by admin | June 7, 2024

Taxation is an intrinsic and crucial part of any country’s financial ecosystem. The ruling government levies taxes at various events to run the nation smoothly and progressively. From salaried individuals to businessmen, these taxes affect everyone’s life in one or another way. Let’s find out more about the what is tax and taxation system in India.

what is Tax

What does tax mean?

A tax refers to an obligatory payment or amount levied by any government on an individual or a business to accumulate revenue for public works with the purpose of delivering improved facilities and infrastructure. The government runs various programs across multiple channels to pass on these benefits to various sections of the society.

Those who fail to deposit the due tax on time can be held accountable and may need to face consequences under Indian law.

Types of Taxes

In India, taxes are classified into two major types based on how they are submitted: direct taxes and indirect taxes. Indirect taxes are imposed on expenses in India, whereas direct taxes are applied on incomes.

Nevertheless, the central government of India has implemented additional taxation schemes to further particular goals. These are levied on top of the two specified taxes and are referred to as “other taxes.” The Infrastructure Cess Tax, Swachch Bharat Cess Tax, Krishi Kalyan Cess Tax, and other similar taxes are instances of this type of tax.

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Direct Tax

As its name dicates, direct taxes are paid straight to the government by people and business entities. These come under the purview of the Central Board of Direct Taxes (CBDT) and are not meant to be transferred to any other individual or entity. Direct taxes are charged during each assessment year, and people can get a number of benefits under the different sections of this tax.

Types of Direct Taxes in India

The direct tax constitutes nearly 50% of the government’s total revenue. Some of the most common types of direct tax are:

Income Tax

Among the various forms of taxes in India, income tax is one of the most important and prevalent. It is applicable to the personal income that people and businesses make within a specific fiscal year. A tax slab is assigned to each qualified individual based on their age and the total taxable income for the assessment year. The various forms of income tax and the tax slab you are in determine how much you must pay in income taxes.

Corporate Tax

The corporate tax, commonly known as the corporation tax, is a type of direct tax that is imposed on the earnings or profits that a business generates. This kind of tax is imposed on both private and public firms that are registered under the Companies Act of 1956. Both domestic businesses and international corporations must pay corporate tax.

Currently, domestic businesses that generate less than Rs 250 crore in revenue annually pay 25% of that amount, while those that generate greater revenue pay 30%.

Furthermore, if the net income falls between Rs. 1 crore and Rs. 10 crore, there would be a 7% surcharge, according to the Income Tax Act. On the other hand, the surcharge rises to 12% if the income climbs by Rs 10 crore.

Perquisite Tax

Benefits and perks provided by your company, such as free parking, free power, a car, etc., are subject to taxation under the perquisite tax. This is dependent upon how you are using the privileges.

But remember that there are advantages that are both taxable and non-taxable.

Among other things, free club memberships, medical assistance, a laptop or desktop computer provided by the company for official use, travel reimbursement, and PF contributions are examples of exempt perks.

Capital Gain Tax

Profits from the sale of a capital asset are subject to capital gains tax. These profits may come from investing or from selling real estate. There are two types of capital gains, depending on the duration:

Gains on short-term capital: Relevant to any asset held for fewer than three years. On the other hand, the time frame for immovable properties is about 24 months.

Long-term capital gain: This applies to any asset held for a minimum of three years.

Securities Transaction Tax

The government levies a securities transaction tax on gains made from trading securities, including stocks, futures and options, on the local stock exchange. Every kind of security has a distinct tax rate.

Indirect Tax

An indirect tax is primarily levied by the government on the use of goods and services. The government collects this tax from sellers and retailers of the product and services. They, in turn, shift the responsibility to buyers. When you purchase a product or service, you not only pay the price of the product but also the tax. Hence, you are indirectly paying the tax to the government.

Types of Indirect Taxes in India

The most common types of indirect taxes in India are defined below:

Sales Tax

Sales tax is levied by the government on items made in India or imported from overseas are subject to sales tax. The vendor of the goods is subject to this tax, which they subsequently collect from the customer by including it in the product’s price. In general, each state in India has its own sales tax.

Goods and Services Tax (GST)

The cost of some goods and services sold in the nation is subject to the Service Tax, often known as the Goods and Services Tax (GST), which went into full force on July 1, 2017. Customers who acquire the goods from the business pay the sales price plus the applicable GST amount. The business includes GST in its products.

The seller or company will also collect and forward the GST portion to the government.

One important point to remember is that various indirect tax categories in India have been consolidated under the GST, including:

  • Services tax
  • VAT or Value added tax
  • State excise duty
  • Purchase tax
  • Octroi
  • Central Excise tax duty
Customs Duty

Customs duty is a kind of indirect tax that is levied on goods and commodities imported from overseas is customs duty. It is used for any commodity that arrives by land, air, or sea. The tax is assessed based on the weight, size, value of the items, and other relevant factors. Its goal is to guarantee that the items that are brought into the nation are duly taxed and paid for.

Entertainment Tax

Commercial performances, sporting events, movie tickets, amusement parks, theatrical productions, music festivals, exhibitions, and other private gatherings are all subject to the indirect entertainment tax. States have different rates for income taxes.

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Difference Between Direct and Indirect Tax

Below is a table that underlines the differences between direct and indirect tax.

ParticularsDirect TaxIndirect Tax
DefinitionA direct tax is one that is imposed on a person directly and is paid to the body that is enforcing it.An individual pays an indirect tax to the intermediaries, who then report the tax to the government, on goods and services. 
Managing AuthorityCentral Board of Direct Taxes (CBDT) Central Board of Indirect Taxes and Customs (CBIC)
Burden ShiftOne cannot transfer the cost of direct taxes to another individual.Indirect tax burdens can be transferred to other people.
TaxpayerIndividuals, companies and HUFs (Hindu Undivided Family) Final consumer
Taxable SituationWhen an individual’s income exceeds or equals the maximum level, direct taxes are assessed.Sales and purchases of products and services by consumers are subject to indirect taxes. 
Tax CollectionTax collection is complex and hardTax collection is simple and convenient.
Tax EvasionA case of tax evasion is possible. Tax evasion is not possible as the tax amount gets included in the total value of goods and services.
Tax EffectThe impact of tax relies on the same person.The impact of tax relies on different individuals.
Eventual LiabilityAnybody who is subject to a tax is required to pay it.The only one responsible for paying the tax is the one getting the benefits.
Tax NatureProgressiveRegressive

Benefits of paying taxes in India

In general, the deposited tax is utilized by the government to give better infrastructure, safety, and security to its citizens and business units come under its jurisdiction.

1. Public services and infrastructure are paid for by taxes. For instance, when compared to other growing countries, India spends the largest percentage of its GDP on public services and infrastructure. The Union government has reiterated its commitment to using infrastructure as a force multiplier for long-term economic growth with a year-over-year increase in capex of more than 35% and a planned infrastructure expenditure of more than Rs 10 lakh crore in Budget 2022–2023.

2. Social development and welfare initiatives are funded in part by taxes. For instance, the Indian government sets aside a sizeable portion of its income—roughly 6% of GDP—for a range of welfare and social development initiatives, such as public health and nutrition, education, and rural development initiatives.

3. Education is funded by taxes. For instance, the government of India, where illiteracy is a significant issue, requires a substantial financial outlay in order to deliver high-quality education, not only in urban areas but also at the local level. This covers expenditures on education from both the public and commercial sectors, including money for teacher wages, school infrastructure, and R&D and innovation.

4. The nation’s boundaries are protected by taxes. This covers the costs associated with personnel and equipment acquisitions, defense R&D, defense imports, foreign military cooperation, and international peacekeeping missions.

5. Government employees’ pensions and salaries are paid for by taxes. This covers the salaries and benefits of workers in the public sector, including those employed by the federal, state, and local governments.

6. The principal and interest on government debt are covered by taxes. India’s government is heavily indebted to other countries, with a substantial amount of its outstanding debt held in foreign currencies. The finance ministry’s most recent data indicates that India’s external debt climbed from USD 571,300 million in the second quarter of 2021 to USD 593,100 million in the third. As a result, the government must borrow money from the global financial markets, which entails paying interest.

7. The government’s rail and road transportation networks are financed by taxes. This covers the acquisition of an extensive range of vehicles, such as ships, buses, trains, coaches, tractors, and other vehicles for the construction of roads, highways, and other infrastructure projects.

8. The police, the paramilitary forces, the air and sea forces, the border patrol, customs and excise, and intelligence services are all funded by taxes. This covers the costs of hiring staff, buying tools, providing training, and building infrastructure to ensure public safety and security.

9. Social security programs like the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and the National Rural Employment Guarantee Act (NREGA), which are designed to assist the unemployed and those with low incomes, are funded in part by taxes.

10. Taxes are another source of funding for healthcare and medical infrastructure. This covers the cost of hospital infrastructure, health insurance, medical research and development, and other related services.

The Conclusion

The numerous ways that tax regulation impacts the ebb and flow of economic activity demonstrate the significance of taxes. Governments can invest in raising the standard of living inside their boundaries if the tax system is properly regulated and payments are collected efficiently. Tax deductions on specific investments and services, such as life insurance, give people and companies greater financial stability and operating freedom.

FAQs

Q.1. What does TDS mean?

Ans:- As per the Income Tax Act, there are particular payments such as interest, salary, etc., in which the individual who pays is permitted to deduce tax. This is also called TDS or tax deducted at source.

Q.2. Does the central government or state governments collect corporate tax?

Ans:- In India, the central government is responsible for collecting corporate tax, sometimes referred to as corporate tax, from private and public companies that are established under the Companies Act 1956.

Q.3. What are the most important taxes in India?

Ans:- Some most important taxes in India are Income Tax, Goods & Service Tax (GST), and Customs Duty.

Q.4. Who is the highest tax paying organization in India?

Ans:- The highest tax-paying organization in India is Tata Consultancy Services or TCS at present.

Q.5. Does each and every Indian have to pay taxes?

Ans:- All Indians pay taxes, either directly or indirectly. You will still be liable for GST even if your income isn’t high enough to be subject to income tax. The government gets its funding to administer the nation through taxes.

Q.6. How to save income tax in India?

Ans:- Tax-saving expenses and investments are described in Chapter VI A of the Income Tax Act and can be found in different variations of Section 80.

Q.7. What section 80C in income tax?

Ans:- Taxpayers may deduct up to Rs 1,50,000 from their taxable income if they invest in the designated instruments under Section 80C of the Income Tax Act.

Q.8. Does the Income Tax Act only apply to locals?

Ans:- No, everyone who earns income in India is subject to the Income Tax Act be it residents or as non-residents.