(Sample Material) IAS PRE GS Online Coaching : Economic & Social Development - Taxation System In India: Concepts & Policies

Sample Material of Our Online Coaching Programme

Subject: Economic & Social Development
Topic: Taxation System In India: Concepts & Policies

Ques. 1 : What do you mean by Tax?

Ans. Tax is a payment compulsorily collected from individuals or firms by government. A direct tax is levied on the income or profits of an individual or a company. The word ‘direct’ is used to denote the fact that the burden of tax falls on the individual or the company paying the tax and can not be passed on to anybody else. For example, income tax, corporate tax, wealth tax etc. An ‘indirect’ tax is levied on manufacturing and sale of goods or services. It is called ‘indirect’ because the real burden of such a tax is not borne by the individual or firm paying it but is passed on to the consumer. Excise duty, customs duty, sales tax etc.

Funds provided by taxation are used by governments to carry out the functions such as:

  • military defense
  • enforcement of law and order
  • redistribution of wealth
  • economic infrastructure — roads, ports etc
  • social welfare
  • social infrastructure like education, health etc
  • social security measures like pensions for the elderly, unemployment benefits

Taxation System in India

India has a well developed tux structure. Being a federal country, the authority to levy taxes is divided between the central government and the state governments. The central government levies direct taxes such as personal income tax and corporate tax, and indirect taxes like customs duties, excise duties and central sales tax (CST). CST is assigned to the States in which it is collected. (Art.269). The states have the constitutional power to levy sales tax apart from various other local taxes like entry tax, octroi, etc.

Taxation has always played an important role in the formulation of the government’s economic policy. Taxation policy in a developing country like India can play an important part to raise resources for growth, to bring in reduction in inequalities, to direct growth in backward regions, to reduce consumption of luxury goods, to direct investment into small scale sector, to promote savings etc. In the wake of the economic reforms, the tax structure and procedures have been rationalised and simplified. Since 1991, the tax system in India has undergone substantial rationalization reduced rates and slabs and better administration.

Some of the changes are:

  • Broadening the tax base to include services, fringe benefits, stock market transactions etc.
  • Reduction in customs and excise duties. Peak customs rate is today 10%.
  • Lowering of corporate tax rates to 30%.
  • Rationalizing the personal income tax rates and slabs starting- from 1997 ‘dream budget’
  • Sales tax reforms at the State level as a preliminary step towards their integration into GST.
  • introduction of VAT from 2005 at the state level; GST is expected to be introduced in 2013.
  • Simplifying income-tax return filing procedures. For example, Saral, Towards better taxpayer services, in 2011-12, the JT department has introduced simple and user friendly SAHAJ (Form) for individual salary tax-payers; SUGAM for small tax-payers availing presumptive tax scheme. (For presumptive tax, see ahead).