Taxation & GST
UPSC core on taxation: direct vs indirect taxes, tax devolution, and the architecture, slabs and Council of GST under the 101st Amendment.
The Constitutional Basis of Taxation
Article 265 of the Constitution states that no tax shall be levied or collected except by authority of law. Taxing powers are distributed through the Seventh Schedule: the Union List (List I), the State List (List II), and the Concurrent List (List III). Crucially, there is no concurrent taxation power; a tax is either Union or State. Income tax other than agricultural income (Entry 82, Union List), customs and excise on tobacco/petroleum, and corporation tax fall to the Centre; land revenue, taxes on agricultural income, and taxes on alcohol for human consumption fall to the States.
Direct versus Indirect Taxes
A direct tax is borne by the same person on whom it is legally imposed and cannot be shifted: income tax, corporation tax, and (until abolished) wealth tax. The indirect tax falls on goods and services and is shifted to the final consumer: GST, customs duty, and central excise (now confined to petroleum and tobacco). India's tax structure has historically been indirect-heavy and therefore regressive; the direct tax share rose after the 1991 reforms and the recommendations of the Raja Chelliah Committee (1991–93). The Direct Taxes Code ambition culminated in part in the new concessional regime under Section 115BAC (introduced by the Finance Act, 2020) and the reduced corporate rate of 22% under Section 115BAA (Taxation Laws (Amendment) Act, 2019).
Tax Buoyancy, Elasticity and the Laffer Curve
Tax buoyancy measures the responsiveness of tax revenue to GDP growth without changes in tax rates; tax elasticity measures responsiveness after isolating discretionary changes. A tax-to-GDP ratio (gross, around 11–12% for the Centre and roughly 17–18% combined) below peers signals a narrow base and evasion. The Laffer curve posits that beyond an optimal rate, higher rates reduce revenue by depressing activity and incentivising evasion.
Devolution of Taxes
Under Article 270, the net proceeds of Union taxes (excluding cesses and surcharges under Article 271) are shared with States on the recommendation of the Finance Commission (Article 280). The 15th Finance Commission (Chair: N.K. Singh) fixed the States' share of the divisible pool at 41% for 2021–26 (reduced from 42% set by the 14th FC, to account for the reorganisation of Jammu & Kashmir into Union Territories). Cesses such as the Health and Education Cess and surcharges are retained wholly by the Centre, a recurring source of Centre–State fiscal friction examined in Mains GS-3.
