The tax system in India mainly, is a three tier system which is based between the Central, State Governments and the local government organizations. India has a well-developed tax structure with clearly separated authority between Central and State Governments and local bodies. Central Government levies taxes on income, customs duties, central excise and service tax.

According to the Constitution of India, the government has the right to levy taxes on organizations and individuals. However, the constitution states that no one has the right to levy taxes except the authority of law or the parliament. The main body, which is responsible for the collection of taxes, is the Central Board of Direct Taxes, which is a part of the Department of Revenue under the Ministry of Finance of the Indian government. The CBDT functions as per the Central Board of Revenue Act of 1963. In last 10-15 years, Indian taxation system has undergone wonderful reforms. The tax laws have been simplified and the tax rates have been rationalized resulting in better compliance, ease of tax payment and better enforcement.

Tax Structure India

Indian Tax Structure after Independence:

The period after Independence was quite challenging for the tax planners. An enormous black economy set in both due to Second World War and increases in economic activity after independence. Savings and investment were encouraged through the different taxation laws by the way of incentives. There was a requirement for generating huge amount of revenues to fund the economic growth of the country. The tax department took great care to plan the tax structure not only with the aspect to widen the income tax base, but also to look for alternate taxes and to eliminate tax avoidance .The department was harshly tested due to the high volumes of work.

Some of the prominent taxes that came into existence were:

  • Business Profits Tax (1947)
  • Capital Gains (1946-48 to 1956)
  • Estate Duty (1953)
  • Wealth Tax (1957)
  • Expenditure Tax (1957)
  • Gift Tax (1958)

To check the growth of black money, high denomination notes were demonetized in 1946. In 1961, The Income tax Act was remodified, replacing the outdated law of 1922.

Income Tax Structure Post Liberalization:
The wave of tax reforms that started across the world in the second half of 1980’s found its way into India. As part of its policy of liberalization, India introduced tax reforms in the 1990’s.The reforms introduced in the Indian tax structure are various in comparison to other countries. In India, The tax reforms took place independent of interference from any external multilateral agency unlike some other countries. But the tax reforms took place in such a way as to ensure its obedience to the prevailing International trends.