What are the Different Types of Taxes in India?

An essential part of being a responsible and productive citizen of your country is paying your taxes on time. Tax is basically the contribution you make towards the growth and development of your country. From local to international, all levels of corporations and individuals, falling under the tax slab are supposed to pay tax.

In India, tax payments are majorly deducted from an individual’s income. In some case, they are also added to product invoices, transactions and services. Every tax levied is backed by a law passed by the Parliament or the State legislature.

We pay taxes in different forms, and the types of tax in India differ based on their implementation and how they are paid to the authorities. Mainly, there are two types of taxes, direct and indirect tax. These income tax types are further subdivided into other categories.

Let’s see how these two types of taxes differ:

Direct taxes:

Direct tax is a tax that you directly pay to the authority imposing the tax. It is a tax that is directly paid by the taxpayer to the government. To estimate the amount to be paid through direct taxes, you will have to check your wealth or income. There are several acts that govern direct taxes. The CBDT (Central Board of Direct Taxes) overlooks India’s direct taxes. A direct tax is not transferred to any other entity or individual other than the taxpayer on whom it is levied. Major taxes in India are computed based on the ability of the taxpayer to pay, which means that direct taxes are higher with a higher capability of paying.

Following are the types of direct tax in India:

Income Tax:

Income tax is one of the most common and important taxes among different types of tax in India. This tax entails taxing an individual’s income generated through different sources like salary, investments, property, business, etc. It is also applicable to the income generated by capital gains and other sources. The rate of Income-tax depends directly on the income of a family. The income tax act describes a tax benefit that you can get through insurance premiums or fixed deposits. They also help in deciding savings from income through investments and income tax slabs.

Corporate Tax:

The income tax a company pays from the revenue earned by it is called a corporate tax. Corporate tax has its own slab for deciding the amount to be paid. It is usually levied on the net profit of the firms. Along with the Domestic firms, Foreign companies are also liable to pay Corporate tax under the Income-Tax Act.

Perquisite Tax:

Under this tax, any perks or privileges provided to you by your employer, like a car, house, fuel, etc. are taxed considering how the perks are used. Personal uses of the perk will be taxed, while official uses are not eligible.

Securities Transaction Tax:

The tax is levied including a share’s price and tax. It means, that every time you buy or sell a share, you have to pay this tax. It covers taxable securities such as equity, unit of equity-oriented mutual funds and derivatives.

Capital Gains Tax:

This tax is payable when you get a significant lump sum of money. They include two types of capital gains, long-term capital gains and short-term capital gains. The tax applicable for both is different as short-term gains tax is computed depending on the income bracket. Capital gains can be calculated by subtracting the cost of capital investment from the money received from the sales.

Indirect Taxes

An indirect tax is applied to the sale and purchase of services or goods. Government levies this tax on sellers and retailers of various products and services. The seller then shifts the responsibility of the tax payment to the buyer of the products and services. Hence, the user indirectly pays tax to the Government of India. Indirect tax is also known as the consumption tax.

Types of indirect taxes are;

Sales tax:

A tax levied for the sale of a product is called sales tax. This tax is levied on a product’s seller who then passes the price to the product’s buyer with the tax included in the product’s price. Sales tax can be applicable on three different levels:

-Inter-State sale

-Sale during import/export

-Intra-state level

Service tax:

Like sales tax, this tax is also included in the price of a product sold in the country. It is levied on the services that a company offers. They are collected depending on the way these services are offered. It covers all the paid services including telephone, healthcare services, maintenance services, consultancy services, banking and financial services, advertising etc.

Excise duty:

Excise duty is the tax imposed on produced goods or goods in India. It is collected directly from the manufacturer of the goods. They are also collected from entities that receive goods and work for the individuals to ship the products.

Customs Duty:

Customs duty is the charge levied on any product that has been imported from abroad. It is to make sure the goods which enter the country are taxed and are paid for. The rate of taxation depends on the nature of the product.

Goods & Services Tax

Before the introduction of the Goods and Services Tax, there were numerous types of tax in India.

GST is an indirect tax that has clubbed together many indirect taxes in India like excise duty, VAT, service tax, etc. This is the tax levied on the supply of services and goods, which are sold for domestic consumption in India.

GST is considered a multi-stage comprehensive tax that is levied as per the destination on the value addition. The tax is levied on the consumers buying goods or services. However, the responsibility of remitting the tax to the government lies on the seller/provider of the goods and services.

Here is how the GST works:

1. Manufacturer: The manufacturer has to pay GST on the raw material that is purchased for the product.

2. Service Provider: The service provider has to pay GST on the amount that is paid for the product.

3. Retailer: The GST is applied on this level where a retailer purchases the product from the distributor and margin is added. However, the price that has been paid by the retailer can be reduced from the overall GST.

4. Consumer: At last, the consumer who obtains the product has to pay the suitable GST on the product.

Classification of taxes in India for GST

CGST - Central Goods and Services Tax

The revenue earned from CGST is collected by the Central Government and is applicable on intrastate transactions (within the same state).

SGST - State Goods and Services Tax

SGST refers to the State Goods and Services Tax. It is the tax that the state government levies on intra-state transactions of goods and services. UGST or Union Territories Goods and Services Tax replaces SGST in Union Territories like Andaman and Nicobar Island or Chandigarh.

IGST - Integrated Goods and Services Tax

The Integrated Goods and Services Tax is applied on the interstate (between 2 states) supply of goods and or services. It is also applicable for imports and exports.

Taxes are imposed on consumers, businesses and other entities equally in different forms. Understanding the classification of taxes in India is very important since it might sound a little complex at first.

Direct taxes are levied on income and profits, while indirect taxes are applied on goods and services. Paying taxes on time is crucial to foster the economic growth and development of a nation.