According to Article 265 of the Constitution of India, no tax of any nature can be levied or collected by Central or State Governments except by authority of law.
The authority to enact law and levy taxes and duties has been given by the constitution vide Article 246. According to Article 246, law can be enacted by Parliament or the State Legislature, if such power is given by the Constitution of India.
Such power is given by Article 246 in Seventh Schedule of the Constitution of India under the following three lists:
List-I — Union list
Under List-I, the Parliament has exclusive power to make laws including the law for levy of taxes in respect of the matter (entry) enumerated in that list.
List-II — State list
Under List-II, the legislature of any State has exclusive power to make law for such state or any part thereof in respect of the matter (entry) enumerated in that list.
List-III — Concurrent list
Under List-III, the Parliament or the Legislature of a State has power to make laws in respect of the matter (entry) enumerated in that list.
Further, the Parliament has power to make laws with respect to any matter for any part of the territory of India not included in the State (i.e. for union territory) notwithstanding that such matter is a matter enumerated in State list. In other words for union territories, parliament shall have the exclusive power to make laws even if that matter in included in the State list.
1. Types of taxes
Taxes can be broadly classified into the following two types:
(a) Direct taxes
(b) Indirect Taxes.
Every tax which is levied by any Government has the following two effects:
(1) Immediate effect:
When a tax is imposed, the immediate effect of the tax is on the person on whom the tax has been imposed and he shall be liable to pay such tax. The immediate effect is also known as impact of tax.
(2) Ultimate effect:
The next issue involved in the imposition of tax is whether the burden of such tax, which is imposed on a person, can be shifted to another person i.e. can this tax be recovered from the other person. In other words who will be ultimately effected by the imposition of such tax. Ultimate effect of tax is also known as incidence of tax.
If the impact and incidence of tax is on the same person i.e. the burden of the tax cannot be shifted or recovered from other person, it is known as direct tax.
For example, income tax levied by the Central Government and taxes (i.e. stamp duty) on land and buildings levied by the State Government.
If the impact of tax is on one person and the incidence of the tax is on another person i.e. the burden of tax can be shifted or the tax so paid by a person can be recovered from another person, it is known as indirect tax. For example, Central Excise Duty levied by the Central Government and VAT levied by the State Government.
Thus, indirect tax is one that can be shifted by the taxpayer to some other person. Its incidence is borne by the consumer who ultimately consumes the product or the service.
Further, direct taxes are imposed on persons, whereas indirect taxes are levied on goods and services e.g. Excise duty, Customs duty, Service tax, VAT, etc. (and now GST).
2. Taxes levied by the Central Government
The Central Government levied both direct and indirect taxes as per the following entries contained in the List I i.e. union list:
(A) Direct Taxes
(1) Entry No. 82 — Taxes on Income other than agricultural income.
(2) Entry No. 85 — Corporation Tax
(3) Entry No. 86 — Taxes on capital value of assets i.e. wealth tax (wealth tax has been withdrawn, w.e.f. A.Y. 2016-17)
(B) Indirect Taxes
(1) Entry No. 83 — Duties of customs including export duties
(2) Entry No. 84 — Duties of excise on tobacco and other Goods manufactured or produced in India except on:
(a) alcoholic liquors for human consumption
(b) opium, Indian hemp and other narcotic drugs and narcotics.
but including medicinal and toilet preparations containing alcohol or opium/Indian hemp/narcotic drugs/ narcotics Excise duty has now been subsumed in GST.
(3) Entry No. 92A — Taxes on sale or purchase of goods other than newspapers in the course of inter state trade and commerce.
Central Sales Tax (CST) on sale in the course of inter State Trade and Commerce has been levied under this power.
CST has now been subsumed in GST.
(4) Entry No. 92B — Tax on consignment of goods.
(5) Entry No. 92C — Taxes on services.
However, service tax was levied as per entry No. 97 and no separate Service Tax Act was enacted.
Service tax has now been subsumed in GST.
(6) Entry No. 97 — Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists.
In other words, Entry No. 97 is a residuary power given to the Central Government to levy tax also provided the matter is not enumerated in List II or List III of the Seventh Schedule.
3. Taxes levied by the State Government
State Governments also levied both direct and indirect taxes as per the entries contained in the list II i.e. the State list. Some of the important taxes levied by State Governments are as under:
(1) Entry No. 46 — Taxes on agricultural income.
(2) Entry No. 49 — Taxes on lands and buildings.
(3) Entry No. 51 — Duties of excise on the following goods manufactured or produced in the State and countervailing duties at the same or lower rates on similar goods manufactured or produced elsewhere in India:—
(a) alcoholic liquors for human consumption;
(b) opium, Indian hemp and other narcotic drugs and narcotics,
but not including medicinal and toilet preparations containing alcohol or any substance included in subparagraph (b) of this entry.
(4) Entry No. 52 — Taxes on the entry of goods into a local area for consumption, use or sale therein i.e.
Octroi and Entry tax. Octroi and Entry tax has now been subsumed in GST.
(5) Entry No. 54 — Taxes on the sale or purchase of goods other than newspapers i.e. State Level VAT. State VAT has now been subsumed in GST.
(6) Entry No. 60 — Taxes on professions, trades, callings and employments.
(7) Entry No. 63 — Rates of stamp duty in respect of documents other than those specified in the provisions of List I with regard to rates of stamp duty.