In this blog post, Shreya Saraiya, a student pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the different forms of taxation in India.  

Direct Tax

A tax which is directly paid by any person to the entity which is imposing it is called as Direct Tax.  It is also called as ‘income Tax’ as it is directly levied on the income of any person and burden to pay the tax is on the same person to is earning the income and cannot be pass or Profession on to other persons. The Taxation laws of India were revised and the administration of taxes was rationalised to suit the requirements of the era of Globalisation, Privatisation and Liberalisation introduced by the way of economic reforms in the year 1990 in India. This led to tremendous growth in collection of taxes from individuals. The tax revenue of the Government of India scaled up from being Rs. 24.6 billion in the year 1990 to 103.76 billion in the year 2000.

The money valuation of a net accretion between two phases of  time is called as income. As per flow of wealth concept, income can be described as net flow of wealth to a taxpayer in a particular period of time.  The computation of Income of an individual falls under the following heads according to the Section 14 of  Income Tax Act,1961 (the Act) –

Salaries – wages, any annuity, any type of fees, commission, advance or salary, arrears of salary according to Section 17 of the Act.

Income derived from House Property–  as per  Section 22, in certain conditions, income derived from rent of the House Property is subject to taxation

Profits derived from gains of Business  or Profession– the income which is derived from the profits from the business or profession is liable to tax

Capital Gains– the gain or profit derived from transfer of any capital asset is called as Capital Gain and income derived from Capital Gain is subject to taxation, according to Section 45 of the Act.

The most important source of direct tax in India is Income Tax.  The role of Income Tax as

Source of direct tax has taken a backseat since the introduction of Corporate Tax and Union Excise duties, as they contribute significantly as revenue to the Government of India.

Role and Significance of Income Tax

The assesses under the garb of Income Tax in India are individuals, Hindu Undivided Families and Unregistered Firms and associations of persons. The contribution of Income Tax to the growth of country’s economy can be determined by examining the ratio of Income Tax to the total revenue of the country, national Gross Domestic Product.  The economist G.S. Sahota was the first person who initiated to undergo the study of  buoyancy and elasticity of Income Tax in India. The level of buoyancy is an indicator of exploitation and the study by Sahota revealed that the Income Tax elasticity is lower that Income Tax buoyancy.

Goods And Services Tax

All the indirect taxes which are levied upon the manufacturing, sale and consumption of goods and services at the State and Central level are subsumed under a single, broad and  comprehensive framework of Goods and Services Tax (GST).  It has overhauled the taxation regime in India and is aimed to transform the tax regime into a harmonised and efficient one. In the layman’s language, GST can be understood as VAT on goods and services at the national level, difference being the coverage of service under its ambit.

The tax mechanism initiated by GST is that it entails the payment of tax at each stage of sale of goods or provision of services. The service provider or seller of goods is entitled to avail the provision of input credit for the purpose of making use of services of purchasing the goods and after that the credit can be used by him for setting off against the amount payable on the supply of Goods or Services. It can be regarded as the consumption tax collected on the addition of value of goods or services at each stage of consumption. The person who is on the end side of the supply chain bears the responsibility of paying tax, therefore GST can be referred to as last-point retail tax.

Historical Background

The historical background of GST highlights its origin in France in 1954. Later in 1980s , the Manufacturer’s Sale Tax of Canada was replaced by the GST.  The purpose of introduction of GST was to bring about the nationally harmonised sales tax replacing the Provincial Sales Tax, and both the governments were entitled to share the revenue.  On Jule1, 2000 the GST was introduced in Australia which replaced the Federal Wholesome Sales Tax System which led to the elimination of numerous state and territory government taxes. About 150 countries have adopted GST as the part of their tax regime.

Indian Scenario

The discussion on GST was brought up in the Union Budget of the year 20006-07, the Finance Minister P.Chidambaram  emphasised the need of the country for the adoption of national level GST, the income derived from which must be shared between both the Central and State Governments. The Joint Working Group was constituted in the year 2007 by the Union Government of India with the consultation of State government to recommend the GST Model. After the unsuccessful attempt of UPA Government to pass the GST, it has been passed by the NDA Government.

Key Features of GST

The Union and State legislature is given the power to make laws pertaining to the GST. The GST Council representing the Union and State Government will ensure the implementation of GST.

• Applicability

GST is to be levied on goods or on provision for services. There are certain goods which are being exempted from the application of GST. These are as follows- Alcohol liquor (for Human Consumption), petroleum products like petroleum crude, high speed diesel, motor spirit, natural gas and aviation turbine fuel. The decision is of the GST Council of when to apply GST on these goods.

• Levying of GST

The power to make laws with respect to GST lies with the Parliament and the State Legislature. However, the application of State Law cannot be overridden by any law made by the Parliament. The power to collect as well as levy IGST (Integrated GST) rests with the Union, IGST. The GST Council has the important role to play in implementation of GST.

• Integrated GST

The interstate trade of Goods or Services is to be monitored by the model developed under the GST model known as IGST. It cannot be stated that IGST is a third tax, its only task is monitoring of interstate trade of goods and services as well as to ensure the availability of SGST to the consuming state. The parliament is to formulate a policy for ascertaining the place of supply for determining the place where the supply of Goods or Services will occur and for ascertaining the nature of supply of whether they are interstate or intrastate. The Place of Supply determines the place of import as it is the place where tax revenue accrues. The cross-utilisation of the credit of IGST, CGST and SGST is permitted under the IGST model for the payment of IGST. The sum of CGST and SGST is the tax levied on the interstate sale of goods and services as per the IGST model.

• GST Council

The Union Finance Minister (chairman), the Union Minister of State in charge of Revenues and Finance and the Minister in charge of Finance or Taxation or any other Minister are the parties which will comprise the GST Council. The 3/4th of the majority of the Council will ratify the decision made by the Council. The Council has the power to make recommendations on the following the exempted list of goods or services, the threshold of the turnover for the purpose of applying GST, the rates of the taxes which are to be levied, levy principle, the model pertaining to GST, the decision with regard to IGST division and regarding the locus of supply principle, the provisions applicable to the eight North Indian states.

• Compensation to States

The revenue losses to the States arising out of implementation of GST can be compensated by the parliament through enactment of any law for the same, however, the parliament has to act in consonance with the GST Council. The compensation period is maximum five years.

• Objectives

The elimination of multi layered cascading effect of the taxes which are being levied on the production and distribution cost of goods and services is the ultimate aim of GST. The GDP growth thread higher as the competitiveness of goods and services produced in the nation will increase due to elimination of the vast web of indirect tax which is to be overridden by the GST. All the indirect taxes are to be subsumed into one tax i.e. GST, ensuring the removal of cascading effect of taxes. The one of the important objectives of GST is equality of opportunity and distribution of taxes promoting the principles of a socialist country.