The Taxation structure in India is governed by a three tier system where the Union Government, the State Governments and the Urban/Rural Local Bodies viz. Municipalities/Panchayats have been empowered to levy taxes and duties according to provisions laid under the Indian Constitution.
The Union Government has been empowered to levy taxes and duties are Income Tax (except tax on agricultural Income), Customs duties, Central Excise and Service Tax. The State Governments are empowered to levy VAT (Value added Tax)/Sales Tax in States where VAT still not applicable, Stamp Duty, State Excise, Land Revenue, Duty on Entertainment and Tax on Professions. The Local bodies can levy tax on properties, octroi (tax on entry of goods for use/consumption within areas of the Local Bodies) and tax on utilities like drainage etc.
After Liberalization, Indian Taxation System in India has undergone a radical Change where tax rates and tax laws are being streamlined and simplified resulting in better compliance and enforcement of Tax laws.
Taxation reforms
The most drastic reform has been reduction in Corporate and Personal Income taxes. Individuals investing in various saving schemes were exempted from payment of Tax up to a specified Limit. In the case of Corporate Income tax, the tax rates were gradually reduced as well as exemption is given to Investment in Government promoted Industrial Schemes (Information Technology, Telecommunication, SEZs’ etc.).

The Indian tariff rates were reduced substantially over the decade, and India is committed to reduce tariff rates to bring them at par with other competing countries.
The Government introduced VAT at the State level, VAT is a tax on Market Value added to product at each stage of manufacture or distribution. India launched VAT to replace Sales Tax on 1 April 2005 though some states have forestalled its’ implementation till now.
Other Taxation reforms in pipeline are your goods and service tax (GST) which will rationalize the Indirect Tax levy on manufacture, sales and consumption of goods as well as services at a national level. The new Direct Tax Code will replace archaic Income Tax Act, 1961 is anticipated to be implemented in FY 2011-12.