i

HISTORY AND EVOLUTION OF INDIAN TAX SYSTEM

(A project report)

Submitted to:
Dr. Archana Gharote
Faculty, Principles of Taxation

Submitted by:
ARCHIT SRIVASTAV
Sem V, Sec:A, Roll no: 30
B.A. LLB (HONS.)

Date of Submission: 18/08/2018

Hidayatullah National Law University,

Naya Raipur, Chhattisgarh
 ii

Declaration

I, Archit Srivastav, hereby declare that, the project work entitled, ‘History and Evolution of
Indian Tax System’ submitted to H.N.L.U. Naya Raipur, is record of an original work done
by me under the guidance of, Dr. Archana Gharote, H.N.L.U., Naya Raipur.

Name: Archit Srivastav

B.A. LLB (HONS.)
Semester: V
Section: A
Roll No: 30
Date: 18/08/2018
 iii

Acknowledgements

I, Archit Srivastav, would like to humbly present this project to Dr. Archana Gharote. I would
first of all like to express my most sincere gratitude to Dr. Archana Gharote for her
encouragement and guidance regarding several aspects of this project. I am thankful for being
given the opportunity of doing a project on ‘History and Evolution of Indian Tax System’.
I am thankful to the library staff as well as the IT lab staff for all the convenience they have
provided me with, which have played a major role in the completion of this paper.
I would like to thank God for keeping me in the good health and senses to complete this
Project.
Last but definitely not the least, I am thankful to my seniors for all their support, tips and
valuable advice whenever needed. I present this project with a humble heart.
 iv

Contents

Declaration............................................................................................................................... ii
Acknowledgements................................................................................................................. iii
Chapter I: Introduction............................................................................................................1
Research Methodology .................................................................................................... …..2
Research Problem ...................................................................................................................2
Rationale .......................................................................................................................... …..3
Objectives ...............................................................................................................................3
Hypothesis ..............................................................................................................................3
Review of Literature ...............................................................................................................4
Nature and Type of Study .......................................................................................................5
Sources of Data .......................................................................................................................5
Limitations of the Study .........................................................................................................5
Chapter II: Taxation In Ancient India.....................................................................................6
Chapter III: Taxation In Medieval India.................................................................................9
Chapter IV: Taxation In Modern India…………………………………………………… 12
Chapter V: GST: A new tax regime.......................................................................................17
Conclusion and Suggestion ....................................................................................... ……...22
Bibliography ......................................................................................................................... 23
 1

CHAPTER 1. INTRODUCTION

“Taxes, after all, are dues that we pay for the privileges of membership in an organized
society.”
— Franklin D. Roosevelt

The origin of the word "Tax" is from "Taxation" which means an estimate.
Taxation is a term for when a taxing authority, usually a government, levies or imposes a tax.
The term "taxation" applies to all types of involuntary levies, from income to capital gains to
estate taxes. Though taxation can be a noun or verb, it is usually referred to as an act; the
resulting revenue is usually called "taxes."
The most basic function of taxation is to fund government expenditures. Varying
justifications and explanations for taxes have been offered throughout history. Early taxes
were used to support ruling classes, raise armies and build defenses. Often, the authority to
tax stemmed from divine or supranational right.
Later justifications have been offered across utilitarian, economic or moral considerations.
Proponents of progressive levels of taxation on high-income earners argue that taxes
encourage a more equitable society. Higher taxes on specific products and services, such as
tobacco or gasoline, have been justified as a deterrent on consumption. Advocates of public
goods theory argue taxes may be necessary in instances in which the private provision of
public goods is considered sub optimal, such as with lighthouses or national defense.

Tax is a mandatory liability for every citizen of the country. There are two types of tax in
india i.e. direct and indirect. Taxation in India is rooted from the period of Manu Smriti and
Arthasastra. Present Indian tax system is based on this ancient tax system which was based
on the theory of maximum social welfare.

In India, the system of direct taxation as it is known today has been in force in one form or
another even from ancient times. Variety of tax measures are referred in both Manu Smriti
and Arthasastra. The wise sage advised that taxes should be related to the income and
 2

expenditure of the subject. He, however, cautioned the king against excessive taxation; a king
should neither impose high rate of tax nor exempt all from tax.

Research Methodology

This project work has been carried out following the descriptive analytical approach. It is
largely based on the Evolution of Tax and the different type of taxes during different period .
At the same time, efforts have been made to study various other factors which influence the
current tax regime. Advantages and disadvantages of GST are also discussed.

Research Problem

Economy plays an important role in the development of any country. Similarly, for a healthy
economy ease of doing business should be high in any country. A lot of other things are also
dependant upon the business industry. For example, it provides employment to a huge chunk
of masses, it develops skill development in the people and also develop their leadership skills.
Further, with the launching of StartUp India programme it is necessary to have a business
friendly laws in the country to attract more and more investments. This paper aims to analyse
the various regime and under various rulers how taxation system has been evolved. The
advantages and disadvantages of GST have also been discussed.
 3

Rationale

This study is important because it involves the phases of Indian Tax System of the country. If
a certain policy matter or legislation will affect the business or economy of the nation, then it
has to be examined to its very core and attempts shall be made to make it more suitable to the
economy of the country and history shapes the system which we have currently now.

Objectives

The objectives of the research project are-

To study the history of Indian tax system.
To study the various types of taxes during various phases of India.
To discuss the advantages and disadvantages of the GST

Hypothesis

India is a developing country with the largest workforce in the world. The various types of
taxes and economists in earlier India gaves us the idea about how taxation helps a country for
its own welfare. The introduction of various taxes in India during different times will have a
major role to play on the business of the country especially upon the small and medium
scaled business industry of the country.
 4

Review of Literature

Review of literature is the documentation of a comprehensive review of the published and

unpublished work from secondary sources of data in the areas of specific interest to the
researcher. It is an extensive survey of all available past studies relevant to the field of
investigation. It gives us the knowledge about what others have found out in the related field
of study and how they have done so. The information from the following literatures were
helpful in the preparation of the research project:

Tax System in India: Evolution & Present Structure

M. M. SURY

The Indian tax system has undergone major structural changes since independence in 1947.
Besides being the main source of revenue, both for the central and state governments, it is an
effective instrument to realize various socio-economic objectives of national policies.
However, the tax system has been relying heavily on indirect taxes and suffering extensively
from tax evasion. Restructuring of the tax system has constituted a major component of fiscal
reforms initiated since 1991. The main focus of the tax reforms has been on the simplification
and rationalization of both direct and indirect taxes with the objective of augmenting
revenues and removing anomalies in the tax structure. Tax reforms in recent years have
brought the tax system much closer to international tax practices. This book provides an
exhaustive and analytical account of tax structure developments in India since its
independence, with a focus on post-1991 reforms, placing the current developments in
perspective.
 5

Nature and Type of Study

The nature of the study is Doctrinal, which means that it is based upon the doctrines which
already exists in works by different authors or in legal system. It is of the descriptive type. It
is a non-empirical study. No survey or collection of statistical data is done by the author.

Sources of Data

Primary sources such as Acts and Statutes related to the regime of taxation are used in the
current research work. Apart from that, secondary and electronic resources have been used to
gather information and data about the topic. Books and other reference articles as guided by
the faculty have been primarily helpful in giving this project a firm structure. Websites,
dictionaries and article have also been widely referred.

Limitations of the Study

The project deals with “History and Evolution of Indian Tax System”. Tax regime includes
various no. of different laws. This project is limited to how Indian tax system has been
evolved throughout the ages.
 6

CHAPTER 2. TAXATION IN ANCIENT INDIA

MANUSMRITI AND ARTHASASTRA: TAXATION PRINCIPLES

Although, the date of Manusmriti has been a subject of considerable debate, it is generally
recognised to be one of the most ancient texts on the principles of governance in India.
Kautilya himself acknowledges having drawn from it extensively. Taxation should enable the
king to perform his functions, and should enable the traders and economic agents to produce
and retain adequate fruits of their trades. The basic principle of taxation is most summarily
stated in the second line of Sloka 127 which says: "Considering the protection of that which
is already there, and that which is to be increased, the King should levy tax on his traders".
Thus, the protection of the tax-base (or productive-base) and its augmentation become the
first principles of taxation.
In the next Sloka, this is expanded upon."That which would enable the King to perform his
functions of looking after (the welfare of people) and traders to remain with the fruits of their
trades (both should get adequate rewards according to their industry); this, having been well-
considered, the King should levy a tax". Earlier, in Sloka 80, it has been said that the tax
should be annual, and that it should be collected by reliable functionaries. In collecting the
tax, the King should be fairbetween his subjects, as fair as a father, between his sons.The
King should never overtax. Taxation should never be detrimental to the spontaneous growth
of the tax base. Metaphors of a leech, bee and calf are used to bring this point home.
"Just like a leech, calf and bee draw only small-but-very-small quantities from their
respective feeds (i.e., blood, milk and honey),similarly a King should, by his orders, take
from his subjects, very small amounts of taxes". In the examples of leech, calf and bee, the
amount drawn is always too small to be detrimental to the growth of the base. Similarly,
taxation should be moderate enough to be conducive to the growth of the tax-base. Further
on, in Sloka 139, a warning is issued against excessive `tax-greed' that will destroy the
productive base of the system."The King should not destroy his own roots, and the roots of
his subjects by excessive greed, because the King, destroying his own roots, and the roots of
his subjects, makes himself and his people suffer" [7.139].The imagery of a tree is picked up
by Kautilya in Arthashastra who likens taxation to the picking up of just ripening fruits. In
 7

the Chapter on "Replenishment of Treasury", Kautilya in his Arthasastra lays down the
guiding principle of taxation and warns against destroying the tax-base. Taxation should not
inhibit the spontaneous growth of the productive base of the economy. It is from the ripe
fruits that seeds for a new crop of trees would emanate. The following Sloka [Book 5,
Chapter 2, Sloka 70] aptly summarises his instruction to the king:"He (the King) should take
from the kingdom, fruits as they ripen,as from a garden, avoiding taking unripe fruits, for that
will be self-destructive, and cause an uprising against him".1

MANUSMRITI AND ARTHASASTRA: PRESCRIBED TAX-RATES

Keeping these general principles in mind, Manu and Kautilya subsequently proposed specific
rates of taxation for specific tax-bases. The core tax-rates are common in both the texts, and
can therefore be referred to as the Manu-Kautilya rates of taxation. Both ad-valorem and
specific tax-rates have been prescribed in Manusmriti and Kautilya's Arthasastra.

The rates are usually in terms of proportions (percentages). Important Slokas wherein Manu
has indicated the tax-rates, that are often different for different categories of tax-bases, and
also contain some elements of progressivity, are given below. Chapter 7 of the Smriti, in
Slokas 130,131 and 132, contain the prescribed tax-rates."The tax of the King for animals and
gold (in excess of the initial amount) shall be 1/50th part, and for grains it will be 1/6th, 1/8th
or 1/12th part (the latter ones for less fertile lands)". Here, the general rate prescribed for
agricultural produce is 1/6th. Lower rates(1/8th and 1/12th) are for less fertile land. The same
rate has been specified for a host of other goods. Thus,"On trees, meat, honey, ghee
(buttermilk), gandha (perfumes),medicines, juices (and salt, etc.), flowers, leaves, green
leaves(shaka), grass, leather, bamboo, earthen pots, and articles made of stone (the King)
should take 1/6th as the tax".In Slokas 137 and 138, several categories of people are
indicated, where concessional rates are to be applied or exemptions are to be given. It is clear
that with some exceptions (1/8th or 1/12th for less fertile lands, and 1/50th for animals and
gold), the general rate of taxation prescribed by Manu is 1/6th of the tax-base.The entitlement
1
D. K. Srivastava, ON THE MANU-KAUTILYA NORMS OF TAXATION: AN INTERPRETATION USING
LAFFER CURVE ANALYTICS (Aug 11, 2018)
https://www.academia.edu/1491719/ON_THE_MANU-
KAUTILYA_NORMS_OF_TAXATION_AN_INTERPRETATION_USING_LAFFER_CURVE_ANALYTIC
S
 8

to the King of one-sixth share of the activities of his subjects,appears to have a `divine'
sanction in Manusmriti. It transcends mere taxation of economic activities, and characterises
even the sharing of the fruits of `dharma' and `adharma' of his subjects, i.e., the (intangible)
fruits of the good and prescribed deeds, as also the fruits(punishments) of bad and proscribed
deeds of his subjects. Thus,"The King who protects his subjects, obtains one-sixth of the
reward of the good deeds (dharma) of his subjects, the King who does not protect his subjects
gets one-sixth of the fruits of bad deeds (adharma) of his subjects". And "From among the
subjects residing in his kingdom, the King who protects his subjects well, obtains one-sixth of
the fruits of good deeds performed by his subjects, like the reading of Vedas, performing of
Yajnas, giving of donations and worship of devas". In the Kautilya Arthasastra, the general
principles of taxation and the rates of taxation are given in Part 2 Chapter 22 and additional
principles for the `replenishment of treasury'(in times of emergency, war, etc., which may
have caused an excessive outflow from the treasury) are given in Part 5 Chapter 2.In Part 2,
Chapter 22, Sutras 3-8 prescribe these tax-rates. Sutra 3 states: "On goods coming in (the
duty shall be) one-fifth of the price". This is the highest duty prescribed in the Arthasastra
and applies to `imports' from outside the kingdom. It is an ad-valorem duty. For goods
produced within the kingdom, a slight edge is provided with lower rates. Thus, Sutra 4, gives
the rate as 1/6th. It states:"Of flowers, fruits, vegetables, roots, bulbous roots, fruits of
creepers, seeds, dried fish and meat, he should take one-sixth part(as duty)". Lower rates are
prescribed for the tax-bases indicated in the Sutras 6 and 7. "On kusama, duckula, silk yarn,
armours, yellow orpiment, red arsenic, antimony, vermilion, metals of various kinds and ores,
on sandalwood, aloe, spices, fermentation, and minor substances, on skins, ivory, bedspreads,
coverings and silk cloth, and on products of goats and rams (the duty to be charged is) one-
tenth part or one-fifteenth part". "On clothes, four-footed and two-footed creatures, yarn,
cotton,perfumes, medicines, woods, bamboos, banks, leather goods and earthenware, and on
grains, fats, sugars, salts, wine, cooked food and so on (the duty is) one-twentieth part or one-
twenty-fifth part".2

2
Ibid.
 9

CHAPTER 3. TAXATION IN MEDIEVAL INDIA

Sultanate Period: (13th to 16th century)

The Sultans took several measures to increase their revenue.
Following were the chief sources of their revenue:
● The khiraj or Land Revenue:
Land revenue was the major source of the income. It was generally realized at 1/5 of the total
produce thought the Sultans like Ala-ud-Din Khilji and Muhammed Tughlak raised it to 1/2
of the produce.
● The Jizya Tax:
It was imposed only on the Non-Muslims. It is believed that children, women and friars were
exempted from its payment. It was realized at the rate of 10 to 40 takas depending on the
payer’s income.
● The Octroi Duty:
It was realized on the exchange and transportation of commercial goods. Import tax was
levied on goods imported from other countries. It was between 2 ½ % to 10%.
● The Zakat Tax:
It was a negligible tax supposed to be paid by all the Muslims.
● Other Source of Income:
Other sources of income included state’s share in booty which was calculated at 1/5 of the
plunder plus gifts, tributes etc. from the subordinate rulers.

Mughal Period: (1526-1761)

Till the 10th year of Akbar’s reign (1566), no change was made in Sher Shah’s crop rate (ray)
which was converted into a cash rate, called dastur-ul-amal or dastur, by using a single price-
list. Akbar reverted afterward to a system of annual assessment. In the nineteenth year (1574)
officials called amil, but popularly known as karoris were placed in charge of lands which
could yield a crore of tankas.
 10

The karori assisted by a treasurer, a surveyor and others was to measure the land of a village
and to assess the area under cultivation. In the same year, a new jarib or measuring rod
consisting of bamboos joined by iron rings was introduced for the measurement of land. This
karori experiment was introduced in the settled provinces, from Lahore to Allahabad.
In 1580, Akbar instituted a new system called the Dahsala or the Bandobast Arazi or the
Zabti system. Under this, the average produce of different crops as well as the average prices
prevailing over the last ten years was calculated. One-third of the average produce was the
state share, which was however stated in cash.
The credit for developing this system i.e. Ain-i-Dahsala, goes to Raja Todarmal. This system
did not mean a ten-year settlement but was based on average of the produce and prices during
the last ten years. For the measurement of land, bigha was adopted as standard unit of area
which was 60 x 60 yards. A new gaz or yard, gaz-i-llahi was introduced 41 digits (anguls) or
33 inches in length (Sher Shah’s I gaz 32 digit was discarded).
For purpose of fixing the land revenue, both continuity and productivity of cultivation were
taken into account. Land which were continually under cultivation were called polaj. Lands
which were fallow (parauti) for a year, paid full (polaj) rates when they were brought under
cultivation.
Chachar was land which had been fallow for 3-4 years. It paid a progressive rate, the full-rate
being charged in the third year. Banjar was cultivable waste land. To encourage its
cultivation, it paid full rates only in the 5th year. The lands were further divided into good,
bad and middling. One third of the average produce was the state share.
After the assessment of land revenue in kind, it was converted into cash with the help of price
schedules (dastur-ul-amal) prepared at regional level or dastur level in respect of various food
crops. For this purpose, the empire was divided into a large number of regions called dastur at
pargana level having the same type of productivity. The government supplied dastur-ul-amal
at tehsil level which explained the mode of land revenue payment. Each cultivator received a
patta or title deed (land holding deed) and qubuliyat (deed of agreement according to which
he had to pay state demand).
A number of other systems of assessment were also followed under Akbar. The most
common was called batai or ghallabakshi (crop-sharing). This, again, was of three types:
First was bhaoli where the crops were reaped and stacked, and divided in the presence of the
parties. Second type was khet batai where the fields were divided after sowing. Third type
was lang batai where the grain heaps were divided. In Kashmir, the produce was computed
on the basis of ass loads (Kharwar), and then divided. Under batai, the peasants were given
 11

the choice of paying in cash or kind, but in the case of cash crops the state demand was
invariably in cash.
Kankut—In Kankut or appraisement, the whole land was measured, either by using the jarib
or pacing it, and the standing crops estimated by inspection.
Nasaq—This system of assessment was widely used in Akbar’s time. It meant a rough
calcula-tion of the amount payable by the peasant on the basis of past experience.
The peasant was given remission in the land revenue if crops failed on account of drought,
floods, etc. The amil was to advance money by way of loans (taccavi) to the peasants for
seeds, implements, animals, etc. in times of need.

Maratha Period:(1680-1818)

Shivaji greatly concentrated his attention towards the Revenue administration to enhance his
source of income.
(1) He abolished the Jagir system first of all because it aroused the rebellious tendencies.
(2) He abolished the Zamindari System and established direct links with the peasants.
(3) He removed the old and corrupt officials who collected revenue. In their place, new and
honest officials were appointed.
(4) He got the whole land measured and divided it into different categories.
(5) He fixed the state share at 2/5 of the total produce. It could be given in kind or in cash.
(6) In the event of a famine or natural calamity, the state offered subsidies in the shape of
debts to the peasants. The peasants could repay the amount in easy instalments.
(7) The accounts of revenue collector began to be thoroughly cheeked.
(8) The cultivated land under Shivaji was very scanty, therefore, the sources were even
enhanced by Sardeshmukhi and Chauth. The Chauth was equal to 1/4 of the total produce.
The payers of this tax were never plundered by Shivaji’s army. The Sardeshmukhi was equal
to 1/10th of the total produce and was collected from -the entire area.3

3
Mamata Aggarwal, The Revenue System in the Sultanate and Mughal Period, HISTORY DISCUSSION
(Aug 12, 2018),
http://www.historydiscussion.net/history-of-india/the-revenue-system-in-the-sultanate-and-mughal-period/676
 12

CHAPTER 4. TAXATION IN MODERN INDIA

The Income Tax was added in India for the first time in 1860 by using British rulers
following the mutiny of 1857. The duration between 1860 and 1886 turned into a length of
experiments inside the context of Income Tax. This duration led to 1886 whilst first Income
Tax Act came into lifestyles. The pattern laid down in it for the levying of Tax maintains to
perform even today although in some modified shape. In 1918, another Act- Income Tax Act,
1918 changed into surpassed, but it became quick lived and become changed by way of
Income Tax Act, 1922 and it remained in lifestyles and operation until thirty first. March,
1961.
The previous Taxation Structure of the us of a played a completely vital function inside the
running of our economy. Some time again the emphasis become on better charges of Tax and
more incentives. While designing the Taxation shape it must be seen that it is in conformity
with our financial and social objectives. It needs to know not impair the incentives to non-
public financial savings and investment float and on the other hand, it ought to not result in
lower in sales for the State.
In our beyond day, financial system structure Income Tax played a critical function as a
source of Revenue and a degree of removal economic disparity. Our Taxation shape affords
for Two forms of Taxes: – DIRECT and INDIRECT.

1860- The Tax was introduced for the first time by Sir James Wilson. India’s First “Union
Budget” Introduced by Pre-independence finance minister, James Wilson on 7 April, 1860.
The Indian Income Tax Act of 1860 was enforced to meet the losses sustained by the
government on account of the military mutiny of 1857. Income was divided into four
schedules taxed separately:
(1) Income from landed property;
(2) Income from professions and trades;
(3) Income from Securities;
(4) Income from Salaries and pensions.
Time to time this act was replaced by several license taxes.
 13

1886- Separate Income tax act was passed. This act remained in force up to, with various
amendments from time to time. Under the Indian Income Tax Act of 1886, income was
divided into four schedules taxed separately:
(1) Salaries, pensions or gratuities;
(2) Net profits of companies;
(3) Interests on the securities of the Government of India;
(4) Other sources of income.
1918- A new income tax was passed. The Indian Income Tax Act of 1918 repealed the Indian
Income Tax Act of 1886 and introduced several important changes.
1922- Again it was replaced by another new act which was passed in 1922. The
organizational history of the Income-tax Department starts in the year 1922. The Income-tax
Act, 1922, gave, for the first time, a specific nomenclature to various Income-tax authorities.
The Income Tax Act of 1922 remained in force until the year 1961.
The Income Tax Act of 1922 had become very complicated on account of innumerable
amendments. The Government of India therefore referred it to the law commission in1956
with a view to simplify and prevent the evasion of tax.
1961– In consultation with the Ministry of Law finally the Income Tax Act, 1961 was passed.
The Income Tax Act 1961 has been brought into force with 1 April 1962.It applies to the
whole of India (including Jammu and Kashmir).
Since 1962 several amendments of far-reaching nature have been made in the Income Tax
Act by the Union Budget every year which also contains Finance Bill. After it is passed by
both the houses of Parliament and receives the assent of the President of India, it becomes the
Finance act.
At present, there are five heads of Income:
(1) Income from Salary;
(2) Income from House Property;
(3) Income from Profits and Gains of Business or Profession;
(4) Income from Capital Gains;
(5) Income from Other Sources4

Here are the salient features of the taxation system in India:

1. Role of the Central and State Government

4
Tarun Kumar, History and Evolution of Indian Tax Act in India, TAXGURU (Aug 12, 2018),
https://taxguru.in/income-tax/history-evolution-income-tax-act-india.html
 14

The entire system is clearly demarcated with specific roles for the central and state
government. The Central Government of India levies taxes such as customs duty,income tax,
service tax, and central excise duty.
The taxation system in India empowers the state governments to levy income tax on
agricultural income, professional tax, value added tax (VAT), state excise duty, land revenue
and stamp duty. The local bodies are allowed to collect octroi, property tax, and other taxes
on various services like drainage and water supply.
2. Types of taxes

Taxes are classified under two categories namely direct and indirect taxes. The largest
difference between these taxes is their implementation. Direct taxes are paid by the assessee
while indirect taxes are levied on goods and services.
A) Direct taxes
○ Direct taxes are levied on individuals and corporate entities and cannot be
transferred to others. These include income tax, wealth tax, and gift tax.
1. Income tax
2. As per the Income Tax (IT) Act, 1961 every assessee whose total income exceeds the
maximum exempt limit is liable to pay this tax. The tax structure and rates are
annually prescribed by the Union Budget. This tax is imposed during each assessment
year, which commences on 1st April and ends on 31st March. The total income is
calculated from various heads such as business and profession, house property,
salaries, capital gains, and other sources. The assesses are classified as individuals,
Hindu Undivided Family (HUF), association of persons (AOP), body of individuals
(BOI), company, firm, local authority, and artificial judiciary not falling in any other
category.

B) Indirect taxes
○ Indirect taxes are not directly paid by the assessee to the government
authorities. These are levied on goods and services and collected by
intermediaries (those who sell goods or offer services). Here are the most
common indirect taxes in India:
○ Value Added Tax (VAT)
This is levied by the state government and was not imposed by all states when
first implemented. Presently, all states levy such tax. It is imposed on goods
sold in the state and the rate is decided by the state governments.
 15

○ Customs duty
Imported goods brought into the country are charged with customs duty which
is levied by the Central Government.
○ Octroi
Goods that move from one state to another are liable to octroi duty. This tax is
levied by the respective state governments.
○ Excise duty
All goods produced domestically are charged with excise duty. Also known as
Central Value Added Tax (CENVAT), this is paid by the manufacturers.
○ Service Tax
All services provided domestically are charged with service tax. The tax is
paid by all service providers unless specifically exempted.

C) Goods and Service Tax (GST)

○ As a significant step towards the reform of indirect taxation in India, the
Central Government has introduced the Goods and Service Tax (GST). GST is
a comprehensive indirect tax on manufacture, sale and consumption of goods
and services throughout India and will subsume many indirect taxes levied by
the Central and State Governments. GST will be implemented through Central
GST (CGST), Integrated GST (IGST) and State GST (SGST).
○ Four laws (IGST, CGST, UTGST & GST (Compensation to the States), Act)
have received President assent. All the States & UT expected to pass State
GST Act, by end of May 2017. GST law is expected to take effect from July 1,
2017.

3. Revenue Authorities

○ CBDT
The Central Board of Direct Taxes (CBDT) is a part of the Department of
Revenue under the Ministry of Finance. This body provides inputs for policy
and planning of direct taxes in India and is also responsible for administration
of direct tax laws through the Income Tax Department.
○ CBEC
The Central Board of Excise and Customs (CBEC) is also a part of the
Department of Revenue under the Ministry of Finance. It is the nodal national
 16

agency responsible for administering customs, central excise duty and service
tax in India.
○ CBIC
Under the GST regime, the CBEC has been renamed as the Central Board of
Indirect Taxes & Customs (CBIC) post legislative approval. The CBIC would
supervise the work of all its field formations and directorates and assist the
government in policy making in relation to GST, continuing central excise
levy and customs functions.
○ The Indian taxation system in India has witnessed several modifications over
the years. There has been standardization of income tax rates with simpler
governing laws enabling common people to understand the same. This has
resulted in ease of paying taxes, improved compliance, and enhanced
enforcement of the laws.5

5
https://www.hdfclife.com/insurance-knowledge-centre/tax-saving-insurance/Tax-Structure-in-India
 17

CHAPTER 5. GST: A NEW TAX REGIME

GST is an Indirect Tax which has replaced many Indirect Taxes in India. The Goods and
Service Tax Act was passed in the Parliament on 29th March 2017. The Act came into effect
on 1st July 2017; Goods & Services Tax Law in India is a comprehensive, multi-stage,
destination-based tax that is levied on every value addition.
In simple words, Goods and Service Tax (GST) is an indirect tax levied on the supply of
goods and services. This law has replaced many indirect tax laws that previously existed in
India.

Advantages under GST:

Boosts Foreign Investment and improves overall investment climate: Tax litigation in
certain high profile cases under income tax act has contributed to a large extent in creating a
very downbeat perception of our country’s taxation system and many allegations were raised
over its certainty. Reluctance to invest was developing due to country’s regulatory and
bureaucratic complexities. In this tax environment, many foreign investors felt it much to
better to shut and go rather than to continue dealing with it. However, GST has given a new
hope and the past bad memories are slowly fading a bit. The mere implementation of GST
and the serious efforts made by government in simplification of GST has developed a strong
positive perception of India’s taxation system world-wide. This is also evident by increasing
growth rate of our economy, increase in FDI’s, stock markets being in consistent boom,
Secondary and territory sectors increased contribution to GDP of the country.
Single assessing authority: One of the important change that businesses will see in the GST
regime is that they need not have to deal with multiple tax authorities. Like in the earlier tax
regime, a person would have to approach multiple tax authorities like Central Excise, VAT,
Service Tax etc. Multiple registrations were required to be taken under each of the laws,
returns were to be filed and assessments, appeals etc. would have to be faced multiple times
on the same business transactions over and over again. In GST, one of the bold steps taken by
 18

government is pruning of tax authorities to one meaning thereby assessee will be either be
registered with the Central tax authorities or with the State tax authorities and not with both,
this shall ease the entire tax assessments and reduce complications that were faced earlier.
Increased certainty/ Reduced litigation: Under earlier indirect tax regime, the main reason for
tax litigation was due to lack of clarity in the law that makes it susceptible to multiple
interpretations, Further, the existence of multiple taxes on the same tax base led to existence
of conflicting opinions from both centre and state tax authorities across the country which has
contributed to multiplicity of litigation. Under GST regime, as majority of the indirect taxes
such as Excise, Service Tax, Value Added Tax (VAT) etc are subsumed and as the tax base
of GST regime is kept very wide with much pruned exemption list, therefore, it will result
into a single streamlined taxation and reduce litigations at large.
Erosion of parallel economy: With some bold reforms like submission of invoice wise
information through electronic mode, fairly lower tax rates, system of compliance ratings
being given to all the businesses, a nation-wide e-way bill system, Concept of auto-matching
of vendor/ customers invoices and seamless flow of input taxes credit etc. could lead to many
businesses voluntarily coming into the tax compliant zone rather than continuing with the
ways and means of tax evasion. The structure of GST is such that non-compliant and
unorganized businesses would find it difficult to survive while the tax compliant businesses
will flourish. Under this scheme of things, GST would help in cutting down the parallel
economy to a great extent.
Reduced corruption: : For the first time in the history of a taxation system of this country,
we have already witnessed that hardly any assesses had to pay bribe to obtain registration
under GST. Now, this the big change that we are immediately seeing which was just not
possible for many in the earlier tax regime. Under the GST regime, the interaction with the
tax authorities would be minimized such that entire flow of communications would happen
electronically through the common portal which would automatically stem way for reduced
corruption.
Downslide of prices: Currently, businesses were not able to avail the credits of various taxes
paid. For instance, CST Paid was becoming fully cost, Excise Duty and Service Tax was not
available as credit to traders, VAT was not available as credit to Service providers and
various
cesses like SBC etc were only adding to the cost for the businesses. With implementation of
GST, all these cascading of taxes would come down substantially and the thereby prices of
goods/ services should only slide downwards. Further, not just taxes but if transactions are
 19

properly structured and the benefit derived is properly passed on at each levels then the prices
of goods and services can further trim down.
Common national market throughout the country: GST brings in the common market
meaning thereby earlier every state tax law was different and had its own rules, tax rates,
procedures etc. leading to high scope of tax planning and manipulation practices to avoid/
reduce taxes. In many cases, purchasing from inter-state and paying only 2% CST was more
beneficial and in some cases procuring locally even at higher prices with local VAT was
more
beneficial which eventually led to high unnecessary purchase planning such as creation of
depots, stock transfers etc. All these planning tools has fall on its foot in the GST regime and
businesses can now plan their purchases purely based on merit of the transaction and a
taxation factor would not have a great influence in procurement decisions to a large extent.
Increase in employment opportunities: After implementation of the new tax regime, the
possibilities of job expansion in the Indian economy has increased as GST is a promising
opportunity. It is learnt that the need for skilled accountants and tax consultants has increased
substantially. The procedural compliances in GST has also given many free-lancers a main
source of occupation. The implementation of GST has increased the jobs in the formal sectors
such as automobiles, logistics, e-commerce, consultancy etc. Further, the software industry
has invested heavily in GST as the tax reform revolves around electronic ways of doing
things and the industry is expected to create large employment opportunities in the GST era.

Disadvantages:
Not a one nation one tax in spirit: An ideal GST would have been one where only one law
would have been framed and only one authority would have been assigned with the
accountability of framing, governing and regulating the GST law. However, contrary to what
was expected, we presently have 31 legislations governing the entire framework of the law
which is definitely not one nation one tax. In other words, Gujarat GST law is different from
the Maharashtra GST law and if a person is doing business in both the states then he has to
take separate GST registration in both the states, file separate GST returns, maintain multiple
state wise accounts and get the tax assessed by each state authority separately which
compromises the basic structure of the GST that was expected so much so that many experts
have started claiming that this GST is not a tax reform but it is just a old wine in a old bottle
with a new label.
 20

Multiple Tax rates: Presently there are 7 standard tax rates and multiple rates of cess
provided for various goods and services which only open the Pandora box of classification
disputes and unnecessary confusion. The nightmare of HSN codes is still prevailing in the
industry and trade with many not having any clarity and following the incorrect coding
system. This may lead to unnecessary issues being faced by businesses at a later date in the
form of tax demands with interests and penalties. A single rate or a dual rate GST system
would have been more appropriate than the present one with varied tax rates.
GST Portal issues: The complete electronic means of reporting transactions in GST is a
good idea but it would have been better if the same is implemented with proper system in
place. GST was implemented without the portal being fully ready and functional with
businesses facing multiple issues in obtaining registrations, cancelling registrations, filing
GST returns etc. Even as the government looks to resolve the glitches of the GST Network,
the efforts doesn’t seem any beneficial as while the old issues get addressed, the new issues
crop up. Since, GST in general demands detailed reporting of transactions through this portal
and sub-standard functioning of the portal is only leading to high time, money and resources
being spent by businesses on unproductive compliances.
Hurried implementation of law: GST is known as the largest tax reform since
independence, it is seen that government has somehow hurried its implementation, while
many business houses and tax experts warned government of its implementation on 1st of
July 2017 and suggested to implement the same from 1st of October 2017 or a little later but
without paying any heed, government went ahead with its implementation. Resultantly, it is
seen that there was confusion amass among industry, trade, professionals and also
government officials. Even today, there are many aspects of GST which lack clarity. Now, as
a damage control mechanism, every time and again a new notification, press release,
circulars, orders, tweets are issued leading to frequent changes in the law which is only
adding to the confusion. This has been one of the biggest setback and disadvantage which
GST has brought that could have been easily avoided if more patience in its implementation
was shown.
Working capital blockage: Working capital is the fuel of every business, it is the money
available for your company’s day-to-day operations, and it reflects the short-term financial
health of the company. Exporters have face the brunt of working capital to the core with
refunds being blocked so much so that even today post 200 days of implementation of GST,
exporters are not able to smoothly claim refunds, same is the position for traders who are not
able to claim the transitional benefit due to non-availability of the required forms on the
 21

portal. Further, in service sector, tax rate will be 18% under GST as compared to 15% under
earlier regime leading to increased blocking of working capital for certain businesses where
the credit period is high.
High compliance burden: Compliance under GST is very high due to filing of three tax
returns in a month. Not only that if a person is doing business in multiple states then it needs
to obtain multiple registrations for each state and separate GST returns needs to be filed for
each state.
This structure of GST has increased compliance burden and it is causing pain mainly for
compliances mainly for small businesses which cannot spend high costs on support functions
such as accounting and taxation etc.
Elimination of local tax incentives/ schemes: In earlier tax regime many investment based
tax incentives were given by central and state governments to make the area business friendly
and encourage investments by virtue of fiscal policies. With implementation of GST, it is
seen that the tax incentives in indirect taxes are no more made available by the governments
and the earlier existing tax incentives have also been discontinued and pruned. This has
caused a huge worry to industries which have set up its business in various states especially
in north eastern states based on various tax incentives promised by the governments. The
continuance of such tax incentives in the GST regime in a new form are not more lucrative
and causing high concerns over viability of such setup.
Disconnect from Foreign Trade Policy: Foreign Trade Policy (FTP) is a beneficial piece of
legislation that provide incentives to various export and import transactions thereby
encouraging foreign trade. Earlier such incentives were also available on Excise duty, service
tax, CVD, SAD paid, however it seen that similar incentives are not continued with IGST.
Further, many schemes and benefits as available to EOU’s, deemed exports, advance license
etc. are not fully linked to the GST regime leading to delinking of FTP with GST. Since,
precious foreign currency brought in the country by the exporters govern the country’s
standing in the international market, any such pruning in the foreign trade policy can only
have adverse effect on the economy as a whole.6

6
CA Madhukar N Hiregange, Advantages and Dis-advantages of GST , GST INDIA.COM (Feb 14, 2018),
https://www.gstindia.com/advantages-and-dis-advantages-of-gst/
 22

CONCLUSION AND SUGGESTIONS

As we can see from this paper how tax has been evolved since ancient period under different
rulers and governments. Indian tax system really struggled through lot of difficulties like
some taxes were only for a particular religion and some were so high that the poor people
didn’t able to pay. Some kings were strict and some were lenient regarding the taxation
system. It also shows how British rulers exploited us by charging heavy tax on lands and
crops. We know that tax is one of the source of revenue collection of the government and
they in return provide us the services and resources. For a welfare society, tax is one of the
important measure to move the society in a balanced way. It also regulates the money in the
market and provides everyone with benefit. Apart from we know that tax is very important
for the society, many greedy people follow the practice of tax evasion. They use the services
but they don’t want to pay for those services provided by the government and that practice
puts the economy in danger as government doesn’t get much revenue and it doesn’t get much
money to provide good services and that in result prejudice to welfare society concept. So we
need to emphasise on the basic problem of tax evasion followed by various big companies
and people. We need a strong law and the punishment which can be used as a deterrent for
the crimes related to tax and that is how we will be able to take the country in the right
direction.
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BIBLIOGRAPHY

BOOKS REFERRED
● Tax System in India: Evolution & Present Structure
M. M. SURY

JOURNALS REFERRED

● D. K. Srivastava, ON THE MANU-KAUTILYA NORMS OF TAXATION: AN

INTERPRETATION USING LAFFER CURVE ANALYTICS

● Mamata Aggarwal, The Revenue System in the Sultanate and Mughal Period,
HISTORY DISCUSSION

● Tarun Kumar, History and Evolution of Indian Tax Act in India, TAXGURU

● CA Madhukar N Hiregange, Advantages and Dis-advantages of GST , GST

INDIA.COM

WEBSITES REFERRED

● Gstindia.com

● Hdfclife.com

● Taxguru.in

● Historydiscussion.net

● Academia.edu