Features of Income Tax (Guide 2023)

The Indian income tax system has evolved significantly over the past decade. Some major changes have been introduced in the income tax system to make it more efficient and relevant to today’s needs. New departments have been set up, more policies have been introduced to save taxes, encourage people to invest, and so on. 

In this article, we will see the features of income tax, the purpose of income tax, and the objectives of the income tax system. 

What Are The Main Features of the Indian Tax System?

The main feature of the Indian tax system is its bifurcation at various levels. The Indian tax system is structured at the central, state, and municipal levels. The revenue generated from the bottom two tiers is sent to the central. The central government plans and strategizes the needs and development rate of the states to assign a budget. The state has a say in levying taxes and keeping revenue for its personal growth. The taxes collected by them are in the form of advance taxes, corporate tax, cess, excise duties, and customs duties.

• The central state and Municipal level of taxation

The taxes are collected from the urban and rural parts of the states. All three receive a portion of the revenue generated as tax. This revenue is then used to implement developmental schemes proposed by the government.

• Different Types of Taxes

The taxes under the Indian tax system are collected as direct and indirect taxes. 

Direct taxes are imposed on individuals and corporations. The tax includes income tax, wealth tax, etc. 

Indirect taxes are the taxes imposed on goods and commodities. Some of its examples are VAT: custom duty, octroi duty, excise duty, service tax, and GST (SGST, CGST, and IGST

•     Revenue Management 

The Indian tax system has in place the following departments to control and regulate tax-related affairs. They are the Central Board of Direct Taxes aka CBDT, Central Board of Excise and Customs aka CBEC, and Central Board of Indirect Taxes & Customs aka CBIC. 

Having separate departments to cater to different aspects of income tax helps streamline the whole taxation process. The tax collected from individuals, HUF, corporates, firms, trusts, and funds, etc are well recorded. All departments have a digital portal from which any taxpayer can avail the information required. This also makes the Indian taxation system transparent.

• Amendments in Acts 

To keep the Indian tax system relevant, the income tax act of 1961 has been amended from year after year. New sections have been introduced, unnecessary sections have been removed. The tax rates have been updated as per the inflation and living cost conditions. 

• Progressive Policies

The Finance ministry keeps focus and takes suggestions from CBDT, CBIC, and CBEC to incorporate new changes. New strategies and policies are formulated for better growth and development of the country and taxpayers. 

After learning about its features, it’s about time that we know about the inception of the Income Tax System!

Who Started Income Tax?

In India, the direct tax system was enforced in ancient times. The references are present in Arthashastra and Manu Smriti. Earlier the taxes were paid in form of gold coins, materials, and also by offering personal consultations. It has been known that Kautilya’s Arthashastra was the first book on finance, management, public finance, administration, and the fiscal laws of a country.

Let’s talk about the modern era. The income tax was introduced as an act by James Willson, finance minister of British Ruled India. He introduced the income tax act in 1860, which underwent necessary amendments and formed the base for the income tax act of 1961. The income tax act of 1961 formed the foundation of the Indian tax system. 

But, what’s the objective of collecting taxes, and who benefits from it? The answer lies below! 

What Are The Five Major Objectives of Taxation?

Out of the several objectives of taxation for a country, we will discuss five significant objectives of taxation here. They are:

• Economic Development of the Country

The fundamental objective of any tax system is to build a strong economy for its country. The tax system enables the government to gather revenue from its earning class. A big chunk of this revenue is used in formulating new strategies and implementing them for the growth of the nation.

• Employment 

The tax brings revenue, and revenue creates new possibilities for establishing industries and firms, which becomes the source of employment for the people. A loop begins as the new earning class will also pay taxes and the increase in revenue collected will be put back for more development, and hence, generating more employment.

• Price Regulation

One of the main objectives of taxation is to regulate the price of certain commodities. This is done to check inflation and control the purchasing power of the buyer. The taxes imposed on commodities are based on the industries. The finance ministry updates the tax slab for commodities from one budget year to another.

• Controlling Cyclical Fluctuations of the Economy

The taxation system helps the nation to come out of the period of recession smoothly or by taking less heat than other economies. This is done by lowering the tax rates during the depression phase of the economy or by giving a boost of concessions and subsidies, exemptions, etc to its citizens. This helps the citizens to get by the tough times. Such example is introducing schemes like tax relief in payment of home loan interest during covid time, decreasing taxes on grocery, and levying more taxes on tech, gadgets, and imported products.

• Decreasing BOP issues

Custom duties imposed on imported goods are used to control the price variation among homemade products. It’s done to encourage the demand of local products.

• Non Revenue Objectives

This means that the taxation is designed in such a way that it decreases the earning gap between the lower and higher earning class of the economy. The rich are taxed more than the economically weaker section. An example would be that in the present budget 2023, the tax slab for exempted income was raised to 5 lakhs and no tax will be paid by an individual earning up to 7 lakhs. However, the tax slab rates increased to 30% for individuals earning more than 15 lakhs.

FAQ: Features of Income Tax

1. What Are The Features of Income Tax?

A few main features of the income tax act are the division of the tax system at the central state and municipal levels, types of taxes to increase income tax collection, formulation of separate departments for separate tax issues, progressive tax policies, regular amendments in the income tax act, and more.    

2. What is The Main Purpose of Income Tax?

The main purpose of income tax is the collection of tax from any entity earning money, then regulation of taxes, generating revenue, creating employment, developing nations’ economies, formulating new policies, etc. the ultimate aim of income tax is to develop a sustainable economy for a better future for its citizens.

Conclusion

Features of Income Tax System shed some light on why the Indian taxation system works. What is the purpose of Income tax and how it benefits the country? The Indian taxation system caters to billions of people. An efficient taxation system is important for the growth and development of any country. The main objective of any taxation system is the well-being of its citizens and country. 

Interested to know more about income tax? Well, we have lined up a series of curated articles just for you, head to the recommended section to read more. 

Recommended Articles

History of Income Tax in India ( Self Guide)

Section 36 of Income Tax Act (Quick Guide)