Tax is the contribution you make towards the growth and development of your country. Therefore, all levels of corporations and individuals falling under the tax slab, from local to international, should pay tax.
In India, tax payments are majorly deducted from an individual’s income. They are sometimes 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 list of taxes in India differs based on their implementation and how they are paid to the authorities. Mainly, there are two types of taxes, direct and indirect tax.
When was the income tax introduced in India?
The Income Tax Act of 1961 went into effect on January 1, 1962. As a result, a revenue audit is implemented for the first time in the department. In addition, a new system for evaluating the performance of Income tax officers has been introduced.
Let’s see how these two types of taxes differ:
Taxes levied directly:
Understanding Direct Tax
It is a tax paid directly to the government by the taxpayer. You must check your wealth or income to estimate the amount paid through direct taxes. Several acts govern direct taxes:
- The CBDT (Central Board of Direct Taxes) overlooks India’s direct taxes.
- A direct tax is not transferred to any entity or individual other than the taxpayer on whom it is levied.
- Significant 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.
The following are the types of direct tax in India:
Income Tax:
Income tax is among the most common and essential taxes among different types of tax in India. This tax entails taxing an individual’s income through different sources like salary, investments, property, business, etc. It also applies 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 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 slab for deciding the amount to be paid. It is usually levied on the net profit of the firms. Along with 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. In addition, 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. You must pay this tax every time you buy or sell a share. It covers taxable securities such as equity, unit of equity-oriented mutual funds and derivatives.
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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. Both taxes are 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.
Understanding Indirect Taxes
An indirect tax is applied to selling and purchasing 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.
Sales tax:
A tax levied for the sale of a product is called a sales tax. This tax is levied on a product’s seller, who then passes the price to the 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, maintenance, consultancy, banking, 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 ensures the goods entering the country are taxed and paid for. The rate of taxation depends on the nature of the product.
Goods & Services Tax:
Before the Goods and Services Tax was introduced, 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 sold for domestic consumption in India.
GST is considered a multi-stage comprehensive tax 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 tax to the government lies on the seller/provider of the goods and services.
Here is how the GST works:
- Manufacturer: The manufacturer has to pay GST on the raw material purchased for the product.
- Service Provider: The service provider has to pay GST on the product’s amount.
- Retailer: A retailer purchases the product from the distributor, adding a margin. However, the retailer’s price can be reduced from the overall GST.
- Consumer: 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 applies to 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 to the interstate (between 2 states) supply of goods and services. It is also applicable for imports and exports.
Taxes are imposed on consumers, businesses and other entities equally in different forms. Therefore, understanding the classification of taxes in India is very important since it might initially sound a little complex.
Direct taxes are levied on income and profits, while indirect taxes are applied to goods and services. Paying taxes on time is crucial to foster a nation’s economic growth and development.
Features of the Indian tax system
A larger share of Indirect Taxes:
In India, there is the domination of indirect taxes over direct taxes in the total tax revenue. Indirect taxes shared 63% in 1950 – 51, where it increased to 77% in 2001-02. It shows that because of the undeveloped character of the economy and glaring inequality in income, the scope of direct taxes is limited.
Insufficient Tax Revenue:
Despite a rising trend in tax revenue, the total revenue remained small compared to developed countries. As a result, India’s tax GDP ratio generally remained in the range of 8 percent to 9 percent.
Incidence of Taxation:
In India, taxation is much higher in urban areas than in rural areas. This is because of the predominance of agriculture in rural areas and the low income of rural households.
The urban population depends more on the service and business sector and enjoys comparatively higher income and tax paying capacity.
Progressiveness in Tax Structure:
The Indian tax structure is framed so that all indices of ability to pay are taxed. The direct tax is framed so that as the tax base increases, the tax rate also rises sharply. Excise duties are levied and collected in different ways based on the type of commodity and the consumer class.
When you purchase term insurance, you not only provide financial protection for your loved ones, but you also minimize your taxable income. When you get a term insurance policy, you must pay an annual policy premium. This is the amount that will be deducted from your total income in order to reduce your taxable income.
