Lecture Note

Unit-II Taxation

Introduction

Taxation plays a pivotal role in the functioning of modern states, serving as a cornerstone for
governance and a catalyst for economic development. It constitutes the most significant and
stable source of revenue for governments, enabling them to undertake a wide spectrum of
functions ranging from administrative operations to social welfare. Through taxation,
governments mobilize resources that are essential for financing infrastructural development,
public health, education, defense, and other critical sectors of the economy.

At the grassroots level, tax revenues empower local bodies and administrative units to
implement developmental schemes tailored to the needs of specific communities. This not only
strengthens decentralized governance but also ensures that the benefits of public policy reach
the most vulnerable sections of society. Furthermore, taxation contributes to economic stability
by influencing consumption patterns, redistributing wealth, and regulating market externalities.

Importantly, tax revenues support both revenue expenditures (such as salaries, pensions, and
subsidies) and capital expenditures (like infrastructure projects and investments in public
enterprises), thereby addressing both short-term and long-term developmental goals. In this
context, the proper understanding of the canons of taxation—such as equity, certainty,
convenience, and economy—is essential to design tax systems that are just, efficient, and
growth-oriented.

Additionally, a well-structured classification of taxes—into direct and indirect, progressive and

regressive, or specific and ad valorem—enhances the effectiveness of policy formulation and
implementation. It provides the analytical framework for assessing the impact of various taxes
on different income groups, sectors, and economic activities. Ultimately, a rational and
transparent taxation system not only ensures sustainable revenue generation but also reinforces
the legitimacy of public institutions and promotes social justice.

Concept of Taxation

A tax is a compulsory financial charge imposed by a government on individuals or entities to

fund public expenditure.

Key Features:
 1. Mandatory
2. No direct quid pro quo
3. Levied by the authority of law
4. Main source of government revenue

Objectives of Taxation

1. Revenue generation
2. Redistribution of income
3. Regulation of consumption and production
4. Promotion of economic stability
5. Encouragement of investment and savings

Canons of Taxation (Adam Smith)

1. Canon of Equity: Fairness—based on ability to pay

2. Canon of Certainty: Clear, not arbitrary
3. Canon of Convenience: Easy to pay
4. Canon of Economy: Low cost of collection

Additional Modern Canons of Taxation

1. Productivity: Yield sufficient revenue

2. Elasticity: Adjust with economic conditions
3. Simplicity: Easy to understand
4. Diversity: Broad-based, multiple sources

Classification of Taxes (Direct and Indirect)

Classification based on Impact

1. Direct Tax: Incidence and impact on same person

Example: Income Tax, Wealth Tax

2. Indirect Tax: Shiftable to others

Example: GST, Customs Duty

Classification Based on Structure:

1. Proportional Tax: Same rate for all

 2. Progressive Tax: Rate increases with income
3. Regressive Tax: Rate decreases as income increases

Summary Points: Taxation is fundamental to governance and economic development. As the

primary source of government revenue, it supports a wide range of policy initiatives and
grassroots implementation. Tax revenues finance numerous development projects and help
meet both current and capital account expenditures. A sound understanding of the canons of
taxation ensures fairness, efficiency, and transparency in the system. Moreover, the proper
classification of taxes enhances the formulation, execution, and evaluation of effective fiscal
policies.

Goods and Services Tax (GST)

The introduction of the Goods and Services Tax (GST) in India marks a revolutionary shift in
the country’s indirect taxation system. Launched on 1st July 2017, GST aimed to unify the
fragmented tax structure, eliminate the cascading effect of taxes, and bring transparency and
efficiency into the system. Touted as “One Nation, One Tax,” GST replaced a host of indirect
taxes levied by both Central and State Governments. This comprehensive and multi-tiered tax
has since become a backbone of India’s fiscal policy.

Historical Background

Before GST, India’s tax system was riddled with multiple indirect taxes such as:

• Central Excise Duty

• Service Tax

• Value Added Tax (VAT)

• Central Sales Tax (CST)

• Entry Tax, Octroi, Entertainment Tax, etc.

This created a tax-on-tax (cascading) structure, which increased the cost of goods and services
and hampered economic efficiency. The idea of GST was first proposed in 2000 by the Atal
Bihari Vajpayee government, and after nearly two decades of discussion and negotiation
among the Center and States, GST was finally implemented in 2017.

Structure of GST in India

India follows a dual GST model, in which both the Centre and States levy tax on a common
base. The structure includes:

• CGST (Central Goods and Services Tax): Levied by the Central Government on intra-
state supplies.

• SGST (State Goods and Services Tax): Levied by State Governments on intra-state
supplies.

• IGST (Integrated Goods and Services Tax): Levied by the Central Government on
inter-state and import/export transactions.

This model maintains the federal nature of the country while simplifying tax collection and
credit mechanisms.

Key Features of GST

• Destination-based Tax: Tax is collected at the point of consumption, not production.

• Value Addition Tax: GST is levied at every stage of the production-distribution chain
on the value added.

• Input Tax Credit (ITC): Businesses can claim credit for the taxes paid on inputs,
avoiding cascading.

• Technology Driven: GST processes—registration, returns, refunds—are administered

through the Goods and Services Tax Network (GSTN) portal.

Objectives of GST

1. Eliminate Cascading of Taxes

2. Simplify the Tax Structure

3. Improve Ease of Doing Business

4. Broaden the Tax Base

5. Enhance Government Revenue

6. Create a Unified National Market

Benefits of GST

1. For the Economy:

 o Reduction in overall tax burden.

o Improvement in the efficiency of logistics and supply chain.

o Formalization of the economy by incentivizing invoice-based transactions.

2. For the Government:

o Higher revenue due to better compliance and widened tax base.

o Real-time data and analytics through GSTN for policy-making.

o Reduction in tax evasion.

3. For Businesses:

o Uniformity in tax laws across states.

o Easier compliance and return filing.

o Availability of seamless input tax credit.

4. For Consumers:

o Reduction in prices of goods over time due to lower tax incidence.

o Transparency in taxation.

GST Tax Slabs in India

Goods and services are classified under four major slabs:

• 5% – Essential items (e.g., food grains)

• 12% and 18% – Standard goods and services

• 28% – Luxury goods and sin items (e.g., tobacco, cars)

Some goods and services are exempted from GST (e.g., unprocessed food, education,
healthcare).

Challenges in GST Implementation

Despite its success, GST has faced several challenges:

1. Complex Tax Slabs: Multiple rates make the system less simplified than intended.

2. Technical Glitches: Initial problems with GSTN affected return filing.

 3. Compliance Burden: Especially for small traders and MSMEs.

4. Frequent Changes: Constant rate revisions create uncertainty.

5. Revenue Concerns: States have at times reported compensation shortfalls.

Reforms and Policy Initiatives

• E-invoicing system introduced for better monitoring.

• Simplification of return filing procedures.

• QRMP scheme for small taxpayers.

• GST Council meets regularly to address rate rationalization and policy issues.

Impact of GST on Indian Economy

• Increased tax compliance: Over 1.4 crore businesses registered under GST.

• Formalization of the informal sector through digital payments and invoicing.

• Boost to logistics and warehousing due to removal of inter-state check-posts.

• Enhanced interstate trade leading to increased efficiency and competitiveness.

Global Comparison

Unlike India, countries like New Zealand and Canada have implemented single-rate GST
systems. India's dual structure is unique and reflects its federal setup. However, experts
advocate for convergence toward fewer slabs and greater simplicity in the future.

Conclusion

The Goods and Services Tax represents a landmark step toward building a modern, transparent,
and growth-oriented taxation system in India. While it has had a complex and sometimes
bumpy journey, GST has significantly altered the fiscal landscape. With continued reforms,
rate rationalization, and enhanced compliance mechanisms, GST has the potential to serve as
a powerful engine for India's economic transformation and inclusive development.