A Detailed Guide on Sources of Revenue for the Government of India
India, which boasts of a massive young population, is one of the world’s fastest growing economies. Experts have predicted a high growth rate for the country despite global economic uncertainties. But have you wondered what exactly the sources of revenue are for the Government of India? Well, the government earns primarily from two primary sources- taxes and non-tax revenues.
Read on to know more details.
What are the Various Sources of Revenue for the Government?
Tax and non-tax revenues are essential sources of income for the government. While tax revenues are collected on incomes and profits, non-tax revenues happen to be the recurring income that the government earns from revenue sources other than tax.
Taxes can be classified as direct taxes and indirect taxes.
Some of the crucial revenue streams for the Government of India happen to be income tax, corporate tax, Goods and Services Tax (GST) and union excise duties.
Breakdown of the Government’s Revenue
As mentioned above, taxes in India can be classified as Direct and Indirect.
- Direct Taxes
The Income Tax Department has mandated tax payment by people or organisations according to their incomes. So, when an individual or organisation directly pays a tax to the concerned entity, it is called a direct tax.
A direct tax cannot be paid on any one’s behalf, i.e., the responsibility for paying the tax cannot be shifted to someone else. Examples include income tax, property tax, corporate tax, inheritance tax and gift tax.
- Indirect Taxes
Taxes paid on the consumption of goods and services are called indirect taxes. When it comes to indirect taxes, the person who bears the liability to pay the tax and the person who ultimately pays the tax to the government are different.
Examples of indirect taxes include goods and services tax (GST), value-added tax (VAT), sales tax etc.
What are the Important Sources of Tax Revenues for GoI?
The various types of taxes are explained below:
Income Tax
The Government of India has imposed taxes on every individual/organisation’s income or profit. One has to pay it directly to the government. This tax is referred to as income tax. The amount an individual has to pay as income tax is decided as per the income tax slab under which their incomes fall.
The Income Tax Act, 1961 provided the legal framework for the administration and collection of income taxes. Income tax rules, introduced in 1962, helped implement the Income Tax Act.
Certain entities are liable to pay income taxes if they generate income. Given below is their list:
- Association of Persons (AOP)
- Body of Individuals (BOI)
- Hindu Undivided Family (HUF)
- Corporate Firms
- Local Authorities
- Companies
- Artificial Juridical Persons
Corporate Taxes
In India, both domestic and foreign companies pay corporate tax on their income earned. However, the rate of corporate tax depends on the type of company.
A domestic corporate company is an entity that is established and registered under the Companies Act, 2013. A foreign company can also be considered a domestic corporation if the management of its Indian section is entirely based in India.
A foreign company is a corporate entity established outside India but carries out business in India.
So, while a domestic company pays taxes for total income, a foreign company is required to pay taxes for its income earned in India.
Given below is the list of different types of incomes that a company earns:
- Income earned from business
- Income earned by renting a property
- Capital gains
- Income earned via dividends, interest etc
Property Tax
The Government of India has levied property taxes on real estate like residential and commercial buildings. Property tax is also known as ‘house tax’. Please note that every real estate owner has to pay property tax to the respective municipal corporation or panchayat, i.e. the liability lies with the owner and not the occupant of the property.
The determining factors of property tax are the size of the property, construction type and area. Municipalities or local governments use the amount collected from property tax to maintain and improve civic amenities like sewage systems, roads, street lighting, parks, etc.
It is advisable to check with respective municipal corporations regarding property tax payments because certain municipal bodies provide exemptions on property tax under specific circumstances. These exemptions are dependent on the type of property, its location, age and income of the owner.
The government imposes a property tax on the following categories of properties:
- Land without any improvement or construction in it
- Improvements made on the land like construction of buildings
- Intangible property like patents and royalties
- Personal property
One needs to pay property tax annually. The IT department will impose a fine in case of delayed payment. This fine is the interest on the amount due and can go up to 2% per month.
Goods and Services Tax
The Government of India introduced Goods and Services Tax (GST) in 2017. It is an indirect tax. Simply put, GST is levied on goods and services.
It is an important step toward indirect tax reforms in India. This is because GST amalgamates within its broad umbrella various Central and State taxes like VAT, excise duty, service taxes etc.
Given below is the list of the three types of GST:
- CGST (Central Goods and Services Tax) – Tax collected by the Union Government on an intra-state sale (for example, a transaction that has happened in Karnataka)
- SGST (State Goods and Services Tax) – Tax collected by the State Government on an intra-state sale, i.e. a transaction that has happened within Karnataka
- IGST ( Integrated Goods and Services Tax) – Tax collected by the Union Government for an inter-state transaction (for example, a transaction that has happened from Karnataka to Madhya Pradesh)
Please note that the tax levied on the Intra-Union Territory supply of goods and services is UTGST (Union Territory Goods and Services Tax).
Union Excise Duty
Union Excise Duty is an indirect tax on manufactured goods. The manufacturer pays excise duty during the manufacture of goods.
However, the manufacturer adds the tax component to the price of the finished product. So ultimately, the buyer has to pay a higher amount while purchasing the finished product.
While GST is levied upon the supply of goods and services, excise duty is imposed at manufacture and when goods are transported from factories.
Central excise tariff rules decide the excise duty rates which are primarily dependent on the type of goods.
Customs Duty
The Government of India also levies an indirect tax called customs duty for transportation of goods across international borders. It imposes this tax during both the import and export of goods.
The tax levied upon the import of goods is called import duties, while the tax that one has to pay during the export of goods is called export duties.
The Central Board of Excise and Customs (CBEC) is the concerned authority for customs duty in India. Custom duty rates depend on the place that produces the goods and the constituent items.
Enumerated below are the classifications of custom duties:
- Basic Customs Duty (BCD)
- Countervailing Duty
- Additional Customs Duty or Special CVD
- Anti-dumping Duty
- Protective Duty
Final Word
To sum up, the two essential sources of revenue for the Government of India are tax and non-tax revenues. Taxes can be further classified into direct taxes and indirect taxes. Some of the crucial direct taxes are income tax, corporate tax and property taxes.
Importantly, GoI has introduced GST as an amalgamation of many indirect taxes in the country, which occupies an important place in India’s history of tax reforms.
FAQs
The payment of taxes is the responsibility of every citizen. The Government collects taxes in these three ways:
1. Voluntary depositing of tax in designated banks by individuals
2. Taxes Deducted at Source (TDS) from income
3. Taxes Collected at Source (TCS)
Yes. One can seek exemptions on property tax based on these following criteria:
1. Age – If you are a senior citizen, you are eligible to seek exemptions
2. Net income
3. History of public service
4. Location, i.e. if your property is constructed in a famine zone, you are eligible to seek exemptions
5. Type of property
Given below is a list of some taxes levied and collected by State Governments:
1. Central Sales Tax
2. Stamp Duty
3. Luxury Tax
4. Entertainment Tax
5. Tax on vehicles entering the state
6. Motor Vehicles Tax
7. Agricultural Income Tax
The Constitution of India has exclusively assigned collection of certain taxes to the Union Government as listed below:
1. Customs and export duties
2. Excise duty on tobacco, jute, cotton
3. Corporate tax
4. Income tax
5. Taxes on capital value of assets of individuals and companies
6. Estate duty and succession duty from properties apart from agricultural land
7. Income from railways and postal departments
Here is a list of incomes that are exempted from tax:
1 House rent allowance
2. Transportation allowance
3. Allowance or subsidies for children’s education and hostel fees
4. Exemptions on housing loans
5. Incomes specified under Section 10 and Section 54 of ITA
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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