Data indicates that direct taxes have dominated the Central Government’s tax revenue throughout the years. From 2008-09 to 2024-25, the share of direct taxes in total gross tax revenue increased from approximately 55% to 58%, while indirect taxes’ share decreased from 45% to 42%. Further, within the direct tax collections, the share of corporate tax collections reduced from 67% to 46% between 2010-11 and 2024-25.
Taxation is a fundamental element of any nation’s economic framework, serving as the primary mechanism through which governments raise revenue to fund public services, infrastructure, and social welfare programs. In India, a diverse and expansive country with a complex federal structure, the tax system is designed to address the needs of its vast population and varied economic activities. The Indian taxation system is structured into two main categories: direct and indirect taxes. Each type of tax plays a distinct role in the economic system, governed by specific legislative frameworks and administered by both central and state governments. This story explains what these taxes and their components are, the roles of central and state authorities in their collection and administration and provides an overview of tax collections over the past 15 years at the national level.
Direct taxes are paid directly by the taxpayer to the government
Direct taxes are levied directly on individuals and entities based on their income or wealth. The primary components of direct taxes in India include:
- Income Tax: Governed by the Income Tax Act, 1961, income tax is imposed on the income of individuals, Hindu Undivided Families (HUFs), firms, etc. This tax is progressive, with rates varying based on income slabs. Individuals and entities are required to file annual returns and pay taxes based on their income levels after considering deductions and exemptions.
- Corporate Tax: Also covered under the Income Tax Act, corporate tax is levied on the profits of companies. It applies to both domestic and foreign companies operating in India. The rates and regulations for corporate tax are designed to account for the various forms of business structures and their respective profit margins.
- Wealth Tax: This tax was previously imposed under the Wealth Tax Act, 1957, but was abolished in 2015. It was levied on the net wealth of individuals and companies, including assets such as real estate and jewellery.
- Gift Tax: Historically governed by the Gift Tax Act, 1958, this tax was repealed in 1998. It was levied on the value of gifts received by individuals above a certain threshold.
Indirect taxes are levied on goods and services
Indirect taxes are levied on goods and services rather than on income. These taxes are collected by intermediaries and passed onto the government. The key components of indirect taxes in India include:
- Goods and Services Tax (GST): Introduced by the GST Act, 2017, GST is a comprehensive indirect tax covering the sale of goods and services. It has replaced multiple previous taxes, including Central Excise Duty, Service Tax, and Value Added Tax (VAT). GST has several components:
- Central Goods and Services Tax (CGST): Levied by the central government on intra-state transactions.
- State Goods and Services Tax (SGST): Imposed by state governments on intra-state transactions.
- Integrated Goods and Services Tax (IGST): Applied to inter-state transactions and imports.
- Union Territory Goods and Services Tax (UTGST): Implemented in union territories.
2. Customs Duty: Governed by the Customs Act, 1962, this tax applies to goods imported into and exported from India. Customs duties are crucial for regulating trade and protecting domestic industries.
In short, direct taxes are paid directly by the taxpayer to the government and cannot be transferred to others, such as personal income tax. In contrast, indirect taxes like GST, can be passed on or shifted to other parties. Moreover, direct taxes are tied to income levels and wealth, while indirect taxes are driven by consumption patterns. In addition, the state government levy other taxes such as on the sale of property, liquor, petrol & diesel, and motor vehicles among others. In this story, we look at only the taxes collected by the Government of India.
Article 265 of the Constitution mandates that no tax shall be levied or collected except by authority of law
The taxation system in India is framed by a combination of constitutional provisions and specific legislative acts, some of which were discussed above. Article 265 of the Indian Constitution mandates that no tax shall be levied or collected except by authority of law. Article 246 outlines the distribution of powers between the Parliament and State Legislatures concerning taxation, differentiating between taxes levied by the central and state governments. Article 286 imposes restrictions on the power of states to levy taxes on the sale or purchase of goods, ensuring uniformity and preventing tax competition between states.
Central taxes or those collected by the Centre include Income Tax, levied on individuals and corporations; Central Goods and Services Tax (CGST), Customs Duty, and Integrated Goods and Services Tax (IGST). State taxes include State Goods and Services Tax (SGST), also part of the GST system, and Stamp Duty & Registration, charged on property transfers and legal documents, among others.
Direct taxes have always dominated the Indian Government’s tax revenue
Data on the Union Government’s revenue receipts as compiled by Dataful for the period from 2008-09 to 2024-25 reveals that direct taxes have dominated the tax revenue throughout the years. From 2008-09 to 2024-25, the share of direct taxes in total gross tax revenue increased from approximately 55% to 58%, while indirect taxes’ share decreased from 45% to 42%.
In 2020-21, the share of revenue from indirect taxes was 53%, exceeding that of direct taxes when the COVID-19 pandemic struck. A substantial share of this indirect tax revenue was through the excise duty on petrol and diesel. During this period, the government also provided direct tax relief measures, including income tax reductions and deferments, to provide financial relief to individuals and businesses affected by the economic downturn. In 2016-17 too, the share of revenue from indirect taxes was marginally higher than that from direct taxes which could be because of increased revenue from GST implementation and higher excise duties on fuel.
Personal Income Tax Collections now more than Corporate Tax Collections
Within direct tax collections (as per data from Dataful), while corporate tax used to be a larger share of direct tax collections, personal income tax has now overtaken corporate tax collections. The share of corporate tax that constituted about 67% of direct tax collections in 2010-11 is estimated to drop to 46% in 2024-25, while the share of personal income tax collections has increased. The personal income tax estimated to be collected in 2024-25 is Rs. 11.87 lakh crores out of the total tax collection of Rs. 22.07 lakh crores.
Especially in the last three years, tax collected via personal income tax has been more than that from corporate taxes as the corporate tax rate was slashed through amendments in 2019.
The corporate tax rate for certain companies was reduced from 30% to 22%, provided they do not avail of any specified incentives or deductions. Further, for new domestic manufacturing companies incorporated on or after 01 October 2019, the corporate tax rate was reduced to 15%. According to the ministry, this rate is among the lowest in the world and aims to attract new investments in the manufacturing sector.
This increased share of personal income tax in the direct tax collections was being widely criticized by the opposition. Rahul Gandhi’s criticism (originally in Hindi) of the current tax system, terming it as ‘tax terrorism,’ highlights concern about the disproportionate burden placed on the middle class compared to businesses and corporates. He argues that while middle-class incomes have remained stagnant for years, income taxes have increased, exacerbating financial strain. Additionally, he said that heavy GST on everyday purchases, coupled with severe inflation, further intensifies the financial pressure on individuals.
India’s Personal Income Tax rate is lower than that of China and South Africa, but higher than Brazil and some developed countries
According to PWC, the headline Personal Income Tax (PIT) rate of India was 42.7% as per the Old Tax Regime and 39% as per the new PIT regime. (The headline PIT rate collated by PWC is the highest statutory PIT rate, inclusive of surcharge but exclusive of local taxes.) This is higher than that in developed countries like the USA (37%), Sweden (20%), Singapore (24%), and Canada (33%). Brazil also had a lower rate (27.5%). However, the headline PIT rates were higher than India’s, at 45% in China, Australia, France, Japan, and South Africa.
Meanwhile, the same data revealed that India’s Corporate Income Tax rate varied from 15% to 30% with additional surcharge and cess. This is 25% in China, 15% in Canada, 25-30% in Australia, 10% in Brazil, 23.2% in Japan, 27% in South Africa, and 21% in USA.
