Tax System of India

Abstract : 

The tax regime in India plays a pivotal role in strengthening the country’s economy, through  levying taxes and thereby, generating the revenue to implement the Government’s governance,  development and welfare initiatives. India has evolved its tax system from historical times and  the revenue collected has been used for meeting the changing demands of society during the  various phases of development. The introduction of GST was a true watershed, with the creation  of an integrated national market and a major simplification of indirect taxes. But tax compliance  and narrow base,and complex laws remain barriers to efficiency and equity. Recent reforms such  as faceless assessment, digital taxation and scraping of obsolete levies reflect India’s journey  towards a transparent and technology-driven system.  

Keywords: Taxation in India, GST, Direct and Indirect Taxes, Tax Reforms, Digital Taxation.

Introduction : 

The word tax can spark a range of emotions — frustration, resentment, even anger. For some, it  is a liability; for governments, it is the lifeblood of governing; for economists, it is the lever that  defines a nation’s development. But irrespective of those perceptions, taxation is and will always  remain a country’s lifeline. Taxes build roads and maintain courts and armies and fund welfare  programs. In India, the tale of taxation is as old as civilisation, from the Kautilya’s Arthashastra,  which spoke of taxes as the just share of the king, to the colonial days of punitive taxation, and  then independent India’s search for tax revenue balances with principles of equity and justice. 

India’s current system of taxation is a well crafted one laid out in the Constitution. Article 265 of  the Constitution provides that “no tax shall be levied or collected except by authority of law,”  while the Seventh Schedule allocates taxing powers between the Union and the States. India has  tested numerous forms of taxation—land revenue during the time of the British Raj, wealth tax,  estate duty, excise duties, service tax and sales tax over the years, leading to major changes such  as the Income Tax Act passed in 1961 for direct taxes and GST in 2017 for indirect taxes. These  changes have turned taxation, which used to be a disorganized or confusing order into a more  systematic and technology-based process.

Currently the Indian tax system is broadly based on two types of taxes, namely direct taxes (such  as income tax; corporate tax; and capital gains tax) and Indirect taxes (including GST and  customs duties). Of course, just a small percent of the population actually pays income tax, but  GST ensures that everyone contributes to tax and you can’t escape it. But problems remain — tax dodging, black money, difficult compliance regimes and mounting friction between the  politics of welfare and taxpayer expectations. 

In the future, India is set to transform digitally through its tax system. The emergence of faceless  assessments, e-filing, AI-based fraud detection and the proposed decadal direct tax code are  harbingers of an era in which efficiency, transparency and fairness will be key principles. In  addition, the tax of digital economy, transaction with cryptocurrency and cross-border e commerces are going to be in the lists for next reforming. 1 

Types of Taxes in India 

Broadly tax in India is classified into two categories Direct Tax and Indirect Tax. 

∙ Direct Tax is collected by government directly from individuals or firms. For instance,  integrate of tax amount and company tax. These taxes cannot be passed on to anyone else. ∙ Indirect Tax is collected from buyers by the intermediaries like shop-keepers, service  

providers and manufacturers. For example, GST and customs duty. This is where the buck  stops with the end consumer. 

The Indian Constitution distributes the power to levy taxes between the centre and states as  follows: 

∙ Union List: Includes taxes such as customs duty, income tax (excluding agriculture related  income), corporation tax etc. 

∙ State List: Includes land revenue, agricultural income tax, stamp duty and taxes on vehicles  and entertainment. 

∙ Concurrent List: Restricted topics generally contested where both Centre and State is  competent to make laws. 

Prior to 2017, India had multiple indirect taxes including excise duty, VAT, service tax and entry  tax that overlapped and obstructed the smooth running of business, creating an environment of  inefficiency and double taxation. The Goods and Services Tax (GST) unified most of these,  2creating a streamlined structure. 

Direct Taxes Explained 

Direct taxes are levied directly on individuals and organizations, based on income, wealth, or  profits. These taxes promote progressivity, as those who earn more contribute more. 

a) Income Tax 

Income tax in India is governed by the Income Tax Act, 1961. It applies to individuals, Hindu  Undivided Families (HUFs), firms, and other entities. 

Tax Slabs: Income tax operates on a slab system. The higher the income, the higher the rate of  taxation. This ensures fairness and equity. 

Surcharge and Cess: For higher income groups, an additional surcharge is levied. A health and  education cess is also imposed on the total tax liability. 

A landmark ruling, CIT v. Sun Engineering Works (P) Ltd., clarified that reassessment of tax  cannot be used as an opportunity for fresh claims, thus reinforcing certainty in taxation. 

b) Corporate Tax 

Companies are a separate legal entity from individuals. 

∙ Domestic Companies (incorporated in India) pay tax at the normal rates with certain benefits  available to start-ups and units involved in manufacturing. 

∙ Foreign Companies pay tax on the income which arises in India. 

The idea behind the principle of MAT was that companies having high book profits, but at the  same time not paying tax under regular provisions were brought within the ambit of law. 

In Vodafone International Holdings v. Union of India (2012), the Supreme Court held that  indirect transfer of Indian assets via foreign deals was not taxable under existing laws, leading to  significant changes in taxation of multinational corporations. 

c) Capital Gains Tax 

Capital gains tax applies to the profit arising from the sale or transfer of capital assets such as  property, shares, gold – any asset that is capital in nature. 

∙ Short-Term Capital Gains (STCG): Applies to assets held for not more than 36 months (or  12 months if you are dealing with shares). Taxed at normal rates. 

∙ Long-term Capital Gains (LTCG): Applies to assets held for longer than above. Taxed at  lower rates with certain exemptions for equity investors. 

This allows investment gains to also contribute to the exchequer. 

d) Wealth Tax  

Under the Wealth Tax Act, 1957, the government imposed wealth tax on net wealth which  included assets such as real estate, motor vehicles, jewelry, et cetera. It was abolished in 2015  because of the negligible revenue raised, associated compliance costs but also due to the shift  from a wealth tax to a surcharge on the super wealthy.3 

Indirect Taxes Explained 

The consumers are the ones who bear the burden of indirect taxes since in India’s taxes they  comprise a substantial share, these indirect taxes are collected from the consumers at the time of  purchase. 

a) Goods and Services Tax (GST) 

The slogan “One Nation, One Tax” was used to implement GST in 2017 to unify the indirect  taxes of excise and the taxation of services. 

∙ CGST: The center government obtains. 

∙ SGST: The state government obtains. 

∙ IGST: Imposed on exports and imports between states. 

In his 2022 decision in Union of India v. Mohit Minerals Pvt. Ltd., the Supreme Court of India  ruled that the GST Council’s advice is not legally enforceable, thereby, maintaining the states’  fiscal policy freedom. 

b) Customs Duty 

Revenue gained and expenses made on the purchase of goods brought into India and on the  goods sold out of India is termed as Customs duty. The revenue collected from customs duty on  the import of luxury cars is intended to foster the domestic industry. 

c) Excise Duty 

Now days, there are not a lot of revenues collected due to the excise duty, but it used to be a  considerable payment made on goods manufactured within the borders of India. The enactment  of GST was the reason and has tremendously changed the revenue excise duty collects.4 

Tax Structure in India 

a) Tax Administration 

∙ Direct taxes such as income and corporate taxes fall under the jurisdiction of the Central  Board of Direct Taxes (CBDT). 

∙ Indirect taxes such as the GST and customs duties fall under the jurisdiction of the Central  Board of Indirect Taxes and Customs (CBIC). 

Thorough collection, compliance, and enforcement are assured by both. Consider a company that  attempts to conceal income, in which case the CBDT would have the authority to levy fines. 

b) Tax Compliance 

Compliance with the law entails filing a return, paying the assessed advance tax, and observing  the provisions of TDS, as well as the provisions of TCS. 

Penalties are imposed for late compliance. Recent examples of such as faceless assessment  reforms were designed to curb corruption and improve the clarity of processes.5 

Tax Rates in India 

a) Individual Tax Rate 

As per slabs in old regime and new regime. 

∙ Old regime: Higher slabs, with deductions. 

∙ New regime: Lower slabs with few deductions. 

For example, income up to ₹2.5 lakh attracts no tax, and higher income earners pay tax up to  30% and a surcharge. 

b) Corporate Tax Rates 

∙ Domestic: About 25-30%. 

∙ Foreign: Higher rates on income originating in India. 

∙ New manufacturing: 15% concessional rate to attract investment under Make in India. c) GST Rates 

The slabs are 0%, 5%, 12%, 18%, and 28%. Exempt are certain essentials, and the luxuries are  28% plus cess.6 

Tax Deductions and Exemptions 

a) Section 80C 

Permits investment in LIC, PPF, NSC, ELSS, home loan principal and tuition fees with a  maximum investment amount of ₹1.5 lakh. 

b) Section 80D 

Provides ₹25,000 and ₹50,000 for individual and senior citizen policyholders respectively.

c) Other Deductions 

∙ 80E: Interest on education loan. 

∙ 80G: Contributions to nonprofits and charitable organizations. 

∙ HRA/LTA: Available to employees earning a salary.7 

Filing Tax Returns 

a) Who Shall File 

Any individual earning above the exemption limits and all businesses and firms.

b) Procedure 

Different taxpayers have different ITR returns (for a salaried individual ITR-1, for a professional  ITR-4, and so on). 

c) Online Payment 

The Income Tax e-filing portal provides online returns and payment, Aadhaar-PAN linking, and  e-verification using OTP.8 

Tax Reforms in India 

a) Historical Reforms 

∙ Colonial Period: Collection of land revenue using Zamindari and Ryotwari systems.

∙ Post Independence: Wanchoo Committee (1971) on tax evasion, Raja Chelliah Committee  (1991) on rationalizing rates. 

b) Contemporary Changes 

∙ Launch of GST in 2017. 

∙ Introduced faceless assessments for greater transparency. 

∙ Removed Dividend Distribution Tax (DDT) in 2020.9 

Challenges in the Tax System 

a) Tax Evasion 

The loss in revenue coupled with the increasing burden on honest taxpayers caused by black  money, hawala, and shell companies is alarming. 

b) Complexity 

Small businesses face considerable challenges with compliance due to frequent changes and  numerous tax slabs. 

c) Narrow Tax Base 

The Indian income tax system is highly dubious and relies on a very small portion of the  population, as only around 1.6% of citizens actually contribute.10 

Future of Taxation in India 

a) Digital Taxation 

Fraud detection, as well as the automation of streamlined assessments and coverage expansion, is  made easier through the use of AI, blockchain, and automation, while cryptocurrency and other  digital assets are also under taxation. 

b) Global Trends 

Alignment with India’s global practices is a work in progress, as the Global Minimum Tax  (15%) by OECD is designed to minimize profit loss shifting to tax havens. The Indian  Equalisation Levy makes it so that foreign digital companies are taxed from India.11 

Conclusion 

As with the rest of the country, the taxation system of India has evolved from colonial silos to a  prefabricated digital architecture. GST, faceless assessments, and online compliance tools are  examples of growing digital sophistication and a commitment to transparency and efficiency. 

Tax evasion, legal intricacies, and a sparse base of willing taxpayers still loom. India must  concentrate on expanding the base, simplifying the legal frameworks, and integrating fairness  and technology for more optimal outcomes. 

Improving and simplifying public trust of the taxation system will broaden the revenue and foster  inclusivity and sustainability to the economic growth of India. 

Reference(S):

1 Francis Rodrigues, “Tax Structure in India – Types of Taxes in India” (HDFC Life, March 3, 2025)  <https://www.hdfclife.com/insurance-knowledge-centre/tax-saving-insurance/tax-structure-in-india> accessed  September 12, 2025.

2 Ektha Surana, “Types Of Taxes In India: Direct Tax And Indirect Tax” ClearTax (December 5, 2022)  <https://cleartax.in/s/types-of-taxes-in-india-direct-and-indirect-tax> accessed September 12, 2025.

3Julia Kagan, “Direct Tax: Definition, History, and Examples” Investopedia (November 25, 2003)  <https://www.investopedia.com/terms/d/directtax.asp> accessed September 12, 2025.

4Julia Kagan, “Indirect Tax: Definition, Meaning, and Common Examples” Investopedia (November 20, 2003)  <https://www.investopedia.com/terms/i/indirecttax.asp> accessed September 12, 2025.

5Francis Rodrigues, “Tax Structure in India – Types of Taxes in India” (HDFC Life, March 3, 2025)  <https://www.hdfclife.com/insurance-knowledge-centre/tax-saving-insurance/tax-structure-in-india> accessed  September 12, 2025.

6Francis Rodrigues, “Income Tax Slab FY 2025-26 & AY 2026-27 – New and Old Regime Tax Rates” (HDFC Life, May  20, 2025) <https://www.hdfclife.com/insurance-knowledge-centre/tax-saving-insurance/income-tax-slab-rates>  accessed September 12, 2025. 

7 Kotak Life, “Income Tax Deductions List: Deductions on Sections 80C to 80U FY 2025-26” (Kotak Life, May 15,  2025) <https://www.kotaklife.com/insurance-guide/savingstax/income-tax-deductions-list> accessed September  12, 2025. 

8“E Filing Income Tax Return – Steps for IT Filing Online” (Groww) <https://groww.in/p/tax/e-filing-income-tax>  accessed September 13, 2025.

9“Challenges and Reforms in India’s Taxation System” (Drishti IAS) <https://www.drishtiias.com/daily updates/daily-news-analysis/challenges-and-reforms-in-indias-taxation-system> accessed September 13, 2025.

10 Dipali Phadke, “Challenges and Solutions in Tax Compliance for Indian Businesses” (Finsmart Accounting, June  19, 2024) <https://finsmartaccounting.com/blogs/challenges-and-solutions-in-tax-compliance-for-indian businesses/> accessed September 13, 2025.

11 vikash gupta, “The Future of Indian Taxation: Trends to Watch” (Ampuesto, August 3, 2025)  <https://ampuesto.in/blog/future-of-indian-taxation/> accessed September 13, 2025.