6. Taxation
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6. Taxation
6.1 Basic Concepts
A tax is a compulsory payment made to the government by individuals and businesses, with no direct return benefit for the payer. Taxes pay for public goods and services and are a tool for reducing inequality.
Adam Smith's canons of taxation
Canon |
Meaning |
Equity |
Each person should pay according to ability |
Certainty |
The amount, time and manner of payment should be clear |
Convenience |
Payment should be easy for the taxpayer |
Economy |
Cost of collection should be low |
Key terms
Term |
Meaning |
Tax base |
The income, property or transaction on which tax is charged |
Impact and incidence |
Impact is on the person who first pays the tax. Incidence is on the person who finally bears the burden |
Tax buoyancy |
How much tax revenue rises with a rise in GDP, including the effect of policy changes |
Tax-GDP ratio |
Tax revenue as a percentage of GDP; shows how much of the economy the state taxes |
Tax evasion |
Illegal hiding of income or facts to pay less tax |
Tax avoidance |
Legal use of loopholes and planning to reduce tax |
Tax haven |
A country with very low or zero taxes that attracts foreign money |
6.2 Constitutional Framework
Article 265: no tax can be levied or collected without the authority of law.
The Seventh Schedule divides taxing powers between the Centre and the States.
List |
Taxes |
Examples |
Union List |
Income tax (except on agriculture), corporation tax, customs duties, taxes on capital value |
Entries 82, 83, 85 and others |
State List |
Land revenue, tax on agricultural income, stamp duty on documents, excise on alcohol, entertainment tax, taxes on lands and buildings, professional tax |
Entries 45 to 63 |
Concurrent List |
Only stamp duties other than those collected through judicial stamps |
Entry 44 |
Article |
Provision |
268 |
Duties levied by the Union but collected and kept by the States, such as stamp duties on bills of exchange |
269A |
IGST on inter-state supply is levied and collected by the Centre; the GST Council decides how it is shared |
270 |
Taxes levied by the Union and shared with the States, called the divisible pool |
271 |
Union can levy surcharges for its own purposes; these are not shared with States |
276 |
Limits professional tax levied by a State to Rs 2,500 per person per year |
279A |
Creates the GST Council |
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6.3 Direct Taxes
Direct taxes are charged on income or wealth and are paid by the person on whom they are levied.
Tax |
Key Point |
Personal income tax |
Progressive tax on individuals; rates are set by the Finance Act each year. The new tax regime is now the default option |
Corporation tax |
Charged on company profits. A concessional rate of 22% for domestic companies was introduced in 2019, and 15% for new manufacturing companies |
Capital gains tax |
On profit from selling assets such as shares or property. Short-term and long-term gains are taxed at different rates |
Minimum Alternate Tax (MAT) |
Companies that show low taxable profit must still pay a minimum tax on their book profits |
Securities Transaction Tax (STT) |
Charged on buying and selling of listed securities; introduced in 2004 |
TDS and TCS |
Tax deducted at source on payments such as salaries, and tax collected at source on specified sales |
Taxes that no longer exist
Estate duty: abolished in 1985.
Gift tax: abolished in 1998.
Wealth tax: abolished in 2015 and replaced by an additional surcharge on the super-rich.
Dividend Distribution Tax: abolished in 2020; dividends are now taxed in the hands of the receiver.
The new Income-tax Act, 2025
The Income-tax Act, 2025 replaces the Income-tax Act, 1961 and came into force on 1 April 2026.
It was passed by Parliament in August 2025 and received the President's assent on 21 August 2025.
It replaces the two terms previous year and assessment year with a single tax year (1 April to 31 March).
The new Act is shorter and better arranged: 536 sections against 819 in the old Act. It is a rewrite for simplicity, not a change in the basic tax policy.
Tax rates are still set each year by the Finance Act.
Administration
Direct taxes are administered by the Central Board of Direct Taxes (CBDT), and indirect taxes by the Central Board of Indirect Taxes and Customs (CBIC). Both are under the Department of Revenue, Ministry of Finance.
Faceless assessment (2020) and the Taxpayers' Charter (2020) were introduced to improve trust and reduce direct contact with officials.
6.4 Indirect Taxes
Goods and Services Tax (GST)
GST is a single, destination-based tax on the supply of goods and services. It replaced many central and state taxes, including central excise duty, service tax, VAT, entertainment tax, octroi and luxury tax.
Component |
Key Point |
CGST |
Central GST on supply within a State |
SGST |
State GST on supply within a State (UTGST in Union Territories) |
IGST |
Integrated GST on inter-state supply and on imports; collected by the Centre and shared with the destination state |
Input Tax Credit (ITC) |
A seller can set off the tax paid on inputs against the tax on output, so tax is charged only on the value added |
GST Council |
Decisions need a three-fourths weighted majority; the Centre has one-third of the vote and States together two-thirds |
GSTN |
Goods and Services Tax Network: the IT backbone for registration, returns and payments |
GST rates after GST 2.0
|
Customs and excise
Customs duty is charged on imports and exports under the Customs Act, 1962. Besides basic customs duty, imports attract IGST and, in some cases, anti-dumping duty or safeguard duty.
Anti-dumping duty is imposed on goods sold in India at an unfairly low price; it is recommended by the Directorate General of Trade Remedies (DGTR).
After GST, central excise remains mainly on petroleum products and tobacco. State excise on alcohol for human consumption remains a State tax.
6.5 Tax Reforms in India
Year |
Reform |
Key Point |
1986 |
MODVAT |
Modified Value Added Tax; gave credit for tax paid on inputs and reduced the cascading effect of taxes |
1991 |
Chelliah Committee |
Tax Reforms Committee: lower rates, fewer exemptions, simpler customs duties and a move towards VAT |
1994 |
Service tax |
Introduced on a few services and widened over time |
2002 |
Kelkar Task Force |
Recommended a broad VAT and later a national GST |
2005 |
State VAT |
Value Added Tax replaced sales tax in the States |
2017 |
GST |
Introduced on 1 July 2017 by the 101st Constitutional Amendment Act, 2016 |
2019 |
Corporate tax cut |
Lower rates for companies that give up exemptions |
2026 |
Income-tax Act, 2025 |
New direct tax law in force from 1 April 2026 |
Direct versus indirect tax in the Centre's revenue
In earlier decades the Centre depended more on indirect taxes. In recent years direct taxes have contributed a larger share of gross tax revenue.
A higher share of direct taxes is seen as good for equity, since they fall on those with more income.
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