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Taxation Structure in India: Understanding Government and State Taxes

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Taxation Structure in India: Understanding Government and State Taxes

tax structure in india

India’s taxation system is a structured blend of central and state-level taxes designed to fund governance, infrastructure, and public welfare. From income tax and GST to stamp duty and excise, every type of tax plays a specific role in the country’s economic framework.

Understanding how these taxes are levied, collected, and shared between the central and state governments is key to becoming a more informed and responsible taxpayer. This blog breaks down the concept in simple terms.

What is Taxation Law in India?

 

Taxation law in India refers to the legal framework that governs the levying, collection, and administration of taxes by the central and state governments. These laws define the types of taxes applicable to individuals, businesses, and goods or services, along with procedures for payment, exemptions, and penalties.

Key legislations include the Income Tax Act, Goods and Services Tax (GST) Act, and Customs Act, among others. Understanding taxation law is essential for compliance and financial planning across personal and professional domains.

Types of Taxes in India

 

India’s tax system is broadly divided into two categories:

  • Direct Taxes: Paid directly by individuals or entities to the government (e.g., Income Tax).
  • Indirect Taxes: Collected by intermediaries on goods and services and passed to the government (e.g., GST).
  • Both types are crucial for generating public revenue and promoting economic development nationwide.

Direct Taxes (Income Tax, Capital Gains Tax, etc.)

  • Income Tax: Levied on the earnings of individuals, HUFs, and businesses based on annual income slabs.
  • Capital Gains Tax: Applied on profits earned from the sale of capital assets like property or shares.
  • Corporate Tax: Charged on the income of companies registered in India.
  • The Income Tax Act, 1961 regulates these taxes.

Indirect Taxes (GST, Customs Duty, Excise)

  • Goods and Services Tax (GST): A unified tax on the supply of goods and services across India.
  • Customs Duty: Imposed on goods imported into or exported from India.
  • Excise Duty: Earlier levied on manufactured goods, now subsumed mainly under GST.
  • These taxes are collected by intermediaries and paid to the government.

State Tax vs Government Tax: Key Differences

 

Understanding the difference between state and central (government) taxes is crucial for knowing who collects what and how it impacts you. Here's a quick comparison:

AspectCentral (Government) TaxState Tax
Collected ByCentral GovernmentRespective State Governments
ExamplesIncome Tax, GST (Central share), CustomsState GST, Stamp Duty, Road Tax
ApplicabilityAcross the entire countryWithin the respective state only
UsageNational infrastructure, defence, etc.State-level services and development

Both types of taxes contribute to public welfare in different but complementary ways

Features of Tax Structure in India

 

  • Dual Taxation System 
    India follows a dual taxation model where both central and state governments have the authority to levy taxes.
  • Clear Classification 
    Taxes are categorised into direct and indirect taxes for administrative efficiency.
  • Constitutional Backing 
    The Indian Constitution outlines detailed provisions for taxation powers across various levels of government.
  • Progressive Nature 
    The system is designed to be progressive—higher income earners pay a higher tax rate.
  • Regular Reforms 
    India’s tax system undergoes frequent updates to stay aligned with economic needs (e.g., GST rollout).
  • Digital Compliance 
    E-filing, online payments, and portals like the Income Tax Department and GSTN ensure easier compliance.
  • Revenue Sharing 
    Revenue collected through certain taxes, such as GST, is shared between the Central Government and the State Governments.

Important Sections under Indian Taxation Law

 

  • Section 80C: Allows deductions up to ₹1.5 lakh for specified investments and expenses.
  • Section 80D: Covers deductions for health insurance premiums.
  • Section 24(b): Provides deduction on home loan interest under the head ‘Income from House Property’.
  • Section 10(14): Deals with exemptions on various allowances (e.g., HRA, transport allowance).
  • Section 234F: Levies a penalty for late filing of income tax returns.
  • Section 139(1): Specifies who is required to file income tax returns and by when.

Specifies who is required to file income tax returns and by when.

Taxation for Salaried, Self-Employed & Businesses

 

India’s tax system applies differently to salaried individuals, self-employed professionals, and businesses. Salaried employees are taxed based on income slabs, with deductions like HRA, standard deduction, and 80C benefits. Self-employed individuals can claim business-related expenses and file returns under presumptive or regular taxation schemes.

Businesses—whether proprietorships, partnerships, or corporations—are subject to separate tax rates and compliance requirements under the Income Tax Act, including GST, TDS, and audit obligations. Understanding these distinctions is essential to ensure accurate tax filing and avoid penalties.

Impact of Digitalisation on Tax Filing in India

 

Digitalisation has made tax filing in India faster, easier, and more transparent. E-filing portals, automated PAN-Aadhaar linking, digital verifications, and pre-filled ITR forms have simplified compliance. It reduces manual errors, increases accountability, and improves access to tax-related services for individuals and businesses alike.

How Tax-Saving Investments Help You Comply with Tax Laws

 

Tax-saving investments not only helps reduce your taxable income but also ensures legal compliance with income tax laws. Options like ELSS, PPF, NPS, and life insurance qualify for deductions under sections like 80C, helping you align financial planning with tax benefits.

FAQs on Taxation Structure in India

 

Q1. What is the difference between state tax and central government tax in India?

Central taxes are collected by the Union Government (e.g., income tax, customs), while state taxes are collected by state governments (e.g., stamp duty, road tax). Some taxes, such as GST, are shared between the parties.

Q2. Which sections of the Income Tax Act should I know?

Key sections include 80C (investments), 80D (health insurance), 24(b) (home loan interest), 10(14) (allowances), and 139(1) (filing rules). Knowing these helps in planning deductions and timely filing.

Q3. Is GST considered a central or state tax?

GST is a dual tax. It includes Central GST (CGST) and State GST (SGST) for intra-state transactions, and Integrated GST (IGST) for inter-state supplies, with revenue shared between the Central Government and the State Governments.

Q4. Do salaried individuals need to file under the new tax regime?

No, it’s optional. Salaried taxpayers can choose between the old regime (with deductions) and the new regime (lower rates, fewer deductions) each financial year while filing their income tax return.

Q5. What are the tax benefits of buying life insurance?

Premiums paid for life insurance policies qualify for deduction under Section 80C, up to ₹1.5 lakh annually. Additionally, maturity proceeds may be tax-free under Section 10(10D), subject to conditions.