Income Tax Structure in India (Updated 2023)

Although you are paying your income tax without fail, are you aware of the income tax structure in India? As a responsible Indian citizen, you must know about the tax systems and structures of our country. Here we come with a detailed article about the income tax structure in India. Have a great read.

Taxes are the most crucial source of income for the Indian Government. The government uses the money from taxes for the development of the nation. The Indian tax system is formulated well and has a three-tier structure.

Also, you should pay tax based on your tax slab. Income tax slab means different tax rates corresponding to income ranges. It means the tax rates increase with an increase in your income. It comes into existence to provide a fair tax system in the country. These income tax slabs change every budget. These slab rates differ based on your category. Income tax has classified into three categories

1. Individuals (aged less than 60 years) which includes residents and non-residents
2. Resident Senior citizens (60 to 80 years of age)
3. Resident Super senior citizens (more than 80 years of age)

Next, let us know about the structure of tax in India.

What Is the Structure of Tax in India?

The tax structure in India is well-made for the benefit of the people. It has a three-tier system

1. The central government
2. The State governments
3. Local municipal bodies

Two types of taxes in India are Direct and Indirect. The direct tax consists of income tax, gift tax, capital gain tax, etc, while indirect tax includes value-added tax, service tax, goods and services tax, customs duty, etc.

Role of the Three Bodies in the Taxation System

The taxation system provides specific roles to the central and state government. 

The role of the Central Government of India is to levy taxes such as customs duty, income tax, service tax, and central excise duty. The state governments levy income tax on your agricultural income, professional tax, value-added tax (VAT), state excise duty, land revenue, and stamp duty. The role of the local bodies is to collect octroi, property tax, and other taxes on various services like drainage and water supply.

Taxes are then categorized as direct and indirect taxes. The implementation of these two taxes is the difference between them. You should pay direct taxes, while indirect taxes are levied on goods and services.

This is the basic structure of tax in India. You read about the structure of tax in India, and what about the income tax structure? Come let’s see that.

What Is the Income Tax Structure?

The income tax structure depends on the various income tax slabs. The slab rates differ annually during the budget. 

Income tax slab rate for FY 2022-23 (AY 2023-24), New Tax regime

In this new regime, you have the option to choose either

1. The new tax regime with lower tax rates. However, it does not allow permissible exemptions and deductions available under the old income tax.

2. Continue to pay taxes under the old tax regime. You can avail of rebates and exemptions in the old regime, and pay tax at the existing higher rate.

Income Tax Slab Rates Under New Regime

Income Tax Slab Rates Under Old Regime

As you see above, these are the various tax slabs in India. And there are also two types of taxes in India. What are they?

How Many Types of Tax Structures Are There?

There are two types of tax structures in India. They are Direct and Indirect Taxes.

Direct Taxes

You have to pay direct taxes and cannot transfer them to others. It suits corporate entities too. These include income tax, wealth tax, and gift tax.

As per the income tax act, if your total income exceeds a limit, you are liable to pay income tax. The amount of tax depends on the income tax slabs that get altered annually in the union budget. Your total income comes under various heads like business and profession, house property, salaries, capital gains, and other sources.

Indirect Taxes

You need not directly pay indirect taxes to the government authorities. Indirect taxes are levied on goods and services, and intermediate persons collect them (those who sell goods or offer services). The indirect taxes in India are,

Value Added Tax (VAT), Customs duty, Octroi, Excise duty, Service Tax, Goods and Service Tax (GST).

1. Customs Duty: If you import goods from foreign countries to India, you should pay Customs Duty.

2. Service Tax: If you are a service provider, you should pay service tax based on the nature of your services.

3. Octroi Tax: If you move goods from one state to another, you should pay octroi tax. The state government is responsible for collecting this tax as it differs from one state to another based on the state government.

4. Value Added Tax: Goods sold in a particular state implement this tax.

5. Excise duty: All goods produced domestically should render excise duty. It is also known as the Central Value Added Tax (CENVAT), and the manufacturers pay it.

6. Goods and Service Tax (GST): The Central Government has introduced the Goods and Service Tax (GST) – a significant step in reforming the taxation system. GST is an inclusive indirect tax on the manufacture, sale, and consumption of goods and services throughout India. It subsumes many indirect taxes levied by the Central and State Governments. 

Now, as you get aware of the entire tax system, do you know the main features of the Indian Tax Structure?

What Are the Features of the Indian Tax Structure?

The main features of the Indian Tax Structure include

1. The most crucial aspect of the Indian tax structure is the multiplicity of taxes. The Indian Tax system has both Union and state government taxes, and the tax structure includes direct and indirect taxes.

2. The indirect taxes hold a greater share in our Indian tax structure. Indirect taxes dominate over direct taxes. According to research, the percentage of direct taxes is lower than indirect taxes because of the undeveloped economy and inequalities in income.

3. Insufficient tax revenue is the next feature. Although we see a rise in tax revenue, still the total tax revenue is small compared to developed countries. The GDP ratio is 8 to 9 percent in India, whereas it is between 30 to 40 percent in developed countries like the UK and the USA.

4. The next feature is that the tax base is very narrow in India in both direct and indirect tax systems. The research shows that only one percent of the working population of India comes under the preview of direct tax.

5. The complexity of Indian laws is the next feature of the Indian tax structure. There are a lot of changes in the tax structure with the intention of a broad-based tax system. There are many loopholes in the direction and indirect tax structure. It provides a lot of loopholes for people to avoid taxes.

The several features of the Indian tax structure are as above, and now it’s time for the most asked questions about the income tax structure in India.

FAQ: Income Tax Structure in India

1. What is the tax structure in India before GST?

Before GST, the VAT system was there in the country. There are a lot of differences between GST and the previous system ranging from the levies, taxes, exemptions, validations, and more.

Under the old taxation system, custom duty/central excise duty, central sales tax on commodities and services, surcharge, and cesses come under the central taxes. State VAT, WCT, entertainment tax, luxury tax, tax on gambling, betting, and lottery, sales tax deducted at source, and surcharge and cesses were under state taxes.

Under GST, all the central and state taxes will be absorbed, and a single tax will be levied on all commodities and services apart from motor spirit, petroleum, natural gas, and high-speed diesel.

2. Which country has the best tax structure?

According to the Tax Competitiveness Index 2022, Estonia has the world’s best tax system.

3. Are the income tax slabs in India changing?

Yes, the income tax slabs in India are subject to changes.

4. Who proposes changes to the income tax slabs in India?

The Finance Ministry of India proposes changes to the income tax slabs in India.

5. When are the changes to the income tax slabs in India proposed?

The Finance Minister usually makes the changes to the income tax slabs during the annual budget every year in February.

Bottomline

As you see from the above article, the income tax structure and income tax slabs of India are made in the best way to bring benefits to all the people of the country. Though the tax structure seems very complicated, you would have easily got an idea from here. Have a thorough look at the tax structure of India in this article, and let us know in case of any queries.

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