Types of Taxes in India

The taxation system in India is a vital component of the country’s fiscal structure, serving as the primary source of revenue for the government to finance public expenditure, infrastructure development, welfare programmes, and national defence. The system is governed by both Central and State Governments, under the framework of the Indian Constitution, which clearly delineates their respective taxation powers. Broadly, taxes in India are divided into two categories — Direct Taxes and Indirect Taxes — each with distinct characteristics, methods of collection, and implications for individuals and businesses.

Classification of Taxes

The Indian taxation structure can be broadly classified into the following two types:

1. Direct Taxes – levied directly on individuals and organisations.
2. Indirect Taxes – levied on the consumption of goods and services.

This dual structure ensures a balanced approach to revenue generation, distributing the burden of taxation across different segments of the economy.

Direct Taxes

Direct taxes are those imposed directly on a person or organisation’s income, wealth, or profit. The liability cannot be transferred to another person — the taxpayer who earns the income must pay the tax. These taxes are administered primarily by the Central Board of Direct Taxes (CBDT) under the Department of Revenue, Ministry of Finance.
Major Types of Direct Taxes in India:

1. Income Tax:
   • Levied on the income earned by individuals, Hindu Undivided Families (HUFs), firms, and companies.
   • Governed by the Income Tax Act, 1961.
   • Individuals are taxed based on income slabs, while companies pay tax on profits at specified corporate tax rates.
   • The tax is collected through systems such as Tax Deducted at Source (TDS), Advance Tax, and Self-Assessment Tax.
2. Corporate Tax:
   • Imposed on the profits of companies registered in India.
   • Includes Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) (the latter abolished in 2020).
   • Domestic companies and foreign corporations are taxed at different rates.
3. Capital Gains Tax:
   • Levied on profits from the sale or transfer of capital assets, such as property, stocks, or bonds.
   • Classified as Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG), depending on the period of holding.
4. Securities Transaction Tax (STT):
   • Charged on transactions made through recognised stock exchanges for securities such as shares, derivatives, and equity-oriented mutual funds.
5. Wealth Tax (abolished in 2015):
   • Previously levied on the net wealth of individuals and companies, but replaced by a surcharge on the super-rich.
6. Gift Tax:
   • Applied under the Income Tax Act, 1961, on gifts exceeding a specified monetary threshold received by an individual from non-relatives.
7. Estate Duty (abolished):
   • Earlier levied on the transfer of property through inheritance; discontinued in 1985.

Characteristics of Direct Taxes:

• Based on the principle of ability to pay.
• Progressive in nature — higher income attracts higher rates.
• Promote social and economic equity by redistributing wealth.
• Collected directly by government agencies without intermediaries.

Indirect Taxes

Indirect taxes are levied on the production, sale, or consumption of goods and services, and the burden of payment can be passed on from producers or sellers to consumers. These taxes are collected at various stages of production and distribution and ultimately borne by the end user.
Prior to 2017, India had a complex structure of multiple indirect taxes levied by both the Centre and the States. To simplify and unify the system, the Goods and Services Tax (GST) was introduced on 1 July 2017, subsuming most existing indirect taxes.
Major Types of Indirect Taxes in India:

1. Goods and Services Tax (GST):
   • A comprehensive tax levied on the supply of goods and services at every stage of value addition.
   • Replaced a wide range of indirect taxes, including Excise Duty, Service Tax, Value Added Tax (VAT), Entry Tax, and Octroi.
   • Implemented as a dual structure:
     • Central GST (CGST): Collected by the Central Government.
     • State GST (SGST): Collected by the State Government.
     • Integrated GST (IGST): Collected by the Centre on inter-state transactions and imports.
   • Administered jointly by the Central Board of Indirect Taxes and Customs (CBIC) and State tax departments.
   • Features include input tax credit, uniform tax rates, and simplified compliance through digital platforms.
2. Customs Duty:
   • Levied on imports and exports of goods under the Customs Act, 1962.
   • Includes:
     • Basic Customs Duty (BCD)
     • Countervailing Duty (CVD)
     • Anti-dumping Duty (to protect domestic industries from unfair foreign competition)
     • Safeguard Duty (to prevent injury to local industries from sudden import surges).
   • Contributes significantly to India’s foreign trade revenue.
3. Excise Duty (Pre-GST):
   • Formerly levied on the manufacture of goods within India.
   • Now subsumed under GST, except for certain products like petroleum, tobacco, and liquor, which still attract excise duties.
4. Service Tax (Pre-GST):
   • Imposed on services rendered in India; merged into GST from 2017.
5. Value Added Tax (VAT) (Pre-GST):
   • A state-level tax levied on intra-state sale of goods; replaced by SGST for most commodities.
6. Stamp Duty and Registration Fees:
   • Levied by State Governments on the transfer of immovable property and registration of legal documents.
7. Excise on Non-GST Items:
   • Certain goods, including petroleum products, natural gas, alcohol, and electricity, remain outside GST and continue to be taxed separately.

Characteristics of Indirect Taxes:

• Regarded as regressive, since they apply uniformly regardless of income level.
• Easier to collect and administer through intermediaries such as manufacturers or retailers.
• Affect consumer prices, as the burden is passed on to the end user.
• Encourage compliance through digital invoicing and self-declaration under GST.

Differences Between Direct and Indirect Taxes

Taxation Powers under the Indian Constitution

The Seventh Schedule of the Indian Constitution distributes taxation powers between the Union and the States under three lists:

• Union List: The Central Government can levy taxes such as Income Tax (except agricultural income), Corporation Tax, Customs Duty, Excise Duty, and GST on inter-state trade.
• State List: States can impose taxes on Agricultural Income, Land Revenue, Stamp Duty, State Excise, and SGST.
• Concurrent List: Both Centre and States can make laws on matters such as GST, subject to coordination by the GST Council.

The Finance Commission, constituted every five years under Article 280, recommends the distribution of tax revenues between the Centre and the States.

Role and Importance of Taxes in India

Taxes play a central role in India’s economic and social policy framework. Their significance includes:

• Revenue Generation: Primary source of funds for public expenditure and infrastructure.
• Redistribution of Wealth: Progressive taxation ensures equitable distribution of income.
• Economic Regulation: Used as a tool to control inflation, consumption, and investment.
• Encouragement of Growth: Tax incentives promote industrial development and innovation.
• Fiscal Responsibility: Helps maintain budgetary balance and financial discipline.

Recent Developments and Reforms

India’s tax system has undergone continuous modernisation to enhance transparency and ease of compliance. Key reforms include:

• Introduction of GST (2017): Unified indirect tax system across India.
• Faceless Assessment (2020): For income tax scrutiny, reducing human interface.
• Corporate Tax Rate Reduction (2019): To boost industrial growth and investment.
• Digitalisation of Tax Filing: Expansion of the Goods and Services Tax Network (GSTN) and Income Tax e-filing portal.
• Focus on Simplification: Rationalisation of tax rates, improved refund mechanisms, and taxpayer charter initiatives.