Who’s Paying India’s Bills? Tax System Decoded

Context:
- There is an indication that a new goods and services tax (GST) slab will be introduced, in addition to the existing four GST rates: 5%, 12%, 18%, and 28%.
- The Group of Ministers (GoM) in the GST council has proposed increasing the tax rates for tobacco and related products, as well as aerated beverages, to 35%
1.
What is the Tax System?

- A tax system refers to the set of principles and policies governments use to collect revenue from individuals and businesses.
- It is designed based on tax policy principles such as equity, efficiency, and simplicity, and can include subsidies and tax expenditures to influence taxpayer behavior and promote economic goals.
- Taxes are levied by governments on their citizens to generate income for undertaking projects to boost the economy of the country and to raise the standard of living of its citizens.
- 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.
2.
What is the history of Taxation in India?

Events | Analysis |
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Manusmriti and Arthashastra |
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Income Tax Act 1860 |
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Income Tax Act 1886 |
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Income Tax Act 1918 |
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Income Tax Act 1922 |
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Income Tax Act 1961 |
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3.
Enlist key milestones in the Indian Income Tax System?

4.
What are the attributes of Taxes?
Attributes | Analysis |
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It is mandatory |
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It is a contribution |
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It is for public benefit |
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It is paid out of income earned or wealth |
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It boosts economy |
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5.
Enlist different types of taxes in India?

Types of Taxes | Analysis |
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Direct Taxes |
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Indirect Taxes |
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6.
Enlist rates for different types of taxes in India?
Taxes | Rates |
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Income Tax |
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Corporation Tax |
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Securities Transaction Tax (STT) |
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Capital Gains Tax |
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GST |
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7.
Enlist revenue authorities in India?
Revenue Authorities | Description |
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CBDT |
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CBEC |
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CBIC |
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8.
Enlist key trends of the Indian taxation system?
Trends | Analysis |
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Growth in Tax Compliance |
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Tax to GDP ratio |
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Direct vs Indirect taxes |
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9.
How has India's tax structure shifted over the years?
- Tax collection trends have changed over the years.
Year | Tax collection |
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1980 |
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2000 |
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2020 |
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2025 (Estimated) |
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10.
What is the definition of middle class?

- Finance Minister Nirmala Sitharaman's recent comments about the Indian middle-class has sparked talk about this famed category of people.
- The debate for definition of middle class triggered after Finance Minister Nirmala Sitharaman recently identified herself as a member of the middle-class and understood the pressures it faced.
- The problem, however, is that there is no universal definition of the middle-class not just in terms of income thresholds, but even whether income should be used as a parameter.
- The definition of middle class in India varies by source, but generally refers to households with a certain income range:
Sources | Sources |
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Theprint |
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People Research on India's Consumer Economy (PRICE) |
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The National Council of Applied Economic Research (NCAER) |
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11.
How is the tax system overburdening the middle class in India?
- From pocketing tax-break profits to freezing real wage growth to paying less tax than individuals, big corporations are getting it all unlike the middle class, which is seeing little salary hike.


Dimensions | Analysis |
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Freezing of wages hitting consumption |
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Dramatic increase in direct tax |
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Corporate profits up, taxes down |
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The middleclass conundrum |
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12.
Why is the Indian Middle Class Suffering?

Reasons | Analysis |
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Technology is replacing human labour in jobs that are routine and repetitive |
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A cyclical downturn, although less worrying, is another factor weighing on middle-class consumption |
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Net household savings are at the lowest level seen in the last 50 years |
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13.
How will the middle class play the hero in India's rise as a world power?

- The middle class is the fastest-growing major segment of the Indian population in both percentage and absolute terms, rising at 6.3 percent per year between 1995 and 2021.
- It now represents 31 percent of the population and is expected to be 38 percent by 2031 and 60 percent in 2047.
- The strength of the middle class is expected to rise from 432 million people in 2020-21 to 715 million (47 per cent) in 2030-31 to 1.02 billion of India's projected population of 1.66 billion in 2047
- The People Research on India’s Consumer Economy (PRICE), an independent, not-for-profit think tank and facts tank, collected primary data in 2014, 2016 and 2021, covering over 40,000 households, both rural and urban from 25 states, for its PRICE ICE 360° surveys.
- According to the survey, by the end of this decade the structure of the country’s demographics will change from an inverted pyramid, signifying a small rich class and a very large low-income class, to a rudimentary diamond, where a significant part of the low-income class moves up to become part of Middle Class.
14.
What is the government’s view on the tax burden on the middle class?
- According to government sources Tax burden on the middle class has come down noticeably over the last 10 years.
- Since the introduction of the new exemption limit in 2024, there has been a notable decline in the percentage of income tax collection from taxpayers earning less than Rs 10 lakh.

15.
Are Indians paying more tax than those in other countries?
1. Comparison of Direct Taxes:
- 15 out of 20 countries in the intergovernmental forum G20 have a maximum personal income tax rate higher than India.
- On the other hand, India has the third highest maximum corporate tax rate of 30 percent among G20 nations.
- Surcharges can go up to 25 percent of the tax liability in case of personal tax.
- Among the five BRICS nations, China and South Africa have a maximum income tax rate of 45 percent, much higher than that in India.


2. Comparison of GST among various nation:

- More than 160 countries have introduced the GST taxation scheme.
- There are about 40 different models of GST running through different economies and include various rules and regulations.
Countries | Analysis |
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GST Singapore Vs. GST India |
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GST New Zealand Vs. GST India |
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GST China Vs. GST India |
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GST Australia Vs. GST India |
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GST UK Vs. GST India |
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16.
Enlist measures to make the tax system efficient and effective?

- To make the tax system more efficient, equitable, and growth-oriented, various reforms have been suggested.
- Some of them are listed below:
Reforms | Analysis |
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Simplifying tax slabs and reducing rates |
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Expanding the tax base |
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Balancing revenue generation and taxpayer relief |
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Digital Transformation |
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17.
What are the expectations from the Budget 2025?
- Taxpayers and businesses are eagerly waiting for new reforms in the upcoming Union budget that will propel India’s economic trajectory.
- Here are some of the suggestions:
Suggestions | Analysis |
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Tax exemption limit |
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To restore the earlier tax rates on Capital Gains |
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Digital assets |
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All Mutual Funds should be allowed to launch pensionoriented MF schemes (MFLRS) with Uniform Tax Treatment as NPS |
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What is the relevance of the topic for UPSC CSE?
For Prelims: Income Tax, Direct Taxes, Indirect Taxes, GST.
For Mains: Reforms, Issues and Challenges in the Taxation system in India, Budget 2024.
Some Previous Years Prelims Questions
Q1. Which one of the following effects of creation of black money in India has been the main cause of worry to the Government of India?(2021)
(a) Diversion of resources to the purchase of real estate and investment in luxury housing.
(b) Investment in unproductive activities and purchase of precious stones, jewellery, gold, etc.
(c) Large donations to political parties and growth of regionalism.
(d) Loss of revenue to the State Exchequer due to tax evasion.
Some Previous Years Mains Questions
Q1. Distinguish between Capital Budget and Revenue Budget. Explain the components of both these Budgets. [2021]
Q2. Explain the rationale behind the Goods and Services Tax (Compensation to States) Act of 2017. How has COVID-19 impacted the GST compensation fund and created new federal tensions? [2020]
Q3. The public expenditure management is a challenge to the government of India in the context of budget-making during the post-liberalization period. Clarify it. [2019]
Q4. What is the meaning of the term ‘tax expenditure’? Taking the housing sector as an example, discuss how it influences the budgetary policies of the government. [2013]
Some Questions from This Year and Previous Years Interview Transcripts
Board Suman Sharma mam:
- Why Temple Tax is an issue in Karnataka?
- Should we tax temples ?
Board Suman Sharma mam:
- What is the difference between duty, cess, surcharge?
- Those who pay income tax, also pay GST on consumption of goods and services.
- So isn't it charging twice for their income ?
Board Dinesh Dasa sir:
- Should we reduce income tax and increase corporate tax?
- Impact of the same on the economy?
- Do we need to rationalise gst with fewer slots?
Board Sanjay Verma sir:
- What is under filing?
- How would you calculate the tax base?
- How to increase the tax base?
- How would you know tax evasion is going on from a broader perspective?
- What is the difference between the resident and non resident assessee?
- Is there anything called non ordinarily resident in case of income tax?
- Tell me how tax evasion is going on especially in the case of the day diamond industry and how you would find out?
Board Sanjay Verma sir:
- Which do you support more direct tax or indirect tax?
- So you oppose the corporate tax cut by the government?
Some Questions for QUIZ
Q1. Consider the following taxes:
1. Income tax
2. Capital gains tax
3. Securities transaction tax
4. Stamp duty
5. Corporation tax
How many of the above comes under direct taxes?
(a) Only two
(b) Only three
(c) Only four
(d) All five
Some Questions for POLL
Q1. Do you think that the middle class in India is under the burden of tax?
(a) YES
(b) NO
(c) Can’t say
Q2. Do you think that indirect taxes should be abolished?
(a) YES
(b) NO
(c) Can’t say