B.Sc.

Economics
Semester 5
Indian Public Finance
Module 3: Taxation

- Vaibhavi Pingale
 Module 3: Taxation
(Theory, Policy, & Indian Perspective)

• Categories of Revenue – Tax & Non-Tax Revenue

• What is a Tax?
• Re-distribution of Income and Revenue source
• Cannons of Taxation – Smith
• Equity in taxation- Horizontal and Vertical
• Progressive, Regressive and Proportional Tax
• Incidence and Impact of taxation
• Laffer curve
 Application- Indian Perspective
Taxation

• Overview of Indian taxation system

• Finance bill
• Comparison between direct and indirect taxes
• The evolution of direct taxes in India- Types,
Trend, Impact
• The evolution of indirect taxes in India- Types,
Trend, Impact
• GST as a Game Changer
 Public Revenue
• The government develops, discovers, and updates new
sources of money regularly.
• The term “public income” or “public revenue” refers to
the government’s total income from all sources.
• Many functions are required of the government to ensure
the well-being of the people. To do so, the government
must spend a significant quantity of public money, which
can be obtained by taxation.
• The quantity of public money that must be raised is
determined by the need for public expenditure and the
ability of the public to pay.
• Dalton in his “Principles of Public Finance” mentioned
two kinds of public revenue.
• Public revenue includes income from taxes and goods
and services of public enterprises, revenue from
administrative activities such as fees, fines etc. and gifts
and grants.
• On the other hand public receipts include all the
incomes of the government received from formal
sources.
• The sources of public revenue have been broadly divided
into: Tax Revenue & Non-Tax Revenue.
 Categories of Revenue
• The receipts of government show the different sources
from which government raises revenue.
• Revenue receipts are current income receipts from all
sources such as taxes, profits of public enterprises,
grants, etc. Revenue receipts neither create any liability
nor cause any reduction in the assets of the
government.
• Capital receipts, on the other hand, are the receipts of
the government which either create liability or cause
any reduction in the assets of the government. e.g.,
borrowings, recovery of loan and disinvestment etc.
 Revenue Receipts
• Revenue Receipts are current incomes of
government, which neither create liabilities
nor cause any reduction in the assets of the
government. These receipts are classified into
– Tax Revenue and
– Non-tax Revenue.
 Tax?
• The word ‘tax’ has been derived from the Latin
word taxare or taxo, meaning ‘to assess the
worth of something’.
• Taxation in any economy is an essential part of
financial management as any government of the
world requires huge revenue to manage and run
its administration, spend money on essential
public services such as health and education and
infrastructure such as roadways, railways etc.
 Difference between Fee/Cess and Tax

• A fee / cess is a consideration for services

rendered. Eg: RD cess, Education cess, Market
fee.
• There should be relationship between levy of
fee and services rendered i.e., quid pro quo. –
• A tax is levied as part of common burden and
there is no quid pro quo (exchange).
 Tax Revenue
• A tax is a legal compulsory payment by the people
and firms to the government of a country without
reference to any direct benefit in return.
• It is imposed on the people by the government.
• A government collects revenue from various taxes
like income tax, sales tax, service tax, excise duty,
custom duty etc.
• Traditionally the revenue from taxes has been the
primary source of government income.
 Direct Tax
• Direct taxes are those taxes which are paid by the same person on
whom it has been imposed. The impact and incidence of tax fall on the
same person, because the tax burden cannot be shifted to others. Direct
taxes include the following taxes.
• i) Personal Income tax is a tax imposed on the excess income earned by
an individual over and above the limit decided by the finance ministry
form time to time. It is progressive in nature.
• ii) Corporate Tax is a tax levied on the profits earned by registered
companies.
• iii) Capital Gains Tax is a tax imposed on the net profits earned through
capital investment in stock market ,Real estate, Gold and Jewelry etc.
• iv) Wealth Tax (or) Property Tax is a tax levied upon the property owned
by individuals. The property includes Land, Building, shares, Bonds, Fixed
Deposits, Gold and Jewelry etc.
• v) Other taxes :These taxes include taxes like Gift tax and Estate duty.
 Direct Taxes
Merits Demerits
• Equity • Inconvenience
• Productivity • Unpopularity
• Certainty • Possibility of Evasion
• Elasticity • Injustice
• Inflation • Expensive
• Economy • Disincentive effect
 Indirect Tax
• Indirect taxes are those taxes which are imposed on one group of
people, but the ultimate burden will fall on another group of people.
The impact of tax and incidence of tax are on different people. In case of
Indirect taxes tax burden can be shifted. There are middlemen between
the Government and the tax payer. The important Indirect Taxes are as
follows:
• i) Excise Duty is a tax imposed on the manufacturers as per the value of
goods produced but the ultimate burden will fall on the final consumers.
• ii) Customs Duty is a tax imposed on import and export of Goods.
Customs duty may be specific or advalorem. Advalorem duty is a tax
imposed on the basis the value of goods imported while specific duty is
imposed as per the number of units imported.
• iii) Value Added Tax (VAT) is a part of a sales tax imposed by the state
government.
• iv) Goods and Services Tax (GST)
 Indirect Taxes
Merits Demerits
• Convenience • Regressive
• Elasticity • Uncertainty
• Wide Coverage • High cost of collection
• Difficult to evade • Discourage savings
• Restrict consumption • Inflationary
• Complementary to direct
taxes
 Non-Tax Revenue
• These sources of revenue are classified as administrative revenues,
commercial revenues and grants and gifts.
• 1) Grants: Grants : are made by a higher public authority to a lower one, for
example, from the Central to the State government or from the State to the
local government. Grants are given so that a public authority is able to
perform certain activities at the local level. There is no repayment obligation
in case of grants.
• 2) Gifts: Gifts and donations are voluntarily made by individuals,
organizations, foreign governments to the funds of the government, e.g.
Prime Minister’s Relief Fund. Such gifts are usually made at the time of crisis
like war or floods. Gifts cannot be considered a regular source of revenue.
• 3) Fees: Fees are an important source of administrative non-tax revenue to
the government.The government provides certain services and charges,
certain fees for them. For example, fees are charged for issuing of passports,
granting licenses to telecom companies, driving licenses etc.
• 4) Fines and Penalties: Another source of administrative non-
tax revenue includes fines and penalties. They are imposed as
a form of punishment for breaking law or non-fulfillment of
certain conditions or for failure to observe some regulations.
They are not expected to be a major source of revenue to the
government.
• 5) Special Assessment: It is a kind of special charge levied on
certain members of the community who are beneficiaries of
certain government activities or public projects. For example,
due to public park in a locality or due to the construction of a
road, people in the locality may experience an appreciation in
the value of their property or land.
• 6) Surpluses of Public Enterprises: Most countries have
government departments and public sector enterprises
involved in commercial activities. The surpluses of these
departments and enterprises are an important source of
non-tax revenue. These revenues are in the form of profits
and interests and are termed as commercial revenues.
• 7) Borrowings: When government revenue is not sufficient
to meet the public expenditure government borrows
either from internal or external sources. Borrowing is
income of the government which creates liability because
the government has to repay the borrowings with interest.
 Capital Receipts
• Capital Receipts are those receipts of the government which either
create liability or cause any reduction in the assets of the government.
The major sources of capital receipts of the central government are:
• Borrowings: There are two sources from which the central government
borrows. They are:
– Domestic Borrowings: The government borrows from domestic financial
market by issuing securities and treasury bills. It also borrows from people
through various deposit schemes such as Public Provident Fund, Small Savings
Schemes, and National Savings Scheme etc. These are borrowings of the
government within the country.
– External Borrowings: In addition to domestic borrowings the government also
borrows from foreign governments and international bodies like International
Monetary Fund (IMF), World Bank etc. Foreign borrowings by the government
bring in foreign exchange into the domestic economy.
• Recovery of Loans: Quite often state and local governments borrow
from the central government. The loans recovered by the central
government from state and local governments are capital receipts in
the budget because recovery of loans reduces debtors (assets).
• Disinvestment – Resale of shares of public sector undertakings: This
is a very recent source of capital receipts by which the central
government has been mobilizing financial resources since 1991.
From 1991, the government adopted the policy of privatisation of
public sector undertakings. Consequently, it started selling its shares
to general public and to financial institutions. This selling of shares
of public sector undertakings by the government is known as
‘disinvestment of public sector undertakings.
 Good Tax
• A good tax system should consist of taxes which conform
to the canons of taxation.
• It is not necessary that each single tax should satisfy all
the canons of taxation.
• But the system as a whole should be equitable. Its
burden should fall on the broadest shoulders.
• It should also be economical so that the work of
collection is done as cheaply as possible. It should not
hamper the development of trade and industry. It
should, on the other hand, assist the economic
development of the country.
 Objectives of Taxation
• Raising Revenue
• Regulation of Consumption and Production
• Encouraging Domestic Industries
• Stimulating Investment
• Reducing Income Inequalities
• Promoting Economic Growth
• Development of Backward Regions
• Ensuring Price Stability
 Taxation as in Instrument of Economic
Growth
• In a developing economy such as ours, taxation
should serve as an instrument of economic
growth. Economic growth is primarily a function
of rate of capital formation. If in the
development strategy public sector has been
assigned an eminent place, then capital
formation in the public sector must occur at a
relatively higher rate.
• This calls for mobilization of resources by the
Government so as to finance capital formation in
public sector.
• Therefore, a good tax system for a developing
country will be such as will enable the
Government to mobilise adequate resources
for capital formation or economic growth.
• This it can do in the following two ways:
• (a) Mobilisation of Economic Surplus
• (b) Increase in the Incermental Saving Ratio
 Taxation for Ensuring Economic Stability

• A tax system must also ensure economic stability. Economic

fluctuations have been a big problem in the developed
countries and for reducing these fluctuations taxation can play
a useful role. For this purpose, tax system must have built-in-
flexibility. To have built-in-flexibility, the taxation system must
be progressive in relation in the changes in national income.
• This will ensure that when national income rises, an increasing
part of the rise in income should automatically accrue to the
Government.
• On the other hand, when national income falls, as in a
recession or depression, the revenue obtained progressive
from taxes will fall more rapidly than the decline in national
income.
• Built-in-flexi­bility attained through progressive taxation ensures that
when incomes are increasing during the period of boom or inflation,
the relatively greater amount of tax revenue accruing to Government
will moderate the increase in purchasing power with the people and
aggregate demand and thus help in keeping prices under check.
• Likewise, under progressive taxation at times of depression or
recession, tax revenue will fall faster than the income so that
purchasing power of the people does not fall as fast as their pre-tax
income. This will serve to check decline in economic activity.
• However, in developing countries, the problem is more of restraining
inflation so as to achieve price stability. By discouraging or restraining
consumption, especially of non-essential or unproductive type,
taxation can pay a useful role in controlling inflation in the developing
countries.
 Smith’s Canons of Taxation
• Adam Smith viewed the problem of devising a
good tax system chiefly from the viewpoint of
devising good tax payers.
• Taxation system should also be such that it
meets the requirements of increasing state
activity and achieves the objectives the
society has placed before it.
• In this sense, his canons of taxation are
‘classical’ in sense, four canons of taxation
are:
• (i) Canon of equality or equity
(ii) Canon of certainty
(iii) Canon of economy
(iv) Canon of convenience.
 Canon of Equality
• Canon of equality states that the burden of taxation must be
distributed equally or equitably among the taxpayers. However, this
sort of equality robs of justice because not all taxpayers have the
same ability to pay taxes.
• Rich people are capable of paying more taxes than poor people.
Thus, justice demands that a person having greater ability to pay
must pay large taxes
• If everyone is asked to pay taxes according to his ability, then
sacrifices of all taxpayers become equal. This is the essence of canon
of equality (of sacrifice). To establish equality in sacrifice, taxes are
to be imposed in accordance with the principle of ability to pay.
• In view of this, canon of equality and canon of ability are the two
sides of the same coin.
 Canon of Certainty
• The tax which an individual has to pay should be certain and
not arbitrary. According to A. Smith, the time of payment, the
manner of payment, the quantity to be paid, i.e., tax liability,
ought all to be clear and plain to the contributor and to
everyone.
• Thus, canon of certainty embraces a lot of things. It must be
certain to the taxpayer as well as to the tax-levying authority.
• Not only taxpayers should know when, where and how much
taxes are to be paid. In other words, the certainty of liability
must be known beforehand. Similarly, there must also be
certainty of revenue that the government intends to collect
over the given time period.
• Canon of Economy: This canon implies that the cost of
collecting a tax should be as minimum as possible. Any
tax that involves high administrative cost and unusual
delay in assessment and high collection of taxes should be
avoided altogether.
• Canon of Convenience: Taxes should be levied and
collected in such a manner that it provides the greatest
convenience not only to the taxpayer but also to the
government. Thus, it should be painless and trouble-free
as far as practicable. “Every tax”, stresses A. Smith: “ought
to be levied at time or the manner in which it is most
likely to be convenient for the contributor to pay it.”
 Modern Canons of Taxation
• Some modern writers on Public Finance such
as Charles Francis Bastable (Irish classical
economist:1855–1945) provided additional
canons of taxation which are as follows:
(v) Canon of productivity
(vi) Canon of elasticity
(vii) Canon of simplicity
(viii) Canon of diversity.
 Canon of Productivity or
Fiscal Adequacy
• An important principle of a good tax system for a
developing country is that it should yield adequate amount
of resources for the Government so that it should be able
to perform its increasing welfare and developmental
activities. If the tax system fails to yield enough resources,
the Government will resort to deficit financing.
• An excessive dose of deficit financing is bound to raise
prices which are harmful for the society. To make the tax
system sufficiently productive it should be broad-based
and both direct and indirect taxes find place in it.
Moreover, taxes should be progressive so that the revenue
from them rises with the increase in income of the people.
 Canon of Elasticity
• Another principle of taxation suitable for the developing coun­
tries is the principle of elasticity of taxation. According to the
concept of elasticity of the taxation system, as national income
increases as a result of economic growth, the Government
revenue from taxes should also increase.
• In developing countries, the share of tax revenue as a
proportion of national income is low as compared to the
developed countries. This share of tax revenue will rise as
national income increases, if the tax system is sufficiently
elastic. Pro­gressive taxation of income and wealth provides
this elasticity to the tax system. Impositions of higher indirect
(axes on luxury goods having a high income elasticity of
demand also makes the tax system elastic.
 Canon of Simplicity
• Every tax must be simple and intelligible to the people so
that the taxpayer is able to calculate it without taking the
help of tax consultants.
• A complex as well as a complicated tax is bound to yield
undesirable side-effects. It may encourage taxpayers to
evade taxes if the tax system is found to be complicated.
• A complicated tax system is expensive in the sense that
even the most honest educated taxpayers will have to seek
advice of the tax consultants.
• Ultimately, such a tax system has the potentiality of
breeding corruption in the society
 Canon of Diversity
• Taxation must be dynamic. This means that a country’s tax
structure ought to be dynamic or diverse in nature rather than
having a single or two taxes.
• Diversification in a tax structure will demand involvement of
the majority of the sectors of the population.
• If a single tax system is introduced, only a particular sector will
be asked to pay to the national exchequer leaving a large
number of population untouched. Obviously, incidence of
such a tax system will be greatest on certain taxpayers.
• A dynamic or a diversified tax structure will result in the
allocation of burden of taxes among the vast population
resulting in a low degree of incidence of a tax in the
aggregate.
 Horizontal & Vertical Equity
• Fairness: Taxpayers in a similar financial condition should pay
similar amounts in taxes. This principle calls for equity in
distributing tax burden among taxpayers.
• It implies that taxpayers with the same income level should pay
the same amount in taxes (horizontal equity)
• Taxpayers with greater ability to pay should pay more than those
with lower ability to pay (vertical equity).
• The latter dimension is addressed via different tax schemes:
progressive (rich taxpayers pay higher share of their income in
taxes than poor taxpayers); regressive (low-income taxpayers
pay higher share of their income in taxes); proportional/flat rate
(all taxpayers pay the same proportion of their income in taxes).
 Proportional, progressive, and regressive
taxes
• Taxes can be distinguished by the effect they have on the distribution of income
and wealth.
• Regressive tax: A tax is regressive if those with low incomes pay a larger share of
income in taxes than those with higher incomes. Almost any tax on necessities,
such as food purchased at a grocery store, is regressive because lower income
people must spend a larger share of their income on these necessities.
Oklahoma’s sales tax is one example.
• Proportional tax: A tax is proportional if all taxpayers pay the same share of
income in taxes. No taxes are truly proportional. Property taxes often come
closest since there is typically a close relationship between a household’s income
and the value of the property in which they live. Corporate income taxes often
approach proportional because one rate applies to most corporate income.
• Progressive tax: A progressive tax requires higher-income individuals to pay a
higher share of their income in taxes. The philosophy behind progressive taxes is
that higher income people can afford and should be expected to provide a bigger
share of public services than those who are less able to pay.
 Overall Tax Burden

• It is rare that a tax will meet all these criteria for a fair tax.
• For example, a tax on alcohol is easy to understand, it achieves
horizontal equity and it can help to improve social efficiency
(tax the external cost of alcohol).
• However, a tax on alcohol will not improve vertical equity, a tax
on alcohol will be regressive (take a higher % of income from
the poor). However, that doesn’t mean a tax on alcohol and
cigarettes should be ignored.
• A tax doesn’t have to meet all the criteria. If alcohol and
cigarette taxes are combined with progressive taxes (take a
higher % of income from the rich) then this will help to offset
the regressive nature of alcohol taxes.
 Impact of taxation
• Impact of a tax is the first resting point of a tax.
• For example, when a tax is imposed on the
production (excise duty) of a commodity, it is
paid by the manufacturer, though the tax
burden is shifted to the ultimate consumer later,
added under the price of the commodity. Here,
the IMPACT is on the manufacturer, whereas the
incidence is on the consumer.
 Tax Shifting
• Tax shifting is the activity of shifting the
burden (payment) of a tax from one person to
another.
• For example, in the case of GST, the tax is
shifted ultimately from the producer to the
consumer. The manufacturer SHIFTED the tax
burden to the ultimate consumer.
 Incidence of Taxation
• INCIDENCE is the final resting point of a tax burden. It
shows ultimately who bears the burden of the tax.
• In the case of direct taxes like personal income tax, the
impact of the tax is on the income-earner, and similarly, he
has to bear the incidence as well. So, direct tax, is a tax
whose burden cannot be shifted.
• On the other hand, in the case of an indirect tax, some
business firms will be ready to bear a part of the tax (by
giving a concession to the consumers) to enhance the sale.
In this case, there is a backward shifting of tax. Such shifting
is not possible in the case of personal income tax as the
impact and incidence will be on the same person.
• Impact may be shifted but incidence cannot.
• For, incidence is the end of the shifting
process.
• Sometimes, however, when no shifting is
possible, as in the case of income tax or such
other direct taxes, the impact coincides with
incidence on the same person.
 Tax burden falls upon who depends upon

• Nature of Tax - Shifting of tax

depends upon the nature of
tax; whether a tax is the part of
fixed cost or variable cost. If it is
a part of fixed cost and is
independent of volume of
production, such taxes are not
shifted in the short period. In
long run also producer can bear
the burden of tax if he is not
incurring losses. In the situation
of loss tax will become the part
of average cost.
 Elasticity of Demand & Supply
• If the demand for the commodity is elastic,
more burden will be borne by the producer,
because commodity elastic demand will have
low demand if price increases.
• With Perfectly inelastic demand entire Burden
of tax is shifted to buyer. No burden is shared
by producer.
• In the case of perfectly elastic supply, the
incidence of tax on the buyers is greater than
that on the sellers.
 Example
• Let’s assume the government decides to impose a
new luxury tax on yachts priced above $100,000.
Let’s find out if the tax incidence falls more on the
supplier or the consumer.
• The new luxury tax calls for a 10% tax on the higher-
priced yachts. However, the new tax also causes the
demand for yachts to be cut in half from 100 to 50
to compensate.
• We will start by finding the elasticity of supply and
demand separately.
 Elasticity of Demand Calculation
• Elasticity of demand = % change in demand / %
change in price
• The % change in demand is calculated as
((New Demand – Original Demand)/ Original
Demand) X 100
• = ((50 – 100)/ 100) X 100 = -50
• This massive drop in demand has caused the
supplier to cut back on supply from 150 to 100.
 Elasticity of Supply Calculation
• The elasticity of supply = (% change in supply/ %
change in price)
• The % change in supply is calculated as ((New
Supply – Original Supply/ Original Supply) X 100
• =((100 – 150/ 150) X 100
• = (-50 / 150) X 100 = -33
• We can now calculate the tax incidence for both
the consumer and supplier to determine how
much the new tax policy affects each group.
• Consumer tax burden = Es/ Es + |Ed|
• = -.33/ (-.33 + |-.50|)
• = -.33 / -.83
• = .40 or 40%
• Supplier tax burden = Ed/ Ed + |Es|
• = -.50/ (-.50 + |-.33|)
• =-.50 / -.83
• = .60 or 60%
• In this case, the luxury tax has passed most of
the new tax policy cost onto the supplier.
 How a tax system can become unfair
• Tax avoidance: Tax avoidance is when individuals and companies
find legal ways to avoid paying tax. For example, individuals may
claim residency in a tax haven and therefore not be subject to a
countries tax. This is a way to free-ride on the tax contributions
of other people.
• Tax loopholes: Firms may lobby for particular tax breaks. For
example, if the coal industry has a powerful political lobby, it
could demand tax breaks and pay less tax than business with
less political power. In the US, companies like Amazon often ask
different states for the best tax-breaks to set up in a particular
state. A state wants the employment that comes with a big
company investing in their state – so it causes tax competition
between the states and a pressure to offer very low tax rates for
the most powerful companies.
• Underground/Parallel economy: The underground economy is
when economic activity takes place without official recognition. It
means individuals and firms can work without being subject to the
same rules and tax systems. For example builders may wish to
work for cash payment and avoid paying income tax.
• Shift from progressive tax to regressive tax: In the UK, in the
1980s, local rates were placed with a poll tax – a poll tax is tax
where everyone pays exactly the same. The logic was that
everyone gains the same level of service. The poll tax is efficient –
in that there is no disincentives to work. However, it takes a much
higher burden of tax from those on low incomes; it reduces
vertical equity. Also, the poll tax was widely regarded as unfair. As
a result non-payment rates rose. This shows that if taxes are
actively disliked it can make it difficult to be enforceable.
 Laffer curve
• Invented by Arthur Laffer, this curve
shows the relationship between tax
rates and tax revenue collected by
governments.
• The curve suggests that, as taxes
increase from low levels, tax
revenue collected by the
government also increases. It also
shows that tax rates increasing after
a certain point (T*) would cause
people not to work as hard or not at
all, thereby reducing tax revenue.
• Eventually, if tax rates reached 100%
(the far right of the curve), then all
people would choose not to work
because everything they earned
would go to the government.
• The Laffer Curve states that if tax rates are
increased above a certain level, then tax
revenues can actually fall because higher tax
rates discourage people from working.
• Equally, the Laffer Curve states that cutting
taxes could, in theory, lead to higher tax
revenues.
• It starts from the premise that if tax rates are
0% – then the government gets zero revenue.
• Equally, if tax rates are 100% – then the
government would also get zero revenue –
because there is no point in working.
• If tax rates are very high, and then they are cut,
it can create an incentive for business to
expand and people to work longer. This boost
to economic growth will lead to higher tax
revenues – higher income tax, corporation tax
and VAT.
• The importance of the theory is that it
provides an economic justification for the
politically popular policy of cutting tax rates.
• However, economists disagree on the level at
which higher tax rates actually cause
disincentives to work.
• The Laffer curve became important in the
1980s because it appeared to give an
economic justification to cutting income tax
rates. For politicians, such as Ronald Reagan,
the Laffer Curve analysis is attractive – it
appears to give the best of both worlds.
• Lower tax rates which are politically popular.
• Increased tax revenues and lower budget
deficits.
Economic analysis behind tax increases

• In reality, it is more complicated. Higher tax rates do not necessarily cause

people to work fewer hours. Firstly, there are two main factors that
influence a workers decision to work more or less.
• Substitution effect – If higher tax leads to lower wages then work
becomes relatively less attractive than leisure. The substitution effect of
higher tax is that workers will want to work less.
• Income effect – If higher tax leads to lower wages, then a worker may feel
the need to work longer hours to maintain his target level of income.
Therefore, the income effect means that higher tax may mean some
workers feel the need to work longer.
• Therefore, there are two competing effects – it depends which effect is
stronger.
• In addition, in the real world, workers may be tied to contracts, if tax rates
go up, many workers may not have the luxury of deciding to work less.
 India’s Taxation System

• The authority of the government to levy tax in

India is derived from the Constitution of
India, which allocates the power to levy taxes
to the Central and State governments.
• All taxes levied within India need to be
backed by an accompanying law passed by
the Parliament or the State Legislature.
 Tax Collection
• Ideal tax collection: According to the World Bank,
tax revenues above 15% of a country's Gross
Domestic Product (GDP) is ideal for economic
growth and is helpful in poverty reduction.
• This parameter of tax collection estimation is
termed as tax-to-GDP ratio.
• A tax-to-GDP ratio is a gauge of a nation's tax
revenue relative to the size of its economy as
measured by gross domestic product (GDP).
 India’s Tax to GDP ratio
• Gross Tax Revenue (GTR) is projected to grow at
10.4% in FY 2023-24 over FY 2022-23.
• Both, the Direct and Indirect Tax receipts are
individually estimated to grow at 10.5% and
10.4%, respectively.
• It is estimated that the Direct and Indirect taxes
to contribute 54.4% and 45.6%, respectively, to
GTR noted the fiscal policy statement.
• The Tax to GDP ratio is estimated at 11.1%.
 Overview
• The tax structure consists of the central
government, state governments, and local
municipal bodies.
• When it comes to taxes, there are two types of
taxes in India - Direct and Indirect tax.
• The direct tax includes income tax, gift tax, capital
gain tax, etc.
• While indirect tax includes value-added tax, service
tax, goods and services tax, customs duty, etc.
 Direct Tax Collection
• The provisional figures of Gross collection of Direct Taxes (before adjusting
for refunds) for the Financial Year 2023-24 stands at Rs. 9,87,061 crore
compared to Rs. 8,34,469 crore in the corresponding period of the preceding
financial year, showing a growth of 18.29%.
• The Gross collection of Rs. 9,87,061 crore includes Corporation Tax (CIT) at
Rs. 4,71,692 crore and Personal Income Tax (PIT) including Securities
Transaction Tax (STT) at Rs. 5,13,724 crore. Minor head wise collection
comprises Advance Tax of Rs. 3,55,481 crore; Tax Deducted at Source of Rs.
5,19,696 crore; Self-Assessment Tax of Rs. 82,460 crore; Regular Assessment
Tax of Rs. 21,175 crore; and Tax under other minor heads of Rs. 8,248 crore.
• The provisional figures of Net Direct Tax collections for the Financial Year
2023-24 (as on 16.09.2023) show that net collections are at Rs. 8,65,117
crore, compared to Rs. 7,00,416 crore in the corresponding period of the
preceding Financial Year (i.e. FY 2022- 23), representing an increase of
23.51%.
 Indirect Tax Collection
• The gross GST revenue collected in
the month of September, 2023
is ₹1,62,712 crore out of which CGST
is ₹29,818 crore, SGST is ₹37,657
crore, IGST is ₹83,623
crore (including ₹41,145 crore
collected on import of goods) and
cess is ₹11,613 crore (including ₹881
crore collected on import of goods).
• The government has settled ₹33,736
crore to CGST and ₹27,578 crore to
SGST from IGST. The total revenue of
Centre and the States in the month
of September, 2023 after regular
settlement is ₹63,555 crore for CGST
and ₹65,235 crore for the SGST.
 Federal Structure & Tax
• The Central Government of India imposes
taxes such as customs duty, central excise
duty, income tax, and service tax.
• The State governments impose income tax on
agricultural income, state excise duty,
professional tax, land revenue and stamp duty.
• The Local Bodies are allowed to collect octroi,
property tax, and other taxes on various
services like water and drainage supply.
 Central State Financial Relationship
• Articles 268-293, mentioned in Part XII of the Constitution, specifies
the financial relations between the Centre and the States.
• Division of taxation authorities between the federal government
and the states:
1. The Parliament has the authority to charge the union list taxes
2. The state legislature has sole authority to impose the taxes listed
in the State List.
3. The Concurrent List enumerates the taxes that can be levied by
both the Parliament and the state legislatures
• The Parliament has the residuary power of taxation (i.e., the
authority to impose taxes not listed in any of the three lists). The
parliament may levy a gift tax, a wealth tax or an expenditure tax
under this article
 Centre list of Taxes
• Income (except tax on agricultural income), Corporation Tax & Service Tax
• Currency, Coinage, legal tender, Foreign Exchange
• Custom duties (except export duties)
• Excise on tobacco and other goods.
• Estate Duty (except on agricultural goods) (Kindly note that its mentioned in the constitution but Estate
duty was abolished in India in 1985 by Rajiv Gandhi Government)
• Fees related to any matter in Union list except Court Fee
• Foreign Loans
• Lotteries by Union as well as State Governments.
• Post Office Savings bank, Posts, Telegraphs, Telephones, Wireless Broadcasting, other forms of
communication
• Property of the Union
• Public Debt of the Union
• Railways
• Stamp duty on negotiable instruments such as Bills of Exchange, Cheques, Promissory notes etc.
• Reserve Bank of India
• Capital gains taxes, Taxes on capital value of assets except farm land
• Taxes other than stamp duties on transactions in stock exchanges and future markets
• Taxes on the sale and purchase of newspapers and advertisements published therein.
• Terminal Taxes on Goods and passengers, carried by Railways and sea or air.
 State list of Taxes
• Taxes and duties related to agricultural lands
• Capitation Taxes
• Excise on liquors, opium etc.
• Fees on matters related to state list except court fee
• Land Revenue, Land and buildings related taxes
• Rates of Stamp duties in respect of documents other than those specified in the Union
List
• Taxes on mineral rights subject to limitations imposed by the parliament related to
mineral development
• Taxes on the consumption or sale of electricity
• Sales tax on goods (other than newspapers) for consumption and use within state.
• Taxes on advertisements except newspaper ads.
• Taxes on goods and passengers carried by road or on inland waterways
• Taxes on vehicles, animals and boats, professions, trades, callings, employments,
luxuries, including the taxes on entertainments, amusements, betting and gambling.
• Toll Taxes.
 Taxes Levied by Union but Collected and
Appropriated by the State

• The taxes on the following items are levied by

the Union Government but the actual revenue
from them is collected and appropriated by
the States.
• Examples- (i) stamp duties on bills of exchange,
cheques, promissory notes, bills of landing,
letters of credit, policies of insurance, transfer
of shares, etc.; (ii) Excise duties on medicinal
toilet preparation containing alcohol or opium
or Indian hemp or other narcotic drugs.
 Taxes Levied and Collected by the Union
but assigned to States

• The taxes in this category are levied and collected by the Union
Government although they are subsequently handed over to the
states wherefrom they have been collected.
• Such taxes included duties in respect of succession to property
other than agricultural land; state duty in respect of property
other than agricultural land terminal taxes on goods or
passengers carried by railways, sea or air, taxes on railway freights
and fares; taxes other than stamp duties on transactions in stock
exchanges and futures markets; taxes on the sale or purchase of
newspapers and advertisements published therein; taxes on
purchase or sale of goods other than newspapers where such sale
or purchases take place in the course of interstate trade or
commerce.
 Taxes Levied and Collected by the Union
but Shared

• Taxes on income other than agricultural

income and excise duties other than those on
medicinal and toilet preparations are levied
and collected by the Union Government but
shared with the states on an equitable basis.
• The basis of distribution is determined by the
Parliament through a law.
 Finance Bill
• A Finance Bill is a Bill that, concerns the country's finances —
it could be about taxes, government expenditures,
government borrowings, revenues, etc. Since the Union
Budget deals with these things, it is passed as a Finance Bill.
• Rule 219 of the Rules of Procedure of Lok Sabha states:
‘Finance Bill’ means the Bill ordinarily introduced in each
year to give effect to the financial proposals of the
Government of India for the following financial year and
includes a Bill to give effect to supplementary financial
proposals for any period.
• Once approved by the Lok Sabha, the Finance Bill becomes
the Finance Act.
 Finance Act
• The Finance Act is an act of Parliament by which the
Union Government of India gives effects to the
financial proposals given by the government for the
following financial year.
• The finance bill is introduced to the Lower House after
the Union Budget is presented by the Finance
Minister. Once the proposals are passed by the
parliament and assented to by the President, it
becomes the Finance Act of that year.
• There is a new Finance Act every financial year which
makes this act an act that renews itself every year.
 Money Bill
• The Money Bill is concretely defined in Article
110.
• A Money Bill is certified by the Speaker as
such — in other words, only those Financial
Bills that carry the Speaker’s certification are
Money Bills.
 Only dealing with following provisions
(a) the imposition, abolition, remission, alteration or regulation of any tax;

(b) the regulation of the borrowing of money or the giving of any guarantee by the
Government of India, or the amendment of the law with respect to any financial
obligations undertaken or to be undertaken by the Government of India;

(c) the custody of the Consolidated Fund or the Contingency Fund of India, the
payment of moneys into or the withdrawal of moneys from any such Fund;

(d) the appropriation of moneys out of the consolidated Fund of India;

(e) the declaring of any expenditure to be expenditure charged on the Consolidated

Fund of India or the increasing of the amount of any such expenditure;

(f) the receipt of money on account of the Consolidated Fund of India or the public
account of India or the custody or issue of such money or the audit of the accounts of
the Union or of a State; or

(g) any matter incidental to any of the matters specified in sub clause (a) to (f)
 Memorandum
• The Finance Bill is accompanied by the Memorandum
Explaining the Provisions in the Finance Bill. As the name
suggests, the memorandum explains the provisions of the
changes proposed by the Finance Bill.
• For example, Memorandum to the Finance Bill, 2019,
included provisions related to direct taxes that sought to
amend the Income Tax Act, 1961.
• Various proposals for amendments are organised under sub-
heads in the memorandum. Sub-heads include amendment
to tax rates, deepening and widening of tax base,
strengthening anti-abuse measures promoting tax incentives,
and more.
• https://www.indiabudget.gov.in/doc/memo.pdf
 Types of Financial Bills
• Type (I) of Financial Bill-
• It is dealt with under Article 117 (1) of the Constitution and contains not
only any or all the matters mentioned in the Money Bill but also other
matters of general legislation.
• It is similar to a money bill as it can be introduced only on the
recommendation of the President and can be introduced only in the Lok
Sabha and not in the Rajya Sabha.
• In all other aspects, a finance bill is treated as an ordinary bill –
• It can be either rejected or amended by the Rajya Sabha.
• In case of a disagreement between the two Houses over such a bill, the
President can summon a joint sitting of the two Houses to resolve the
deadlock.
• When the bill is presented to the President, he can either give his assent
to the bill or withhold his assent to the bill or return the bill for
reconsideration of the Houses.
• Type (II) of Financial Bill-
• It is dealt with under Article 117 (3) of the Constitution and
contains provisions involving expenditure from the
Consolidated Fund of India. It does not include any of the
matters mentioned in Article 110.
• Such Bills can be introduced in either House of Parliament.
• It is governed by the same legislative procedure which is
applicable to an ordinary bill.
• Recommendation of the President is essential for
consideration of these Bills by either House and unless such
recommendation is received, neither House can pass the Bill.
 Direct v/s Indirect Taxes
• Direct taxes – A tax that is paid directly by an individual or
organization to the imposing entity (generally government)
and it cannot be shifted to another individual or entity.
The Central Board of Direct Taxes (CBDT) is the authority
that looks after the administration of laws related to direct
taxes through the Department of Income Tax.
• Indirect taxes – An indirect tax (such as sales tax, a specific
tax, value-added tax (VAT), or goods and services tax (GST))
is a tax collected by an intermediary (such as a retail store)
from the person who bears the ultimate economic burden
of the tax (such as the consumer).
 Revenue Authorities
• CBDT
• The Central Board of Direct Taxes (CBDT) is a part of the Department of Revenue
under the Ministry of Finance. This body provides inputs for policy and planning of
direct taxes in India and is also responsible for administration of direct tax laws
through the Income Tax Department.
• CBEC
• The Central Board of Excise and Customs (CBEC) is also a part of the Department of
Revenue under the Ministry of Finance. It is the nodal national agency responsible
for administering customs, central excise duty and service tax in India.
• CBIC
• Under the GST regime, the CBEC has been renamed as the Central Board of Indirect
Taxes & Customs (CBIC) post legislative approval. The CBIC would supervise the
work of all its field formations and directorates and assist the government in policy
making in relation to GST, continuing central excise levy and customs functions.
 Evolution of Direct Taxes
• It was in 1850 that Sir James Willson formally introduced the tax in India. He
was the finance minister of the pre -Independent India. He introduced the tax
during the first union budget session under British rule. The Indian Income Tax
act of 1860 marks the watershed moment for taxation in India. It is through
this act that centrally organized taxation began in India. The act was
introduced to recover the losses the government suffered from the 1857
military mutiny.
• Under this act, the taxation was divided into 4 subgroups. The incomes from
land, professions or trade, securities, and salaries/pensions were taxed under
this new act.
• The Indian Income Tax act formed the basis of taxation laws in India. However,
it was revised and replaced over the course of decades. The law was revised in
1886 to improvise on some categories for which tax can be levied. The new
categories included net salaries and profits from businesses.
• https
://www.incometaxindia.gov.in/Pages/about-us/history-of-direct-taxation.aspx
• The next revisions came in 1918 and 1922. The act of 1918 repealed the 1886 act
and formed many new important changes. The act of 1922 is extremely important
since it has since then that India started to have an operational Income Tax
Department. This act distinguished various departments of the Income-tax
authorities. Over the years the act became more and more complicated over the
years due to the amendments made by various governments over the course of
decades. The act of 1922 remained in effect in India till 1961. The act was brought
by the British and later in 1956 Government of India referred to a law commission
to make it simpler.
• The Indian Income Tax act of 1961 came into effect after consultation with the
Ministry of law. It was brought into force in April 1962. All citizens of India are
bound by this act. Since 1962 many amendments have been made to the act
annually by the Union Budget. The bills become acts after it is passed by both
upper and lower houses of parliament and get presidential assent to it. Currently,
five categories of income are considered for tax. They are as follows: salary,
property, capital gains, profits from businesses and other sources of income.
• The Income Tax act of 1961 is long. It has 23 chapters, 298 sections and 14
schedules in it.
 Direct Tax Code (DTC)
• Direct Tax Code is a major reform in the tax system where the
government aims at simplifying the tax laws and regulations
into a single legislation.
• The government published a discussion paper on Direct Tax
Code in 2009 and issued the Direct Tax Code (DTC) bill in
parliament in 2010.
• Like all technical bills, this bill too was referred to the standing
committee on finance headed by Mr Yashwant Sinha. The
government wanted to implement DTC from 1 Apr 2012 but
due to delay in the report being submitted by the standing
committee, it was not possible. It is not a very controversial
bill as state governments are not involved in it.
The objectives of the Direct Tax Code are mentioned below:
• To simplify and consolidate all direct tax laws of the central
government
• To make the tax system more effective and efficient.
• To bring the consolidated law relating to direct taxes, that is, income-
tax, dividend
• distribution tax, fringe benefits tax and wealth-tax
• To bring horizontal equity among different classes of taxpayers in line
with best international practices.
• To improve compliance further, tax laws need to be simple, stable and
robust.
• To phase out the multiplicity of tax exemptions and deductions in
order to widen and deepen the tax base.
• Simplification of direct tax laws can be stated as
follows:
• Tax laws would be re-written in simple language
• Exemptions and reductions would be reduced
• Cross-references will be reduced
• Explicit Language will be used.
• Consolidation of tax laws can be stated as follows:
• All tax laws dealing with direct taxes would be merged.
• E.g. Income Tax Act, 1961; Wealth Tax Act, 1957; Gift
Tax Act, 1958.
 Evolution of Indirect Taxes
• Indirect tax was first introduced in India in 1944 in the form of excise duty
on Indian products as a measure of protection for goods imported from
the UK.
• There were several committees which were appointed for this purpose.
From there, the process of reforms of indirect taxes in India went through
ups and downs till the introduction of the Goods and Services Tax (GST) in
2017.
• Till 2017, there were many taxes which were levied at central and state
level. Central indirect taxes were Excise Duty, Customs Duty, Service Tax and
Central Sales Tax.
• State’s indirect taxes included Value Added Tax, Entertainment Tax, Luxury
Tax, Entry Tax and Stamp Duty.
• However, after introduction of goods and service taxes these taxes were
reduced to Central Goods and Service Tax (CGST), Inter-State Goods and
Service Tax (IGST), Customs Duty to be levied by centre while State Goods
and Service Tax (SGST) and Stamp Duty to be levied by states.
 Excise
• An excise or excise tax (sometimes called an excise duty) is a type of tax
charged on goods produced within the country (as opposed to customs
duties, charged on goods from outside the country). It is a tax on the
production or sale of a good. This tax is now known as the Central Value
Added Tax (CENVAT). It is mandatory to pay duty on all goods
manufactured, unless exempted.
• The term 'excisable goods' means the goods which are specified in the
first schedule and the second schedule to the Central Excise Tariff Act,
1985, as being subject to a duty of excise and includes salt.
• The liability to pay tax excise duty is always on the manufacturer or
producer of goods.
• GST has now subsumed a number of indirect taxes including excise
duty. This means excise duty, technically, does not exist in India except
on a few items such as liquor and petroleum.
 Customs
• Customs Duty refers to the tax imposed on the goods when they are
transported across the international borders. The objective behind levying
customs duty is to safeguard each nation’s economy, jobs, environment,
residents, etc., by regulating the movement of goods, especially
prohibited and restrictive goods, in and out of any country.
• Every good has a predefined rate of duty that is determined based on
various factors, including where such good was acquired, where such
goods were made, and what these goods is made of. Also, anything that
you bring into India for the first time should be declared as per the
customs rules. For instance, you need to declare the items purchased in a
foreign country and any gifts which you acquire outside India.
• Customs duties are computed on a specific or ad valorem basis. In other
words, it is calculated on the value of goods. Such value is determined as
per the rules laid down in the Customs Valuation (Determination of Value
of Imported Goods) Rules, 2007.
• https://taxinformation.cbic.gov.in/
 Types
• Basic Customs Duty (BCD)
• Countervailing Duty (CVD)
• Additional Customs Duty or Special CVD
• Protective Duty,
• Anti-dumping Duty
• Education Cess on Custom Duty
 Recent Development
• In recent years, India witnessed major reforms in the taxation
system via digitalization. From Income Tax to GST, most of the
things are now available online. To ensure ease of doing
business, the CBIC (Central Board of Indirect taxes and
Customs), has launched e-SANCHIT, which enables registered
persons to file their customs related documents online.
• The e-SANCHIT initiative is made mandatory from March 15th
this year. Only the ICEGATE registered users can use the e-
SANCHIT application by accessing e-SANCHIT link. Under this
new scheme, hard copies of the uploaded documents are not
required to be produced to the assessing officers. The objective
here is to minimize the physical interface between the customs
agencies and trade and to maximize the pace of clearance.
 VAT
• Value-added tax or VAT is an indirect tax, which is imposed on
goods and services at each stage of production, starting from
raw materials to the final product. It is levied on the value
additions at different stages of production.
• Value Added Tax was introduced into the taxation system in
India on 1st April 2005 replacing the Sales Tax. As of June 2014,
all states and UTs in India except the Andaman and Nicobar
Islands and Lakshadweep were implementing VAT.
• VAT is widely applied in European countries. However, now a
number of countries across the globe have adopted this tax
system. GST (Goods and Service Tax) which is to be
implemented in India is nothing but a kind of VAT system.
• The VAT is similar to the income tax as it is based on the
value of a product or service at each stage of production.
However, there are some important differences.
• A VAT is usually collected by the end retailer.
• A VAT is usually a flat tax
• For VAT purposes, an importer is assumed to have
contributed 100% of the value of a product imported
from outside of the VAT zone. The importer incurs VAT
on the entire value of the product, and this cannot be
refunded, even if the foreign manufacturer paid other
forms of income tax.
 Limitations
• A VAT, like most taxes, distorts what would have happened without it.
Because the price for someone rises, the number of goods traded
decreases. That is, more is lost due to supply and demand shifts than the
gains through tax. This is known as a deadweight loss. If the income lost
by the economy is greater than the government’s income; the tax is
inefficient. VAT and a non-VAT have the same implications on the
microeconomic model.
• The entire amount of the government’s income (the tax revenue) may
not be a deadweight drag, if the tax revenue is used for productive
spending or has positive externalities – in other words, governments
may do more than simply consume the tax income. While distortions
occur, consumption taxes like VAT are often considered superior because
they distort incentives to invest, save and work less than most other
types of taxation – in other words, a VAT discourages consumption
rather than production.
 State VAT
• The State VAT has replaced the earlier Sales Tax
systems of the States. VAT, being a ‘tax on sale or
purchase of goods within a State’ is a State
Subject by virtue of Entry 54 of State List of the
Seventh Schedule of the Constitution of India.
• Since VAT/Sales tax is a State subject, the Central
Government has been playing the role of a
facilitator for successful implementation of VAT.
 Goods & Services Tax (GST):
A Game-changer
• The Goods and Services Tax (GST) is a value-
added indirect taxes levied on goods and
services imposed by the Indian Central and
State governments.
• GST is aimed at being comprehensive for most
goods and services with few tax exemptions.
• The implementation of GST has le to the
abolition of other taxes thus avoiding multiple
layers of taxation that currently exist in India.
• Goods and Services Tax (GST) was introduced by the
Government of India to boost the economic growth of
India. GST is considered to be the biggest taxation reform
in the history of Indian economy. It was introduced to save
time, cost and effort. Goods and Services Tax (GST) Act
came into effect in 2017.
• In order to address the complex system in India, the
Government introduced 3 types of GST which are given
below.
1. CGST (Central Goods and Service Tax)
2. SGST( State Goods and Service Tax)
3. IGST(Integrated Goods and Services Tax)
What is Central Goods and Services Tax (CGST)?
• Revenue under CGST is collected by the Central Government. CGST subsumes the
below given central taxations and levies.
• Central Excise Duty
• Services Tax
• Central Sales Tax
• Excise Duty
• Additional Excise Duties Countervailing Duty (CVD)
What is State Goods and Services Tax (SGST)?
• Revenue under SGST is collected by the State Government. SGST subsumed the
following state taxations.
• Luxury Tax
• State Sales Tax
• Entry tax
• Entertainment Tax
• Levies on Lottery
Who Collects IGST (Integrated Goods and Services Tax)?
• IGST is charged when there is movement of goods from one state to another state. The
revenue will be collected by the central government and accordingly will be shared
between the Union and states in the manner prescribed by Parliament or GST Council.
 Advantages
• GST will boost up economic unification of India which ultimately assists in better
conformity and revenue resilience.
• In the GST system, both Central and state taxes will be collected at the point of sale.
Both components (the Central and State GST) will be charged on the manufacturing
cost.
• It will reduce the burden of tax for consumers
• It will result in a simple, transparent, and easy tax structure as it involves the provision
of merging all levies on goods and services into one GST.
• It will set a uniformity level in tax rates with only one or two tax rates across the supply
chain
• It will result in a good administration of the tax structure
• There are chances of the tax base broadening
• This implementation will increase tax collections due to the wide coverage of goods
and services.
• The global market will witness a comparative cost in the value of goods and services.
• This taxation system will reduce transaction costs for taxpayers through simplified tax
compliance and will also result in increased tax collections due to a wider tax base and
better conformity.
 Limitations
• Experience of various countries shows that it is very
difficult to manage the GST system. Even various
developed countries find it difficult.
• India’s tax collecting authority is not equipped
technically to handle it. Computerization of data is
needed.
• Amendment of Constitution is required for which
consensus of at least half of the states is needed, which
is very difficult in today’s rise of regional politics.
• It is resource-intensive as large data collection is
required.
 Features of GST
• Applicable On the supply side: GST is applicable on ‘supply’ of goods or
services as against the old concept on the manufacture of goods or on sale of
goods or on provision of services.
• GST rates to be mutually decided: CGST, SGST & IGST are levied at rates to be
mutually agreed upon by the Centre and the States. The rates are notified on
the recommendation of the GST Council.
• Multiple Rates: Initially GST was levied at four rates viz. 5%, 12%, 16% and 28%.
The schedule or list of items that would fall under these multiple slabs are
worked out by the GST council.
• Destination-based Taxation: GST is based on the principle of destination-based
consumption taxation as against the present principle of origin-based taxation.
• Dual GST: It is a dual GST with the Centre and the States simultaneously levying
tax on a common base. GST to be levied by the Centre is called Central GST
(CGST) and that to be levied by the States is called State GST (SGST).
– Import of goods or services would be treated as inter-state supplies and would be
subject to Integrated Goods & Services Tax (IGST) in addition to the applicable customs
duties.
 GST Council
• Article 279A – GST Council to be formed by
the President to administer & govern GST. It’s
Chairman is Union Finance Minister of India
with ministers nominated by the state
governments as its members.
• The council is devised in such a way that the
centre will have 1/3rd voting power and the
states have 2/3rd.
• The decisions are taken by 3/4th majority.
 Tax Rates
• The higher VAT rate in India is a goods and services tax (GST) of 28%. It
applies to consumer durables, air conditioning, automobiles, cement,
chocolate and accommodation above 7,500 INR. The standard VAT rates are
18% and 12%. The reduced rate is 5%. India also has some zero-rated goods,
the sale of which must still be reported on your VAT return, even though no
VAT is charged.
• The first standard VAT rate (18%) applies to telephone, banking, insurance,
restaurants with alcohol license, tickets to cultural events and cinema, TVs,
gaming consoles.
• The second standard VAT rate (12%) applies to restaurants (non-air
conditioned), construction, intellectual property, some foodstuff, mobile
phones.
• The reduced VAT rate (5%) applies to privately-provided transport,
advertising, sugar, tea and coffee, medicine.
• Indian zero-rated goods and services include basic foods, postal services,
books and newspapers.
 GST Compensation
• The Constitution (One Hundred and First Amendment) Act, 2016, was the law
that created the mechanism for levying a nationwide GST.
• Into this law there is a provision to compensate the States for loss of revenue
arising out of implementation of the GST. The adoption of the GST was made
possible by the States ceding almost all their powers to impose local-level
indirect taxes and agreeing to let the prevailing multiplicity of imposts be
subsumed under the GST.
• While the States would receive the SGST (State GST), and a share of the IGST
(Integrated GST), it was agreed that revenue shortfalls arising from the
transition to the new indirect taxes regime would be made good from a pooled
GST Compensation Fund for a period of five years that is set to end in 2022.
• This corpus in turn is funded through a compensation cess that is levied on so-
called ‘demerit’ goods. The computation of the shortfall is done annually by
projecting a revenue assumption based on 14% compounded growth from the
base year’s (2015-2016) revenue and calculating the difference between that
figure and the actual GST collections in that year (as spelt out in Section 7 of the
GST (Compensation to States) Act, 2017).
• Adding on all arrears including the most
recent, states received ₹5.89 trillion in GST
compensation for the five-year statutory
period (average of ₹1.18 trillion per year).
• The average annual revenue from the cess
over the same period (including April to June
2022) was ₹0.96 trillion, below the average
annual compensation required.
 Non-Tax Revenue: Grant-in-aids
• How States Get Grant-in-aids From The Centre?
• In addition to the distribution of taxes between the
Center and the states, there are several provisions in
the Constitution that regulate the scope for Grants-
in-aid.
• In accordance with Article 275 and 282, Parliament
may provide grants-in-aid from the Consolidation
Fund of India to such states as they needed
assistance, especially to improve the welfare of the
tribal areas, including a special grant to Assam.
 Statutory Grants
• Statutory grant is provided in Article 275 of the Indian
Constitution.
• Parliament provides these grants to specific states that need
assistance.
• This article sets different grants for different states.
• Amount transferred from India Consolidated Fund.
• There are two conditions for granting aid to the states for any
development plan approved by the Indian government for the
benefit of the Scheduled areas and Scheduled tribes.
• Any parliamentary regulation relating to Grants-in-aid as
specified is subject to prior recommendation by the Finance
Committee.
 Discretionary Grants
• In accordance with Article 282, the Center may, at its
discretion, provide assistance to certain states for
public purposes.
• These Grants are optional, not compulsory in nature.
• The Center previously issued these grants on the
recommendation of a earlier planning commission,
now Ministry of Finance.
• Moreover, during the period of the planning
commission, the general discretionary grants were
even higher than the statutory grants.
 Other Grants
• Grants for a temporary period
• Grants provided in lieu of export duties on
jute & jute products to the states of Assam,
Bihar, W. Bengal & Orissa.
• Charged on Consolidated Fund
• Recommended by FC