Indian Economy
General Knowledge

Tax System

Tax System

» A compulsory contribution given by a citizen or organisation to the Government is called Tax, which is used for meeting expenses on welfare work.
» Tax imposing and Tax collecting is at three levels in India - Central level, State level and Local level.
» The distribution of tax between Centre and State has been clearly mentioned in the provisions of Indian Constitution. For rationalising it from time to time, Finance Commission has been constituted.

» The tax system has been divided into two parts :
Tax by Central Government : Custom Duty, Income Tax and Corporate Tax etc.
Tax by State Government : The state government has right to collect all the taxes in this category and to spend them.

» There are two types of taxes : 1. Direct Taxes 2. Indirect Taxes
Direct Taxes :
The taxes levied by the central government on incomes and wealth are important direct taxes. The important taxes levied on incomes are—corporation tax and income tax. Taxes levied on wealth are wealth tax, gift tax etc.
Indirect Taxes :
The main forms of indirect taxes are customs and excise duties and sales tax. The central government is empowered to levy customs and excise duties (except on alcoholic liquors and narcotics) whereas sales tax is the exclusive jurisdiction of the state governments.

» However, the union excise duties form the most significant part of central taxes. The major tax revenue sources for states are their shares in union excise duties and income tax, commercial taxes, land revenue, stamp duty, registration fees, state excise duties on alcohol and narcotics etc. Sales tax forms the most important component of commercial taxes.
» Progressive Tax : A tax that takes away a higher proportion of one's income as the income rises is known as progressive tax. Indian Income Tax is a progressive and direct tax.
» R. Chelliah Committee was constituted in August 1991 for suggesting reforms in Tax Structure.
» Chelliah Committee recommended Income Tax for agricultural income of more than Rs. 25,000 p.a. Chelliah Committee also recommended for lowering down the tax rates and reducing the tax slabs.
» K.L. Rekhi Committee was constituted in 1992 for suggesting uniform regulations for indirect taxation (Custom Duty and Excise Duty).

Finance Commission

» Finance Commission is constituted by the President under Art 280 of the constitution. Since Independence, 12 Finance Commissions have submitted their reports.

» 1st Finance Commission was constituted under chairmanship of K. C. Neogi while 12th Finance Commission was constituted under chairmanship of Dr. C. Rangarajan. The recommendations of 12th Finance Commission cover period 1st April, 2005 to 31st March, 2010.

» 13th Finance Commission, for the period 2010-2015, has been constituted in November, 2007 with Dr. Vijay L. Kelkar as the Chairman.