Taxation in India and GST: Types, Articles and PYQs

Taxes are the main source of government revenue and the chapter is a favourite of examiners because it is full of definitions, article numbers and dates that can be asked in one line. This note covers what a tax is, how direct and indirect taxes differ, which taxes India has abolished, the constitutional provisions behind taxation, and the Goods and Services Tax in detail, since GST alone accounts for most of the questions set from this chapter.

What a tax is and where the power comes from

A tax is a compulsory payment to the government for which the payer receives no direct service in return. The constitutional base is Article 265, which lays down that no tax shall be levied or collected except by authority of law, so every tax needs a statute behind it. The subjects on which the Union and the states may tax are listed in the Seventh Schedule, while Article 270 governs how the proceeds of central taxes are shared, and Article 280 provides for the Finance Commission that recommends the formula. Two boards under the Department of Revenue in the Ministry of Finance run the system: the Central Board of Direct Taxes for direct taxes and the Central Board of Indirect Taxes and Customs for indirect taxes.

Direct and indirect taxes

In a direct tax the impact and the incidence fall on the same person, so the burden cannot be passed on. Income tax, levied under the Income-tax Act of 1961, corporation tax, capital gains tax and the securities transaction tax are the main examples. Direct taxes are usually progressive, since the rate rises with the ability to pay. In an indirect tax the burden is shifted to somebody else, usually the final consumer: the seller deposits the tax but recovers it in the price. The Goods and Services Tax and the customs duty are the main indirect taxes today. Indirect taxes tend to be regressive, because a poor buyer and a rich buyer pay the same amount on the same packet of goods.

Taxes India has given up

Three abolitions are asked repeatedly. Estate duty, a tax on property passing on death, was abolished in 1985. Gift tax was abolished in 1998, after which gifts above a threshold are taxed in the hands of the receiver as income from other sources. Wealth tax was abolished in 2015 and replaced by an additional surcharge on very high incomes, because it collected very little and cost a great deal to administer.

The Goods and Services Tax

GST came into force on 1 July 2017, and that date is now observed as GST Day. It replaced a tangle of central and state levies with a single tax on the supply of goods and services. The central taxes it absorbed include central excise duty, service tax and the additional duties of customs; the state taxes it absorbed include state value added tax, entertainment tax, luxury tax, octroi, entry tax and purchase tax. Basic customs duty stays outside it, and so do five petroleum products, namely crude oil, petrol, diesel, aviation turbine fuel and natural gas, which are to be brought in on a date the Council recommends. Alcoholic liquor for human consumption is kept out by the Constitution itself, and electricity and stamp duty on property also remain outside.

GST is a destination-based consumption tax charged on value addition, which means the revenue goes to the state where the goods or services are consumed, not where they are made. Because the tax is collected at every stage but credit is given for the tax already paid on inputs, the cascading effect of tax on tax is removed. India follows a dual model borrowed in principle from Canada: on a supply within a state, the Centre levies Central GST and the state levies State GST, and in a union territory the equivalent is Union Territory GST; on a supply between states the Centre levies Integrated GST and the proceeds are apportioned with the consuming state. France was the first country in the world to adopt a value added tax of this kind, in 1954.

The constitutional machinery of GST

GST required an amendment of the Constitution because taxing powers had to be shared. The Constitution (One Hundred and First Amendment) Act, 2016 inserted Article 246A, which lets both Parliament and the state legislatures make laws on GST; Article 269A, which deals with the levy on inter-state supply; and Article 279A, under which the President constituted the GST Council. The Council is chaired by the Union Finance Minister and has the Union Minister of State for Finance and a minister nominated by every state as its members. Its decisions are taken by a majority of three fourths of the weighted votes of members present and voting, the Centre holding one third of the total weight and all the states together two thirds; the quorum is one half of the members. The information technology backbone of the system is the Goods and Services Tax Network. When GST began, the rate structure had four main slabs, of five, twelve, eighteen and twenty-eight per cent, with a lower rate for precious metals and stones, a nil rate on essentials and a compensation cess on luxury and demerit goods; the Council revises these rates from time to time, so read the current schedule from the official portal before the exam.

Terms that carry marks

A surcharge is a tax on a tax and a cess is a levy earmarked for a particular purpose; neither is shared with the states out of the divisible pool, which is why their growing share is a matter of dispute. Tax buoyancy measures how fast tax revenue grows compared with national income, and the tax to gross domestic product ratio measures the reach of the tax system. A tax is called ad valorem when it is charged as a percentage of value and specific when it is charged per unit. The Laffer curve is the idea that beyond a point a higher rate yields less revenue. Input tax credit, the composition scheme for small dealers, the reverse charge mechanism and the electronic way bill are the working terms of GST that short questions are built on.