This article is written by Swathi Vajjhala, pursuing a Diploma in Business Laws for In House Counsels from LawSikho.

Introduction 

Governments need money to maintain law and order in the country. They also need money for welfare measures, which promotes and brings balanced development to the state. The primary source of income or revenue for any government in the world is through tax. 

India is a socialist, democratic, and republic country. The federal structure includes the central and state-level governments. Both governments share primary responsibility, including managing the country’s increasing development needs and the primary source of income is tax. To stimulate economic growth and achieve socio-economic goals, tax is considered the primary source of income for the Indian Government.

A tax is a compulsory contribution a person makes to the state’s spending in all people’s common interests without any specific benefits granted to an individual. The tax cannot be viewed as a voluntary payment or donation; instead, it is an enforced contribution that the legislative authority has imposed upon the people of India. 

History of tax

The word tax is derived or procured from the Latin word ‘taxare’, which means estimate.

Taxation was first introduced in ancient Egypt around 3000 BC-2800 BC. during the first dynasty of the old kingdom. Records from this period suggest that the Pharaoh would tour the kingdom every two years and collect tax revenue from the people. Additional data are granary evidence on limestone flakes and papyrus.

Taxes are the only way to finance public goods because they are unreasonably cheap in the marketplace. The government can only collect it from taxpayers’ money. It is imperative to design a tax system in such a way that it does not lead to any market distortion or failure in the economy. Tax laws should be very competitive for revenue to be generated most efficiently and effectively.

In India, the tax system was introduced in ancient times. The existence of the early tax system can be seen in many ancient books such as Manu-Smriti, and Arthasastra.

During the British Empire, India’s entire tax system was changed. It was wholly in favor of the British Empire, but it also included modern and scientific tax systems techniques. Another notable change took place in the tax system in 1922 when the British introduced an entirely new administrative and tax system in India. The tax system has been divided into two main categories: direct taxes and indirect taxes. 

In India, the tax system is fully controlled, imposed, and updated by the central and state governments. The power to collect taxes stems from the Indian Constitution, which divides the power to collect taxes between the central government and the state government system.

Type of taxes

The tax is divided into two categories depending on the incidence and its impact. One is a direct tax, and another is an indirect tax. 

Direct Tax is a tax paid directly by a person (individual) or organization to an imposing institution, i.e., government. The direct tax is a tax that has both the incidence and the impact of the taxation falling on the same company or person. This means that the taxpayer cannot transfer the brunt of direct taxes to someone else. In India, a direct tax is imposed through Income Tax. 

Indirect Taxes are levied on goods and services. The direct liability to pay indirect tax is with the manufacturer/service provider/seller etc. The burden is ultimately transferred to consumers. Since this tax is borne indirectly by the consumer, it is called an indirect tax. Therefore, an indirect tax is levied by an intermediary from the person who bears the ultimate economic burden of the tax. It is to be noted that the burden of indirect taxes is not transferred in the form of taxes but as part of the price of these goods/services.

Taxation in India 

Taxation is the only instrument to achieve the long-term growth and economic development of a country. It is imperative to understand the components of the tax that should be targeted to achieve economic growth. In general, income tax had little or no impact on business income growth and significantly impacted economic growth. To achieve long-term economic growth, it is crucial to know targeted sources of income. It is also essential to understand which tax components are relevant to achieve long-term economic growth.

The Indian tax system has undergone enormous reforms in the past decade. For better compliance, easy tax payment, and better enforcement, tax rates have been streamlined, and tax laws have been simplified. The effect of rationalizing the tax administration is an ongoing process. 

Income Tax: 

Under the Income Tax Act of 1961, anyone who is a beneficiary and exceeds their total income to maximum exemption limit will be chargeable to income tax at the rate or rates prescribed by Finance law. An assessee can be an individual, a HUF, an association, a group of people, a company, a firm, a local authority, etc. A person’s residential status in India determines their total income. For tax reasons, individuals can be resident, non-resident, or not ordinary residents.

Wealth tax: 

A wealth tax is a tax on a company’s inventory of assets. This includes the total value of personal wealth, including cash, bank deposits, real estate, assets in insurance and retirement plans, ownership of unincorporated companies, financial stocks, and personal trusts.

Types of Indirect Taxes 

Sales tax:

Sales tax, which is usually levied on the sale of all goods, is payable by a trader as part of the trade irrespective of whether interstate, outside of a state or importing to or exporting from India.

Value-added tax (VAT):

It is a multilevel tax system on goods imported, with the tax being levied through different levels of delivery and production with credit for taxes already paid at every stage of their value creation. The introduction of Value added tax at the state level is also the primary tax reform measure that has also been introduced at the state level. The then-existing state value-added tax replaced the value-added tax at the state level. All government taxes on buying or selling goods now only have to be subsumed in the VAT system.

Excise tax:

The excise tax is an indirect tax levied on goods made in India. 

Customs Duty:

Customs duties, also known as import duties, are levied by the Indian central government on India’s goods. The duty rate applied to the goods depends on the classification of the goods determined according to the customs tariff.

Service tax:

The service tax in India was introduced in 1994. It was introduced with only three services, namely stock brokerage, general insurance, and telephone. Today almost all services fall under the scope of service tax, except for those mentioned in the negative list. A steady increase in the rate of service tax was observed. 

Taxation powers under Indian Constitution 

In India, the constitution is paramount, and all laws and acts of government are subordinate to it. The constitution provides that no taxes shall be levied or collected by the government unless required by law.

The government structure in India is federal. Under Article 1(1) of the Constitution, India shall be the Union of states. There is a division of powers between the Union and States. The government of India (central government) has certain powers over the whole country. Every state (and every union territory) has certain powers concerning that particular state (territory of the Union).

India has a three-tier federal structure that includes:

(a) The Union Government 

(b) The State government

(c) The local government

The power to collect taxes and duties are distributed among the three levels of government, i.e., union, state, and local, following the provisions of the Indian Constitution. 

The constitutional provisions of India govern the entire framework for the introduction of indirect taxes. Article 246, Seventh Schedule, gives central and state governments the right to levy taxes and collect indirect taxes based on transactions in goods and services. The tax system varies from manufacturer to manufacturer in terms of the point of sale or the level of imports or exports. Collection systems are based on the origin of indirect taxes and are intended to collect taxes in the case of a taxable activity.

The power to legislate and levy taxes and duties as provided for in the Constitution under Article 246. Parliament may legislate for all or part of India.

The Seventh Schedule contains three lists that list the matters to which the Union and the state governments are empowered to make laws.

List I (Union List): The central government has the exclusive right to make laws concerning all matters covered in this list. Parliament makes laws in this regard. Some of the items in List I are Defense, Navy, Air Forces, atomic energy, railways, highways, currency, corporate tax, etc.

List II (state list): It contains the matters for which the state government is responsible and has the exclusive right to legislate. These matters include public policy, police, local Governance, Public Health and Sanitation, hospitals, Funeral Sites, Cremation sites, Libraries, Water, etc.

List III (Concurrent List): It contains the matters for which both Central & State governments have the power to make laws. This list includes Criminal Laws and Proceedings, marriage and divorce, contracts including partnership, agency, bankruptcy, trust and trustees, unions, labour and labour disputes, etc.

Article 265 states that no tax may be levied or collected unless required by law. It prohibits the arbitrary collection of taxes.

Limitations of tax system during the Pre-GST era

Various taxes are imposed on the Indian population by central and state governments, such as service tax, VAT, etc. Before introducing VAT in the sales tax and CENVAT in the central excise tax and the service tax, the Indian tax system was very complicated, and this had cascading effects. The tax imposed on one destination was also taxed on another destination. However, the tax system of that time has seen remarkable revolutions. Many changes in taxation have been implemented, i.e. VAT and the introduction of the central government’s service tax. The government introduced CEVAT in the central excise tax system by offsetting taxes on intermediate consumption and at the same time manufacturing raw materials. With the introduction of the VAT system in India, the cornerstone for implementing the GST was laid.

The following points illustrate the primary and serious problems of the Indian system of the indirect tax structure.

1. CENVAT (excise duty) was levied on products made in India. However, problems arose with product ratings. Implementing CENVAT only at the manufacturing level has been a critical obstacle to an efficient and neutral flow of tax credits. This resulted in the replacement of VAT for the GST in many countries.
2. The Indian Constitution divided the tax system between the central government and the state government. The state government has the right to levy any tax on affairs or objects of the state. In the case of services tax, the central government can collect taxes, but the state government dominates in employment contracts. This type of system creates a bias in the generation and distribution of revenue for the government.
3. Various things like copyrights, patents, software are not considered by the government for the tax system. As a result, there was again complexity in classifying these goods under tax policy.
4. With the boom in the service sector, the central government has the monopoly right to collect taxes. On the other hand, the state governments lose their income by not imposing taxes on the service sector.
5. Given the CST for the interstate sales of goods, offsetting was not allowed, which increased the cascading effect.
6. Better control and management of taxes requires significant technological changes that are costly, time-consuming, and need to be addressed.
7. The lack of cross-checking of tax returns filed under the central and state tax systems resulted in numerous inconsistencies.
8. Under the indirect tax system, there were more than 15 different taxes payable according to different norms. Therefore, immediate and systematic regulation of the filling and calculation of taxes was required.
9. The Indian tax system was cumbersome and burdensome, and different taxes on the same products in different countries resulted in high inflation that had to be fixed.

Despite the existence of several taxes in the Indian economy such as excise duty, customs duty, service tax, etc., India’s GDP is still much lower than that of other countries at that time, such as the USA – 13.84%, China – 6.99%, Japan – 4.3 % and France – 2.05%. The GDP data of various countries show that tax reform, i.e., the introduction of the goods and services tax (GST) in India, is crucially needed.

GST 

The GST came into force on July 1, 2017, through implementing the 101st Constitution of India by the Indian government. The GST replaces the existing multiple cascade taxes levied by the central government and the state governments. Goods and services are divided into five tax plates for tax collection – 0%, 5%, 12%, 18% and 28%. However, petroleum products, alcoholic beverages, and electricity are not covered by the GST and are taxed separately by individual governments under the tax system.

Definition 

The goods and services tax (GST) is “a tax on goods and services with value creation in every phase with a comprehensive and continuous chain of benefits from service providers point to the retailer level where only the end consumers should bear the tax”. The GST is a destination-based consumption tax levied on several production distribution stages of goods and services. It combines various taxes like state and local tax, entertainment tax, excise tax, surcharges, and octroi. It applies to the transaction value that includes packaging, commission, and other costs during the sale. A silent feature of GST would be good and services considered to be the same, and within the supply chain, they are taxed once until customers can access them. Thus, the tax reforms give companies and SMEs equal rights and tax the inventory/stock transfers uniformly.

Basic scheme of the GST

The overall system of goods and services tax (GST) are as follows – 

1. The tax on goods and services is applied to the delivery of goods or services or both, in India w.e.f 01-07-2017 (including Jammu and Kashmir w.e.f 8-7-2017).
2. For delivery within state or union territory – (a) The central GST (CGST) is payable centrally Government and (b) State GST (SGST) or UTGST (Union Territory GST) are payable to the State Government or Union territory.
3. For international deliveries (delivery from one state to another state), IGST is paid to the head office government.
4. A GST compensation of around 12% will be discontinued payable on pan masala, tobacco products, coal, carbonated water, and car excl.
5. Essential customs duty, education cess and SEC of customs, IGST, and GST compensation will be payable for goods imports.
6. The GST is based on the VAT input concept, tax credit for taxes on intermediate consumption, intermediate consumption, and Capital goods to pay output tax. This will avoid the cascading effects of taxes.
7. GST is a consumption-based tax, i.e., the tax is payable in the state where goods or services or both are finally consumed.
8. The expected rates of GST – (CGST + SGST / UTGST) – NIL, 0.25%, 3%, 5%, 12%, 18% and 28%. This rate also applies to IGST.
9. The GST Council is a top constitutional body that will do this to determine the GST guidelines.

Dual GST

There will be a double GST – State GST (SGST) and a central one. GST (CGST) on delivering goods and services within the state as mentioned under Article 246A of the Indian Constitution. Territorial waters will also be part of the state. Until GST is concerned, SGST will also apply in union territories having a legislative branch. These are – Delhi and Pondicherry. Both CGST and SGST will apply when delivery of Goods and Services within the state.

Importance of the GST tax system – trade, Government, and consumers

GST will overcome various development problems with stronger interactions between VAT / GST systems and overcome the potential risks of double taxation and unintentional non-taxation systems. GST will be a vital place for collecting the tax at an early stage of the value addition. Every entrepreneur/taxpayer would be a part of the control and collection of taxes. GST reforms will play a critical role in trade, government, Consumers in the following manner:

1. Trade: to harmonize trade and bring significant reforms to promote development, GST will be a stepping stone for the following parameters:

• multiplicity or variety of taxes will be decreased, 
• tax neutrality especially for export goods, 
• development of one common economic market, 
• simple tax with fewer rates, and 
• exceptions effectiveness in reducing costs for the domestic industry.

2. Governments: GST promises much transparency for the government in the following manner: 

• easy and simple control system – one standard tax. 
• broadening the tax base. 
• considerable improvements in the direction of revenue collections.

3. The Consumers: For an ordinary Indian citizen, the GST promises much in terms of a better tax system in the following manner: 

• reducing the cost of goods and services, 
• increase in purchasing power, 
• increasing the common man’s savings. 
• increase investment.

GST Council: (GST Council 2017)

To implement GST taxation effectively in India, the Constitution, through the 122nd amendment, introduced GST Council and was later approved by Rajya Sabha on August 3, 2016, and Lok Shaba on August 8, 2016. The GST Council was officially framed on September 8, 2016, after approval by India’s Hon’ble President. According to Article 279A(1) of the constitution, the GST Council was established by the President within 60 years of the article’s commencement. The GST Council consists of the following members:

1. Union finance minister,
2. The Union State Ministers,
3. The minister of taxation or another minister appointed by each state government.

The GST Council was set up to do the following tasks

1. Taxes, surcharges from central and states to be integrated into GST.
2. Tax-exempt from GST on goods and services.
3. Interstate Commerce IGST – Interstate Distribution and central governments.
4. Registration threshold limit for GST.
5. GST minimum prices.
6. Special prices for disasters.
7. Provision for special category rates, especially north-eastern states.

Advantages/benefits of implementing GST in India 

Benefits of GST for Citizens:

1. Simpler control system
2. Reduction in the price of goods and services due to elimination of the cascading
3. Uniform prices across the country
4. Transparency in the tax system
5. Increase employment opportunities

Advantages of the GST for trade/industry:

1. Reduction of tax diversity
2. Reduction of cascading / double taxation
3. More efficient neutralization of taxes specifically for exports
4. Development of the joint national market

Difference between old and new tax regime

1. Tax point levy 

GST is levied on the supply/delivery value of goods and services. The value-added tax was levied on the sales value of goods only.

2. Rules and Regulations

The movement of goods between states requires the creation of an e-way bill that has a national validity. In contrast, under the VAT system, several forms had to be filled out for the movement of goods between states, as each state had different rules and regulations.

Only one return has to be submitted per quarter, with the last return being the combined return for the entire accounting year, whereas, under the VAT system, different annex declarations had to be drawn up for each state, as each state declaration had to be submitted separately.

3. Tax Rate and State Laws

GST rates are the same across the country. There are no differences in tax rates of different states. The state GST (SGST) is collected for states, while the central GST (CGST) is collected for the centre. The integrated GST (IGST) is calculated for the delivery of goods and services between states. If a Union territory is affected, the GST (UGST) of the Union territory is collected, whereas under the VAT system, each state has different tax rates and rules.

4. Tax collection 

SGST and CGST, collected on every sales transaction, are distributed accordingly between the centre and the state. Tax revenues benefit both the state and the central government, whereas, under the VAT system, the state government collected tax amounts concerning where the sales transaction took place. The state government had full access to the tax revenue.

5. Tax regime 

All taxes levied at the state and central level have been suspended. There is only one tax on goods and services across the country. However, there are a few exceptions, namely petroleum and natural gas, motor fuel, and high-speed diesel. In contrast, under the VAT system, various taxes were levied at the state level, including sales tax, luxury tax, entertainment tax, various levies, sales tax, etc. In the meantime, numerous taxes at the central level made the whole system quite complicated.

Conclusion

Thus, GST is a positive step in shifting the Indian economy from the informal to the formal economy. It is essential to leverage lessons learned from global economies that have implemented GST before addressing the challenges ahead. All sectors in India – manufacturing, service, telecommunications, automotive, and small SMEs – will carry these GST effects. One of the most significant tax reforms – GST will not be tying the entire nation under a single tax rate but will improve tax collection and boost India’s economic development. No doubt GST will give India a clear and transparent tax system.

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