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Tax Distribution System in India- State and Union

Tax Distribution System in India

India has a well developed tax structure with a three-tier federal structure, comprising the Union Government, the State Governments and the Urban/Rural Local Bodies. Indian Constitution specifies about the distribution of revenues where exclusive powers are given to the State, to collect taxes and exclusive powers rest with Union in relation with taxes. Central Government levies taxes on income (except tax on agricultural income, which the State Governments can levy), customs duties, central excise and service tax. Value Added Tax (VAT), (Sales tax in States where VAT is not yet in force), stamp duty, State Excise, land revenue and tax on professions are levied by the State Governments. Local bodies are empowered to levy tax on properties, octroi and for utilities like water supply, drainage etc. Some taxes are levied and collected by the Centre but shared with the States. These include taxes on income other than agricultural income and union excise duties on goods included in Union List, except medicinal and toilet preparations. In last 10-15 years, Indian taxation system has undergone tremendous reforms. The Constitution (Eightieth Amendment) Act, 2000, significantly changed the manner of distribution of Central tax collections between the Central and State Governments. Prior to this amendment, income tax and Union excise duties were the only taxes shared with the States. This amendment altered the pattern of sharing of Central taxes between the Centre and the States by providing for the sharing of the net proceeds of all Union taxes and duties with the States. Still further, the Constitution (Eighty-eighth Amendment) Act, 2003 has included taxes on services` under entry 92C in the Union List (List I) in the Seventh Schedule of the Constitution.

Constitutional Provisions Governing Distribution of Tax:

The authority to levy a tax is derived from the Constitution of India which allocates the power to levy various taxes between the Centre and the State. An important restriction on this power is Article 265 of the Constitution which states that "No tax shall be levied or collected except by the authority of law." Therefore each tax levied or collected has to be backed by an accompanying law, passed either by the Parliament or the State Legislature.

Article 246:  Legislative Powers of Making Laws

Article 246 of the Indian Constitution, distributes legislative powers including taxation, between the Parliament and the State Legislature. Schedule VII enumerates these subject matters with the use of three lists;

  • List - I entailing the areas on which only the parliament is competent to makes laws,
  • List - II entailing the areas on which only the state legislature can make laws, and
  • List - III listing the areas on which both the Parliament and the State Legislature can make laws upon concurrently.

Separate heads of taxation are provided under lists I and II. There is no head of taxation in the Concurrent List (Union and the States have no concurrent power of taxation). The list of thirteen Union heads of taxation and the list of nineteen State heads are given below:

Power of Parliament

Serial No.

Item

List and Entry

1

Taxes on income other than agricultural income

(List I, Entry 82)

2

Duties of customs including export duties

(List I, Entry 83)

3

Duties of excise on tobacco and other goods manufactured or produced in India except (i) alcoholic liquor for human consumption, and (ii) opium, Indian hemp and other narcotic drugs and narcotics, but including medicinal and toilet preparations containing alcohol or any substance included in (ii)

(List I, Entry 84)

4

Corporation Tax

(List I, Entry 85)

5

Taxes on capital value of assets, exclusive of agricultural land, of individuals and companies, taxes on capital of companies

(List I, Entry 86)

6

Estate duty in respect of property other than agricultural land

(List I, Entry 87)

7

Duties in respect of succession to property other than agricultural land

(List I, Entry 88)

8

Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares and freight

(List I, Entry 89)

9

Taxes other than stamp duties on transactions in stock exchanges and futures markets

(List I, Entry 90)

10

Taxes on the sale or purchase of newspapers and on advertisements published therein

(List I, Entry 92)

11

Taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce

(List I Entry 92A)

12

Taxes on the consignment of goods in the course of inter-State trade or commerce

(List I, Entry 93A)

13

All residuary types of taxes not listed in any of the three lists

(List I, Entry 97)

Power of State Legislature

Serial No.

Item

List and Entry

1

Land revenue, including the assessment and collection of revenue, the maintenance of land records, survey for revenue purposes and records of rights, and alienation of revenues

(List II, Entry 45)

2

Taxes on agricultural income

(List II, Entry 46)

3

Duties in respect of succession to agricultural income

(List II, Entry 47)

4

Estate Duty in respect of agricultural income

(List II, Entry 48)

5

Taxes on lands and buildings

(List II, Entry 49)

6

Taxes on mineral rights

(List II, Entry 50)

7

Duties of excise for following goods manufactured or produced within the State (i) alcoholic liquors for human consumption, and (ii) opium, Indian hemp and other narcotic drugs and narcotics

(List II, Entry 51)

8

Taxes on entry of goods into a local area for consumption, use or sale therein

(List II, Entry 52)

9

Taxes on the consumption or sale of electricity

(List II, Entry 53)

10

Taxes on the sale or purchase of goods other than newspapers

(List II, Entry 54)

11

Taxes on advertisements other than advertisements published in newspapers and advertisements broadcast by radio or television

(List II, Entry 55)

12

Taxes on goods and passengers carried by roads or on inland waterways

(List II, Entry 56)

13

Taxes on vehicles suitable for use on roads

(List II, Entry 57)

14

Taxes on animals and boats

(List II, Entry 58)

15

Tolls

(List II, Entry 59)

16

Taxes on profession, trades, callings and employments

(List II, Entry 60)

17

Capitation taxes

(List II, Entry 61)

18

Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling

(List II, Entry 62)

19

Stamp duty

(List II, Entry 63)

Article: 268: Duties levied by the Union but collected and appropriated by the States

Article 268 (1) states that stamp duties and excise on medicinal and toilet preparations which are mentioned in Union List, the State shall collect the duty levied by the Union.

Article 268-A: Service tax levied by Union and collected by the States:

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