Taxes in India: what after GST part 1

India is a Federal state. Power is divided between the Union and the states. The functions have been classified as exclusively for the centre, exclusively for the state and both for the centre and the states. The constitution provided a way to distribute the revenues from captain taxes collected by the centre among the states. To ensure a fair and judicious balance between the respective shares of the centre and states, Article 280 of our constitution empowers the President of India to set up a Finance Commission every five years. To understand the upcoming changes vis-a-vis GST/ indirect taxation in India, it is important to first know the basics of taxation as it is till now.

In India, taxes are divided into six groups:

(I) Taxes Levied, Collected and Retained by the Centre:

These taxes are belonging to the centre exclusively. In other words, no part of the proceeds of these taxes can be assigned to the states. The following taxes fall under this category:

(i) Corporation Tax (Corporate tax)

(ii) Customs Duties.

(iii) Surcharge on Income Tax.

(iv) Taxes on capital value of assets of individual and companies.

(v) Fees on matters of the Union list.

(II) Taxes Levied by the Centre but Collected and Appropriated by the States:

The following taxes are included in this category:

(i) Stamp duties on bills of exchange, cheques, promissory notes and others.

(ii) Excise duties on medicinal and toilet preparation containing alcohol.

There taxes which form part of the union list are levied by the centre but (a) collected by the states within which such duties are levied; and (b) collected by the centre when such duties are levied within any Union Territory.

(III) Taxes Levied and Collected by the Centre but Assigned to the States:

This category includes the following duties and taxes:

(i) Duties on succession to property (other than agricultural land).

(ii) Estate duty on property (other than agricultural land).

(iii) Terminal taxes on goods and passengers carried by railways, sea and airways.

(iv) Taxes on railway fares a freights.

(v) Taxes on transaction in stock exchanges and future markets (other than stamp duties).

(vi) Taxes on the sale or purchase of newspapers and taxes on advertisements published in them.

(vii) Taxes on the sale or purchase of goods in course of inter-state trade or commerce (other than newspaper).

(viii) Taxes on the consignment of goods in the course of inter-state trade or commerce.

The net proceeds of these duties and taxes are assigned to states in accordance with the principles laid down by the parliament.

(IV) Taxes Levied and Collected by the Centre and Compulsorily Distributed between the Centre and the States:

Taxes on income (other than agricultural income and corporation tax) shall be levied and collected by the centre but compulsorily distributed between the centre and the states in such manner as prescribed by the president on the recommendations of the Finance Commission. The obligatory sharing of income tax is provided by Article 270 of the Constitution.

(V) Taxes Levied and Collected by the Centre and may be distributed between the Centre and the States:

Under this category falls the excise duties included in the Union list except those on medicinal and toilet preparations. These are levied and collected by the centre. The net proceeds of such duties can be paid to states out of the consolidated Fund of India only if the parliament so provides.

Further, the principles of distribution shall also be laid down by the parliament. It is to be noted that sharing of the proceeds, of income tax is obligatory, while that of excise duties is permissible.

(VI) Taxes Levied and Collected and Retained by States:

The following taxes and duties exclusively belong to states. They are mentioned in the State list. Every state is entitled to levy, collect and appropriate these taxes. The taxes are

(i) Duty on succession to agricultural land.

(ii) Estate duty on agricultural land.

(iii) Land revenue.

(iv) Tax on agricultural income.

(v) Tax on land and buildings

(vi) Capitation taxes.

(vii) Tax on mineral rights.

(viii) Tax on the consumption or sale of electricity.

(ix) Tax on vehicles.

(x) Tax on the sales and purchase of goods (other than newspaper) for e.g. Sales tax.

(xi) Tolls

(xii) Tax on professions, trades and employment.

This structure is now set for a major overhaul with 122nd constitutional amendment bill bringing in the GST revolution. GST will be a game changing reform for Indian economy by developing a common Indian market and reducing the cascading effect of tax on the cost of goods and services. It will impact the Tax Structure, Tax Incidence, Tax Computation, Tax Payment, Compliance, Credit Utilization and Reporting leading to a complete overhaul of the current indirect tax system. 

look out for the next post for the upcoming changes in tax structure of India post GST

By: Abhishek Sharma