes that are indirectly imposed on the individual via goods and services are called indirect taxes. Matters related to levying and collection of indirect tax dealt by Central Board of Indirect Tax and Custom (CBIC). It plays an effective role in formulating policies related to Goods and Services Tax. Customs duty, import duty, central excise, service tax, and value-added tax can be considered indirect tax examples.
Goods and Services Tax
Goods and Services Tax (GST) has been implemented across India on 1st July 2017 and has been identified as one of the major tax reforms after independence. GST is considered as a visionary indirect tax reform that will create a common national market by removing inter-state trade obstruction. GST has included different types of indirect taxes collected by the Central Government and State Government.
India is a country where people belongs to different communities and different wealth groups and income. Levying of tax is different for everyone which is one of the main reasons for the complicated tax system in India. Although the Government is taking many incentives to brought reforms in the Income Tax Act, and easy methods of tax collection, which encourage people to pay tax and provide details of their sources of income. After the implementation of the GST, the process has become smoother and helped prevent the Cascading effect it had earlier. Looking to future needs, the Government has to implement some new laws or amend old laws. Paying taxes probably not be the best task, however, it pays for all the development and infrastructure that one enjoys.
[i] The Constitution of India
~Authored by Golak Mahana