Tax is not a quid pro quo, it is a compulsory levy by the government that is
to be paid by the people and resultantly helps in the overall development of the
country. the historical background provides that even in the ancient period, the
kings used to tax people as per their earnings and that as sufficient to govern
the kingdom efficiently. The same pattern can be seen in the current way of
taxation, that is done based on the income groups and hence, serves purpose of
The tax structure in India is three tier and is federal structure, where the tax
can be levied by Central, State and Municipal bodies, where the taxes cannot be
levied except it is promoted by the authority of law. The taxation in India
is not a new practice, we can trace this since ancient times where, the taxes
were imposed on the people in various forms.
The taxation in India is rooted from the ancient times of Manusmriti and
Arthshashtra, where it was provided that the taxes must be levied to the only
extend that it is based on optimum social welfare.
It was only for the good of his subjects that he collected taxes from them,
just as the Sun draws moisture from the Earth to give it back a thousand fold:
The origin of the word tax
is from taxation
which means an
estimate. Manusmriti lays down that the king should charge the tax from the
people in such a way that it should not pinch or stay heavy on the people.
Kautilya in his Arsthshrastha mentioned that the tax is for a specific purpose
and hence it shall not be charged arbitrarily and based on equity and justice
principles. In 1860, Sir James Wilson first introduced the concept of
taxation to meet government expenditures and a full codified act was enacted in
1922 which was further amended in 1961-62.
The taxation helps in economic development of the country. Any country needs
capital for the development and as the development is for the over all country,
it is collected in parts from everyone. The rise in disposable income will lead
to full employment and resultant would help in increase in development. When the
taxes are fixed and to be paid, that would lead to price stability and also
controlling cyclical fluctuations.
It decreases the income inequalities as the taxes are in such a way that it is
based on the income of the people and also reduces the Balance of Payment
difficulties of the Government. The taxation regulates the income of the
people and also encourages investment by the people.
As per AP Lerner, the taxation achieves the functional financial objective,
where the person is left with less in hand and so he spends less. The objective
of taxation is to regulate the inflow of the money in various efficient sources
and thus it acts as incentive objective. Moreover, taxation promotes economic
growth, equity and stabilisation. The tax structure in India gives the
promotion to the domestic industries and thus, would provide exemptions from
taxes to the various domestic industries.
Tax Structure in India
The tax structure in India is divided into direct and indirect taxes. Direct
taxes are levied on taxable income earned by individuals and corporate entities,
the burden to deposit taxes is on the assesses themselves. On the other hand,
indirect taxes are levied on the sale and provision of goods and services
respectively and the burden to collect and deposit taxes is on the sellers
instead of the assesses directly.
Income tax, Corporation Tax, Dividend Tax, Capital gain tax, Wealth tax, Gift
tax, land revenue, Agricultural Income Tax etc. are the examples of the direct
tax. Whereas, Goods and services tax, customs duty, export duty, stamp duty,
electricity duty, etc. are the examples of the indirect tax.
Whenever, there is direct effect of the tax on the taxpayer, or the taxpayer
directly pays the tax, it is called direct tax as contrary to this, whenever the
tax that firstly affects the traders or manufacturers and consequently it is
shifted to the buyer of the goods is called indirect tax. The shifting of the
burden of tax is difficult in direct tax, whereas the person who buys the goods
would bear the burden in the case of direct tax.
Direct taxes are progressive taxes which reduce inequalities, whereas indirect
taxes are regressive taxes which enhance inequalities. Direct taxes reduce
inflation and indirect taxes increase inflation. Direct taxes are levied as per
the tax bracket which would differ according to the income group of the people,
whereas indirect tax are imposed irrespective of the income group and paying
capacity of the person. Indirect tax help in reducing the consumption of the
harmful goods and hence, that is a good levy.
Scheme of Taxation in India
The Constitution has authorised to levy and collect tax on Income under the
Income Tax Act, 1961. The proceeds collected by this tax are to be shared and
distributed amongst the Centre and the State and they have to be shared as per
the Finance Commission. The Finance Act is published every year, popularly known
and in accordance to that the previous years tax assessment is
done. The income tax can be classified in two parts: Personal Income Tax and
Corporate Income tax. The act also levies the tax on artificial entities such as
body corporates, association of people, Hindu Undivided Family, Body of
individuals, etc. 
The amount of tax payable depends upon the residential status and that can be
classified into three categories, where the residential status has to be
assessed as per the previous year and the non resident has to pay the tax on the
income that is accrued in India.
There are majorly five heads upon which the tax is charged:
- Income from Salary
- Income from house property
- Profits & Gains of business and profession
- Capital Gains
- Income from other sources.
All the heads of the income are mutually exclusive and the income taxed under
one head cannot be taxed under other head, which means that the income that is
falling under one of these heads cannot fall under any other head, because it
would be against the principle of fairness and equity, entirely on which the
idea of taxation is based.
The tax structure in India is divided into two parts direct taxation and
indirect taxation. The direct taxation is collected from the person who actually
consumes it, but here, there are many ways where the tax can be evaded, on the
other hand, indirect taxes are collected from the producer or the manufacturer
by the government and consequently the burden is passed on. The indirect
taxation is better in the way that such a tax cannot be evaded, the government
does not become the ultimate sufferer.
As per a survey, there are more than 68,000 individuals earning above Rs.5
crores, but only 5000 pay a tax till that extent. Likewise, the number of people
earning an income between Rs.1 crore to Rs. 5 crore is 10 times than the actual
Thus, to make the entire scheme of taxation work, the government must take
adequate measures and must ensure that each and every citizen must pay a tax. At
the same pace, the rate of taxes should be less and more exemptions and
promotions should be given in order to make people appreciate the efforts of the
government and actually have a will to increase in the profit and income. If the
government imposes high end taxes, it would neither benefit the citizens nor the
people at large, as majority of them would find a way to surpass the tax.
Thus, the scheme of taxation should neither be blanket or unreasonable, the
government should take into various factors while making a tax scheme and also
implementing the already existing scheme. Thus, the tax structure in India is
perfectly distributed. Thus, the factors considered should be for the same.
- India Const. Art.256
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(Oct. 2 2020, 7:34 PM) https://www.economicsdiscussion.net/government/taxation/taxation-objectives-top-6-objectives-of-taxation-discussed/17450
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36-43, DOI:10.34218/IJM.10.3.2019/004, Available at SSRN: https://ssrn.com/abstract=3467425
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