If you’re someone who regularly pays taxes, you’re probably a responsible citizen. This is because by paying taxes, you make a significant contribution to your country’s growth.
However, it is important to know that our government draws its authority to levy taxes on its citizens from the Indian Constitution. Additionally, all taxes being charged in India are required to be backed by a law passed in the State Legislature or Parliament. So, if you don’t know much about the different types of taxes in India, make sure you continue reading!
Types of Taxes in India
There are primarily two types of taxes in India, i.e., direct taxes and indirect taxes. These two can broadly be differentiated on the basis of their implementation. You pay for some of them directly in the form of income tax, wealth tax, etc., while some are paid indirectly like service tax, sales tax, etc.
If you were to count the types of taxes that are levied in India, you would come close to a double-digit figure. However, they are broadly divided into two types: direct taxes and indirect taxes, which are followed by further sub-classifications.
So, let’s understand the two main types of taxes in India:
Direct Taxes in India
As the name implies, direct taxes are paid to the government directly by the taxpayers, and they cannot be transferred to another entity or individual. In India, direct taxes are overlooked by the Central Board of Direct Taxes and are further classified into the following types:
Income tax is a type of tax that is levied on an individual or business’s annual income or profits. The income can be generated from different sources, such as rental properties, salaries, investments, etcetera. Additionally, legal entities such as Hindu Undivided Family (HUF), Body of Individuals (BOI), local authorities, and Association of Persons (AOP) are also required to pay income tax.
However, the income tax you have to pay depends on the slab rates released by the IT department. For example, if you are below 60 years of age and earn Rs. 2.5 lakhs per annum, you will be exempted from paying income tax. If you earn Rs. 6 lakhs per annum, the 20% rate will apply to the taxable income exceeding 5 lakhs.
Securities Transaction Tax
If you’re someone who enjoys stock market trading, you might be aware of this type of direct tax. Securities transaction tax (STT) is levied on the trading of market shares and securities. This means that every time you sell or buy a share or security, the tax will be included in its total price.
Corporate tax is quite similar to income tax, as it is simply the income tax paid by a company. It is also levied on the corporation’s annual revenue; however, the slab rates for corporate tax are different from income tax slab rates.
Capital Gains Tax
Capital gains tax is levied on the sum of money you receive from the sale of a property, asset, or investment, such as stocks or funds. This type of tax includes both short-term (less than 36 months) and long-term (more than 36 months) capital gains, which is also the deciding factor for the amount of tax to be paid.
As per the perquisite tax, any benefits (a car or a house, for example) that you receive from your employer are taxed. However, the tax will only be applicable if you utilize the benefits for personal use and not official use.
Indirect Taxes in India
Indirect taxes are different types of taxes that are levied on the sale & purchase of goods and services. Since the taxes are collected by the retailer or seller of the particular product instead of the government, they are called indirect taxes. Here are the sub-classifications of indirect taxes:
Goods and Services Tax (GST)
The Goods and Services Tax, popularly known as GST, is a uniform indirect tax applied on goods and services across India. It has replaced taxes like service tax, central excise, additional excise and customs duties on the supply of goods and services.
Sales tax is the amount of tax levied on the sale of any good or product. Since this tax is collected by sellers or retailers, it is added to the sale price paid by the buyer. However, sales tax is also further categorized into manufacturer’s sales tax, wholesale sales tax, use tax, and retail sales tax.
Service tax is quite similar to sales tax, but the only difference is that service taxes are imposed on services provided by a company. For instance, if you visit a salon, café, or restaurant, a service tax will be charged on your transaction.
Value Added Tax (VAT)
Value Added Tax (VAT), also popularly known as commercial tax, is applied to goods throughout the supply chain (or distribution process). The supply chain starts from the manufacturer and stops at the end-user or consumer. However, a tax is imposed on every stage.
Excise duty is a type of indirect tax that is levied on all goods manufactured and produced in India. The tax is collected from the product’s manufacturer as well as the entities that receive the product and transport it.
Customs duty is a type of tax that is levied on goods that are imported from a foreign country. This includes all products, whether they are imported through land, air, or sea. The custom duty tax is imposed to ensure that all goods entering India are paid for and taxed.
While this covers the various indirect taxes applied in India, you should know that most of these have been clubbed together since the launch of the Goods & Services Tax (GST) in 2017. The Goods & Services Tax is a comprehensive, multi-stage tax that is applied to all goods and services being supplied for domestic use in India.
Additionally, there are 3 main types of GST in India:
|Type of GST||Imposed On|
|CGST – Central Goods and Services Tax||Intra-State Transactions|
|IGST – Integrated Goods and Services Tax||Inter-State Transactions|
|SGST – State Goods and Services Tax||Intra-State Transactions|
Difference Between Direct and Indirect Tax
|Direct Taxes||Indirect Tax|
|It is primarily applied to income.||It is applied to goods and services.|
|The burden of tax cannot be shifted under direct tax.||The burden of tax can be easily shifted under indirect taxes.|
|If is paid once the income reaches to the tax payer.||Whereas, this is paid by an individual while they buy goods and services.|
|Tax collection is relatively difficult,||Tax collection is easy|
|Example- Income tax||Example- GST|
Are Taxes Good? Know the Benefits of Taxes
As we discussed earlier, paying taxes makes you a good, productive, and responsible citizen. This is because the different types of taxes we pay are the primary source of income for the Indian government. And this includes both direct and indirect taxes, be it VAT, GST, income tax, capital gains tax, or corporate tax. Additionally, taxes help control inflation, which could otherwise lead to an economic crisis.
Plus, the government utilizes these taxes to develop the country and boost the economy by undertaking several projects, such as:
- Development of public infrastructure like parks, hospitals, schools, etc.
- Government operation, including salaries of government employees
- Public transportation
- Scientific research
- Welfare schemes and programs
- Defense expenditure
- Law enforcement
- Public health initiatives
- Public education initiatives
- Pension schemes
- Provision of basic utilities like water and electricity
- Public insurance
- Unemployment benefits
So, by paying taxes, not only do you help prevent inflation, but you also contribute to your country’s growth and development. Therefore, it is best to pay all your taxes on time, as it helps the government cover its expenditure towards the public interest.
Did You Know?
In 2020, the total GST taxpaying population in India stood at approximately 12.38 million. However, close to 1.6 million of these GST taxpayers were from the state of Maharashtra alone.
Walkthrough: Advantages of Paying Taxes
Now that you’re familiar with what are the types of taxes levied in India and their benefits, let’s understand the advantages of paying taxes, especially income tax.
Hassle-Free Loan Approvals
Whether you apply for a home loan, vehicle loan, or personal loan, banks typically ask you to show your filed income tax returns for the last 2 to 3 years. The reason for this is that banks assess your ability to repay a loan based on your yearly earnings. Additionally, if you are a citizen who pays your taxes on time, banks are more likely to process your loan approvals. Plus, you also might be able to get a higher sum.
Seamless Purchase of Comprehensive Life Insurance Policies
When you buy a comprehensive life insurance policy with a coverage sum of over Rs. 50 lakhs, the insurance provider will ask for proof of income. But in this case, you will have to present your income tax returns for verification. Therefore, if you wish to buy a life insurance plan with high coverage sooner or later, filing your taxes will come in handy.
Quick Visa Applications
We all know that it isn’t really easy to obtain a visa for certain foreign countries. But the good news is that having your ITR receipts can help speed up the process. This is because income tax returns are considered proof that you don’t plan on leaving India to evade taxes. However, while some countries require recent ITR receipts, others require receipts dating back to 2-3 years or more.
Easy Claims for Financial Compensation
If you are ever in a motor accident that results in a disability or even death, you will be eligible to receive monetary compensation for the insurance provider. However, for this, you will be required to present your income tax return receipts. This is because the compensation amount is decided after assessing your annual income and sometimes even yearly expenses.
So, we guess that covers everything you need to know about taxes and the different types of taxes in India. Did we make up for the math lesson that wasn’t part of your syllabus in school? Well, we’d like to think so.
Also, as we established, paying your taxes has several benefits, which is why you should start being a responsible citizen today. Or maybe when you get your first job, that’s okay too!
The three main types of taxes in India are income tax, custom duties and central excise duty.
A tax classification can be defined as the classification of customers as tax free or tax liable.
In India, there are two main types of taxes – direct taxes and indirect taxes.
Three examples of direct taxes are – income tax, corporate tax and capital gains tax.
There are seven indirect taxes levied in India – GST, sales tax, service tax, VAT, excise duty, custom duty, and securities transaction tax.
You can find the different slab rates for assessment years 2021-22 and 2022-23 here. You can also visit the IT department’s official website to know more.
When it comes to direct taxes, there are 5 types of taxes: Income Tax, Capital Gains Tax, Corporate Tax, Perquisite Tax, and Securities Transaction Tax (STT).
If you sell your property, you will have to pay taxes. In this case, the tax will fall under capital gains tax, which is one of many types of taxes levied in India.
Service tax has been phased out by GST and customers are no longer required to pay it.
Yes, you will need to showcase your income tax returns while applying for a home loan, vehicle loan, or personal loan.