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Introduction
Taxes in India are levied by the Central Government and the state
governments. Some minor taxes are also levied by the local authorities
such as the Municipality. The authority to levy a tax is derived from the
Constitution of India which allocates the power to levy
various taxes between the Central and the State. In 2015-2016, the gross
tax collection of the Centre amounted to ₹14.60 trillion (US$220 billion)

Meaning
Taxation is a process by which Government finance their expenditure by imposing
charges on citizens and corporate entities. Tax is the basis for taxation. A tax is a
financial charge or other levy imposed on an individual or a legal entity by a state or
a functional equivalent of a state . Taxes are also imposed by many sub-national
entities. Taxes consist of direct tax or indirect tax, and may be paid in money .
“Taxes are compulsory payments to the government without expectation of the
direct return or benefit to the tax-payer”.
There are three stages in the imposition of tax:
1.The announcement of tax liability i.e. the party of the statute, which determines
the persons in respect of what property are liable.
2.The judgment of tax liabilities.
3.The method of recovery if the person taxed does not voluntarily pay

Types/Classification of tax
Types
of tax
On the
basis of
form
On the
basis of
essence
On the
basis of
volume
On the
basis of
income

1. On the basis of Form
Direct Tax: Direct tax is referred to as the tax, levied on person’s income and
wealth and is paid directly to the government.
Indirect Tax: Indirect tax is referred to as the tax, levied on a person who
consumes the goods and services and is paid indirectly to the government.
2. On the basis of Income
Proportional Tax: It is a tax where the rate of taxation is fixed. The amount of
the tax is a fixed proportion (say 20%) of one's income. It stays a fixed
irrespective of how high or low the income is.
Progressive Tax: It is a tax in which the tax rate increases as the income
increases. A progressive tax takes a larger percentage of income in taxes from
the high-income group than it does from the low-income group.

Regressive Tax: It is a tax imposed in such a manner that the tax rate decreases
as the amount of taxable income increases. The higher income group pays less in
taxes than the lower income group. Regressive taxes impose greater tax burden
on the poor relative to the rich.
Degressive Taxes: In digressive taxation, a tax may be progressive up to a certain
limit; after that it may be charged at a flat rate.

3.On the basis of Essence
Ad valorem tax: When the tax is imposed on a commodity according to its value
it is called ad valorem tax.
Specific Tax: When tax is imposed on a commodity according to its weight, size,
it is called specific tax.
4.On the basis of volume
Single tax system: A tax that serves as the government’s only source of income.
In most cases, it takes the form of tax on i.e. tax on a one commodity.
Multiple tax system: A multiple tax refers to the tax system in which there is the
diversity of taxation, i.e., various types of taxes is levied.

Constitutional Framework of
Taxation
1. Taxes levied by Central Government and State Government(s)
2. Authority to levy a tax is derived from the Constitution of India
 Which allocates power to levy various taxes between the Centre and State
 Article 265 of the Constitution which states that "No tax shall be levied or
collected except by the authority of law”
3. Article 246 of the Indian Constitution, distributes legislative powers including
taxation, between the Parliament of India and the State Legislature
4. Schedule VII enumerates use of three lists;
 List - I Where the parliament is competent to make laws
 List - II Where only the state legislature can make laws
 List - III Where both the Parliament and the State Legislature can make laws
upon concurrently

1. Direct Tax
Direct Taxes in India were governed by two major legislations, Income Tax
Act, 1961 and Wealth Tax Act, 1957. A direct tax is referred to as a tax levied
on person’s income and wealth and is paid directly to the government, the
burden of such tax cannot be shifted. The tax is progressive in nature i.e. it
increases with an increase in the income or wealth and vice versa.
The plans and policies of the Direct Taxes are being recommended by the
Central Board of Direct Taxes (CBDT) which is under the Ministry of
Finance, Government of India.

Types of Direct Tax
1. Income tax
2. Wealth tax
3. Gift tax
4. Corporate tax
5. Capital gain tax
6. Expenditure tax
Types
of direct
taxes
Income tax
Wealth tax
Gift tax
Corporate
tax
Capital gain
tax
Expenditure
tax

1. Income tax: It is levied and collected by the central government. The
government has set up a separate income tax department for this purpose.
Income tax is a very important source of income of the central government.
Person includes in income tax :
1. Individual
2. Hindu Undivided Family (HUF)
3. Association of Persons (AOP)
4. Body of Individuals (BOI)
5. Company
6. Firm
7. Local authority
2. Wealth Tax: The tax levied by the government on a person’s personal net
wealth or capital is called wealth tax. Net wealth is the net value of a person’s
assets. The Wealth Tax Act 1957 lays down the rules governing wealth tax in
India. It applies to three kinds of assesses viz. Individuals, HUFs and companies.

3. Gift Tax: If an individual transfers any of his movable or immoveable
property voluntarily to any other individual it is called a gift. If the value of
a gift exceeds a specified limit then the person giving the gift has to pay
gift tax to the government whereas the person receiving the gift need not
pay any tax.
4. Corporate Tax: A corporation tax is that tax which payable by
companies at is prescribed flat rates on their total income, however small
the total income may be. However, there are different rates for different
types of companies and different types of incomes. In other words, the
income tax paid by a company on its income is known as corporation tax.
The companies are liable to pay the tax.
5.Capital Gain Tax: This is the tax levied on the sale of any asset like
land, building etc. when the price at which is sold or transferred exceeds
the price at which it was purchased or acquired.
6. Expenditure Tax: It is also known as consumption tax. Tax is defined as a fee,
which is charged and collected by a country’s government on a commodity,
activity or income. Taxation is primarily for financing of government
expenditure.

Merits of Direct Taxes
1. Anti-inflationary :The direct taxes can help to control inflation. During
inflationary periods, the government may increase the tax rate. With an increase in
tax rate, the consumption demand may decline, which in turn may reduce inflation.
2. Economical: Direct taxes are generally economical to collect. For instances, in the
case of personal income tax, the tax can be deducted at source from the income or
salaries of the individuals. Therefore, the government does not have to spend much
in tax collection as far as personal income tax is concerned.
3. Relatively Elastic: The direct taxes are relatively elastic. With an increase in
income and wealth of individuals and companies, the yield from direct taxes will
also increase. Elasticity also implies that the government's revenue can be increased
by raising the rates of taxation. An increase in tax rates would increase the tax
revenue.
4. Equity: There is social justice in the allocation of tax burden in case of direct
taxes as they are based on the principle of ability to pay. Persons in a similar
economic situation are taxed at the same rate.

Demerits of Direct Taxes
1. Affects Capital Formation
The direct taxes can affect savings and investment. Due to taxes, the net income
of the people gets reduced. This in turn reduces savings. Reduction in savings
results in low investment. The low investment affects capital formation in the
country.
2. Effect on Willingness and Ability to work
Highly progressive direct taxes reduce people's ability and willingness to work
and save. This in turn may have a negative impact on investment and productive
capacity in the economy. If tax burden is high, people's consumption level gets
adversely affected and this has an impact on their ability to work and save. High
taxes also discourage people from working harder in order to earn and save more.
3. Inconvenient
Direct taxes are inconvenient in the sense that they involve several procedures and
formalities in filing of returns. For most people payment of direct tax is not only
inconvenient, it is psychological painful also.

Indirect Tax
Indirect Tax is referred to as a tax charged on a person who consumes the goods
and services and is paid indirectly to the government. The burden of tax can be
easily shifted to the another person. The tax is regressive in nature, i.e. as the
amount of tax increases the demand for the goods and services decreases and vice
versa. It levies on every person equally whether he is rich or poor. The
administration of tax is done either by the Central Government or the State
government. There are several types of Indirect Taxes, such as :
1. Customs Duty
Customs Duty is a type of indirect tax levied on goods imported into India as well
as on goods exported from India. Taxable event is import into or export from
India.

2. Central Excise Duty
An excise or excise tax (sometimes called an excise duty) is a type
of tax charged on goods produced within the country (as opposed to customs duties,
charged on goods from outside the country). It is a tax on the production or sale of a
good. This tax is now known as the Central Value Added Tax (CENVAT).
The central government levied excise duty under the Central Excise Act, 1944
and the Central Excise Tariff Act, 1985.
3. Service Tax
The service providers in India except those in the state of Jammu and Kashmir are
required to pay a service tax under the provisions of the finance Act of 1994. The
responsibility of collecting the tax lies with the Central Board of Excise and
Customs (CBEC).
Some of the major services that come under the of Service Tax:
Telephone
Stockbroker
General Insurance
Advertising agencies
Courier agencies

4. Sales Tax
A sales tax is a consumption tax imposed by the government on the sale of goods
and services. A conventional sales tax is levied at the point of sale, collected by the
retailer and passed on to the government. With a sales tax, the tax is only collected
once – at the final point of purchase at the retail level by a consumer.
5. Value added tax
A value-added tax (VAT) is a consumption tax levied on products at every point of
sale where value has been added, starting from raw materials and going all the way
to final retail purchase by a consumer.

Merits of indirect tax
1. Convenient
Indirect taxes are imposed on production, sale and movements of goods and
services. These are imposed on manufacturers, sellers and traders, but their
burden may be shifted to consumers of goods and services who are the final
taxpayers.
2.Difficult to evade
Indirect taxes have in built safeguards against tax evasion. The indirect taxes
are paid by customers, and the sellers have to collect it and remit it to the
Government. In the case of many products, the selling price is inclusive of
indirect taxes. Therefore, the customer has no option to evade the indirect
taxes.
3. Wide coverage
Unlike direct taxes, the indirect taxes have a wide coverage. Majority of the
products or services are subject to indirect taxes. The consumers or users of
such products and services have to pay them.

4. Elastic
Some of the indirect taxes are elastic in nature. When government feels it
necessary to increase its revenues, it increases these taxes. In times of prosperity
indirect taxes produce huge revenues to the government.
5. Universality
Indirect taxes are paid by all classes of people and so they are broad based. Poor
people may be out of the net of the income tax, but they pay indirect taxes while
buying goods.
6. Social Welfare
The indirect taxes promote social welfare. The amount collected by way of taxes
is utilized by the government for social welfare activities, including education,
health and family welfare. Secondly, very high taxes are imposed on the
consumption of harmful products such as alcoholic products, tobacco products,
and such other products. So it is not only to check their consumption but also
enables the state to collect substantial revenue in this manner.

Demerits
.1 High cost of collection
Indirect tax fails to satisfy the principle of economy. The government has to set up
elaborate machinery to administer indirect taxes. Therefore, cost of tax collection per
unit of revenue raised is generally higher in the case of most of the indirect taxes.
2. Increase income equalities
Generally, the indirect taxes are regressive in nature. The rich and the poor have to
pay the same rate of indirect taxes on certain commodities of mass consumption.
This may further increase income disparities among the rich and the poor.
3. Inflationary
The indirect taxes are inflationary in nature. The tax charged on goods and services
increase their prices. Therefore, to reduce inflationary pressure, the government may
reduce the tax rates, especially, on essential items.

Central Excise Act, 1944
An excise or excise tax (sometimes called an excise duty) is a type of tax charged
on goods produced within the country (as opposed to customs duties, charged on
goods from outside the country). It is a tax on the production or sale of a good.
This tax is now known as the Central Value Added Tax (CENVAT).
Section 2(f) of the Central Excise Act, 1944 (the Act) defines manufacture as
"any process incidental or ancillary to the completion of a manufactured product.”

Salient features of central excise act,
1944
Following are the features of central excise act:
1. It extends to the whole in India.
2. This act is levied on manufacturer or production of goods.
3. The liability of paying the central excise is on the manufacturer.
4. This act is administered by the Central Board of Excise and Customs through
its field offices, the Central Excise Commission rates.
5. The rates at which the excise duty is to be collected are stipulated in the
Central Excise Tariff Act, 1985.

Customs Act, 1962
Custom duty in India is defined under the Customs Act, 1962 and enables the
government to levy duty on exports and imports, prohibit export and import
of goods, procedures for importing/exporting and offences, penalties etc. All
matters related to custom duty fall under the Central Board of Excise &
Customs (CBEC). The CBEC, in turn, is a division of the Department of
Revenue of the Ministry of Finance. CBEC formulates policies that concern
collection or levying of custom duties, custom duty evasion, smuggling
prevention and administrative decisions related to customs formations.
CBEC has various divisions that take care of the field work including
Commissionerate of Customs, Customs, Customs (preventive and Central
Excise Zones, Central Revenues Control Laboratory and Directorates etc.
CBEC also oversees proper tax administration for foreign and inland travel.

Types of customs duties
1. Basic Customs Duty
• All goods imported into India are chargeable to a duty under Customs Act, 1962.
• The rates of this duty, popularly known as basic customs duty, are indicated in the
First Schedule of the Customs Tariff Act, 1975 as amended from time to time under
Finance Acts.
• The duty may be fixed on ad -valorem basis or specific rate basis.
• The duty may be a percentage of the value of the goods or at a specific rate.
• The Central Government has the power to reduce or exempt any good from these
duties.

2. Additional (Countervailing) Duty of Customs
• This countervailing duty is livable as additional duty on goods imported into
the country and the rate structure of this duty is equal to the excise duty on like
articles produced in India.
• The base of this additional duty is c.i.f. value of imports plus the duty levied
earlier.
• If the rate of this duty is on ad-valorem basis, the value for this purpose will be
the total of the value of the imported article and the customs duty on it (both
basic and auxiliary).
3.Export Duties
• Under Customs Act, 1962, goods exported from India are chargeable to export
duty.
• The items on which export duty is chargeable and the rate at which the duty is
levied are given in the customs tariff act,1975 as amended from time to time
under Finance Acts.
• However, the Government has emergency powers to change the duty rates and
levy fresh export duty depending on the circumstances.

4.Auxiliary Duty of Customs
• This duty is levied under the Finance Act and is leviable all goods imported into
the country at the rate of 50 per cent of their value.
• However this statutory rate has been reduced in the case of certain types of
goods into different slab rates based on the basic duty chargeable on them.
5. Cesses
• Cesses are leviable on some specified articles of exports like coffee, coir, lac,
mica, tobacco (unmanufactured), marine products cashew kernels, black pepper,
cardamom, iron ore, oil cakes and meals, animal feed and turmeric.
• These cesses are collected as parts of Customs Duties and are then passed on to
the agencies in charge of the administration of the concerned commodities.
Education cess on customs duty
• An education cess has been imposed on imported goods w.e.f. 9-7-2004.
• The cess will be 2% and wef 01.03.2007 2%+1% of the aggregate duty of
customs excluding safeguard duty, countervailing duty, Anti Dumping Duty.

6. Protective Duties
• Tariff Commission has been established under Tariff Commission Act, 1951.
• If the Tariff Commission recommends and Central Government is satisfied that
immediate action is necessary to protect interests of Indian industry, protective
customs duty at the rate recommended may be imposed under section 6 of
Customs Tariff Act.
• The protective duty will be valid till the date prescribed in the notification.
7. Anti Dumping Duty on dumped articles
• Often, large manufacturer from abroad may export goods at very low prices
compared to prices in his domestic market.
• Such dumping may be with intention to cripple domestic industry or to dispose of
their excess stock. This is called dumping.
• In order to avoid such dumping, Central Government can impose, under section
9A of Customs Tariff Act, anti-dumping duty up to margin of dumping on such
articles, if the goods are being sold at less than its normal value.
• Levy of such anti-dumping duty is permissible as per WTO agreement.
• Anti dumping action can be taken only when there is an Indian industry
producing like articles.

8. Safeguard Duty
• Central Government is empowered to impose safeguard duty on specified
imported goods if Central Government is satisfied that the goods are being
imported in large quantities and under such conditions that they are causing or
threatening to cause serious injury to domestic industry.
• Such duty is permissible under WTO agreement.
• Safeguard duty is a step in providing a need-based protection to domestic
industry for a limited period, with ultimate objective of restoring free and fair
competition

9. National Calamity Contingent Duty
• A National Calamity Contingent Duty (NCCD) of customs has been
imposed vide section 129 of Finance Act, 2001.
• This duty is imposed on pan masala, chewing tobacco and cigarettes. It
varies from 10% to 45%. - NCCD of customs of 1% was imposed on motor
cars, multi utility vehicles and two wheelers and NCCD of Rs 50 per ton
was imposed on domestic crude oil -section 134 of Finance Act.
• There are different rates of duty for different goods there are different
rates of duty for goods imported from certain countries in terms of bilateral
or other agreement with such countries which are called preferential rate of
duties the duty may be percentage of the value of the goods or at specified
rate.

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