Tax Structure in India

RTI Jammu

Vale Added Tax

Session Overview

Purpose of Taxes;
Raising revenues for administration of the
nation states;
To provide basic public and semi-public
goods (like roads, etc.) to the citizens; and
To maintain internal security and provide
justice to its citizens.
RTI Jammu

Vale Added Tax

Session Overview

In times of war and in times of natural calamities,

additional taxes were imposed on the citizens to
cover the cost of war or to provide succor to people
affected by the natural calamities or to rebuild
infrastructure damaged by war or by natural
calamities.
Taxes have been the main source of revenue for
nations to raise public finances.

RTI Jammu

Vale Added Tax

Session Overview

Based on the administration of tax system and the

system of collection of taxes, the taxes can be
broadly classified into two types;
Direct Taxes are those taxes which are demanded
from the very person who it is intended or desired
should pay it.
Indirect Taxes are those taxes which are demanded
from one person in the expectation and intention that
he shall indemnify himself at the expense of another.

RTI Jammu

Vale Added Tax

Session Overview

Taxes are unilateral payments by citizens to

its Government for which there is no quid pro
quo. In modern day nation-states, taxes are
imposed on the basis of a rule of equity and
that the rule may be the principle of ability to
pay taxes. The best method to to determine
the principle of ability to pay is the income
and consumption of a citizen.
RTI Jammu

Vale Added Tax

Session overview

During this session we will cover:

Tax structure;
Characteristics of good tax structure;
Distribution of taxation powers between the
Union and States in India;

RTI Jammu

Vale Added Tax

Learning objective

At the end of this session the trainees will be

able to define a tax structure and various
types of taxes, the characteristics of good tax
structure, and Constitutional provisions
regarding taxation in India.

RTI Jammu

Vale Added Tax

Tax structure

Taxes are levied on income of citizens and

on consumption of citizens.
Taxes levied on the income of citizens are
Direct Taxes as the incidence of tax and
tax payer is the same person. Income Tax,
Wealth Tax, Corporation Tax are some of the
examples of direct taxes.

RTI Jammu

Vale Added Tax

Tax structure

Taxes on commodities, is essentially a tax on

consumption. It is a form of Indirect Tax as
the tax payer (producer or trader) and the
ultimate bearer of tax (consumer) are two
different persons. Excise Duty, Import Duty,
Sales Tax etc. are the examples of indirect
taxes.

RTI Jammu

Vale Added Tax

Tax Structure

10

Taxes are compulsory payments for which there is

no quid pro quo.
The obligation to pay taxes tends to alter the
affected individuals economic behaviour.
All economic agents (producers of goods and
services) have to make certain major decisions,
namely, what to produce or what employment to
seek, where to produce and how to produce (what
factors of production to use and in what proportion to
combine them) and taxes affect their decisions.
RTI Jammu

Vale Added Tax

Tax Structure

11

Taxes also affect economic incentives;

willingness to work and earn, willingness to
save, willingness to take risk, etc. Very high
rates of personal income tax can alter the
choice between work and leisure, between
savings and consumption and between risky
and safe investments or occupations.

RTI Jammu

Vale Added Tax

Tax Structure

12

Taxes on commodities are intended to be

taxes on consumption, because the ultimate
aim is to reach the consumption of
individuals. Commodity taxes can be divided
on domestically produced goods and
services and those on imports.

RTI Jammu

Vale Added Tax

Tax Structure

13

Commodity taxes on domestically produced

goods take the form of Excise Duty.
Another commonly levied indirect tax on
commodities is the Sales Tax. It is a tax
levied at any stage in the chain of
transactions through which commodities may
pass, i.e. from production to retail.

RTI Jammu

Vale Added Tax

Indirect Taxes

14

An Origin Based tax is one which is levied

and/or collected and retained by the
jurisdiction of production, a Destination
Based Tax, on the other hand is levied
and/or collected and retained by the
importing jurisdiction.

RTI Jammu

Vale Added Tax

Indirect Taxes

15

A Cascading Tax is one which effectively falls on

inputs at every stage and thereby increases the cost
of production. For example if a cascading sales tax
regime is in place where the tax is levied at each and
every stage of transaction without factoring the tax
paid at earlier stages of transaction.
Such a tax tends to create distortions through
altering the degree of vertical integration.

RTI Jammu

Vale Added Tax

Indirect Taxes

16

A Non-cascading Tax on the other hand

takes care of and factors in the taxes paid on
the inputs at various stages of production. It
is more transparent and the consumer or the
ultimate user is sure bout the tax element
included in the sales price.

RTI Jammu

Vale Added Tax

Characteristics of good tax structure

17

To mention only the major characteristics,

the tax system should be fair or equitable;
it should cause the least possible harmful
effects on the economy and to the extent
possible promote its growth;
it should be simple both for administration
and compliance; and
it should be income elastic.
RTI Jammu

Vale Added Tax

Tax jurisdiction in India

18

Constitution of India (Article 1(1) describes

that India shall be a Union of States.
India is also a Union of States.
The existence of States within the Union and
existence of Panchayati Raj Institutions
within the States give India a Quasi Federal
Character.

RTI Jammu

Vale Added Tax

Tax jurisdiction in India

19

For efficient governance with least overlap

and least friction between the Union and the
States and between the States themselves,
the Constitution of India has prescribed, in
detail, the manner of allocation of revenue
resources between the Centre and the
States.

RTI Jammu

Vale Added Tax

Tax jurisdiction in India

20

According to the Constitution, the functions and

financial powers of the government have been
divided into Central and State spheres, together with
concurrent areas.
Keeping in view the importance of uniform
development of the country and for making India into
a vast single market with a single tax structure and
tax rate so that inter-regional tax distortions are
avoided, the framers of Constitution gave most of the
financial powers and major taxation powers to the
Union Government.

RTI Jammu

Vale Added Tax

Tax jurisdiction in India

21

In order that States are not starved of funds for

development and governance of their states, the
Constitution also provides for taxation jurisdiction of
States and sharing of tax revenues between the
Centre and the States in various forms and provides
for a system of grants-in-aid from Centre to the
States. The Centre has been given those resources
which have national or inter-state base and the same
has been the constitutional approach for the division
of the functions between Centre and the States.

RTI Jammu

Vale Added Tax

Tax jurisdiction in India

22

The Seventh Schedule of the Constitution

of India lays down the respective functions
and financial resources for the Centre and
the States in the country. It consists of three
lists:

RTI Jammu

Vale Added Tax

The Union List

23

Consists of 97 entries and contains the following

sources of tax revenue for the Central Government:
Taxes on Income other than agricultural income;
Corporation Tax;
Customs Duties;
Excise Duties except on alcoholic liquors for human
consumption and opium and other narcotics;

RTI Jammu

Vale Added Tax

The Union List

24

Taxes on capital value of assets;

Estate Duty other than on agricultural land;
Stamp Duty in respect of certain financial
documents;
Taxes other than stamp duty on transactions
in stock exchanges and futures market;
Taxes on inter-state sale of goods;
RTI Jammu

Vale Added Tax

The Union List

25

Taxes on sale and purchase of newspapers

and on advertisements published in them;
Taxes on goods and passengers carried by
railways sea or air, taxes on railway fare and
freight;
Taxes not specifically enumerated in the
State list and the concurrent list.

RTI Jammu

Vale Added Tax

The State List

26

Consists of 66 entries and contains the

following sources of tax revenue for the State
Government:
Land Revenue;
Taxes on agricultural income;
Duties in respect of succession to agricultural
land;
Estate Duty in respect of agricultural land;
RTI Jammu

Vale Added Tax

The State List

27

Taxes on lands and buildings;

Taxes on mineral rights subject to any limitation
imposed by Parliament by law relating to mineral
development;
Excise Duty on alcoholic liquors and narcotics;
Taxes on entry of goods into local area;
Taxes on consumption and sale of electricity;
Taxes on sale or purchase of goods other than
newspapers;
RTI Jammu

Vale Added Tax

The State List

28

Taxes on advertisements other than those

inserted in newspapers;
Taxes on goods and passengers carried by
road on inland water transport;
Taxes on vehicles;
Taxes on animals and boats;

RTI Jammu

Vale Added Tax

The State List

29

Tolls;
Taxes on professions, trade , calling and
employment;
Taxes on luxuries, including entertainment,
betting and gambling;
Stamp Duty on documents, other than those
which are subject to duty by Central
Government;
RTI Jammu

Vale Added Tax

Concurrent List

30

This list consists of concurrent powers of

States and the Centre in certain areas of
governance. No major source of tax revenue
is included in this list.

RTI Jammu

Vale Added Tax

Powers of States

31

Article 286 of the Constitution forbids the

levying of any tax by States on:
Imports into and exports from the territory of
India;
Inter-state trade; and
Sale of goods declared by Parliament by law
to be essential for the life of the community.
RTI Jammu

Vale Added Tax

Distribution of Tax Revenues

32

Constitution mentions about such duties

which are levied by the Union Government
but are collected and appropriated by the
States. These include the stamp duties and
excise duties on medicinal preparations
containing alcohol or narcotics.

RTI Jammu

Vale Added Tax

Distribution of Tax Revenues

33

Article 269 of the Constitution provides for a

second group of taxes which are levied and
collected by the Central Government but are
assigned to the States within which they are
leviable in accordance with such principles of
distribution as may be laid down by the
Parliament. These comprise of succession
and estate duties in respect of property other
than agricultural land, etc.
RTI Jammu

Vale Added Tax

Distribution of Tax Revenues

34

Thirdly there is an important category of

taxes on income (other than agricultural
income) which under Article 270 of the
Constitution are levied and collected by the
Central Government but are distributed
between the Union and the States in a
prescribed manner.

RTI Jammu

Vale Added Tax

Distribution of Tax Revenues

35

Fourthly there is a class of taxes comprising

of Union Excise Duties which are levied and
collected by the Union Government but may
be distributed between the Union and the
States.

RTI Jammu

Vale Added Tax

Distribution of Tax Revenues

36

Finally there is a fine balancing element in

the whole scheme of financial relationship
between the Union and the States.
Constitution under Article 275 provides for
the payment of grants-in-aid by the Central
Government to the State Governments.

RTI Jammu

Vale Added Tax

Distribution of Tax Revenues

37

Local Bodies, like the Panchayati Raj Institutions,

have not been given constitutional powers to levy
taxes.
Their taxation powers are those that have been
delegated by the State Government to them and, in
most cases, include Octroi on entry of commodities
into their local area and taxes on property.
They are also given grants-in-aid by the Central
Government and/or by the State Government to
enable them to meet the expenditure obligations on
responsibilities devolved upon them.
RTI Jammu

Vale Added Tax