The word ‘Tax’ has been derived from a Latin word ‘Taxare’ which means to estimate or value. The tax is one of the most common financial terms used in India. Government uses the concept of tax to generate income from the public in order to fulfil various projects and initiatives. Taxes are implied on the residents by central and state governments.
Also, tax is the compulsory fee or charge that is implied by the government on the citizens of the country. Failing to pay taxes of any means might result in punishment under pre-defined taxation laws.
Types of Taxes
In India, Taxes are broadly classified into two types-
- Direct Taxes
- Indirect Taxes
As the name suggests, Direct Tax is a tax that is directly paid by the citizens of the country to the respective government. These taxes are not transferred to anyone else i.e. Entity or Financial Institution. The Central Board of Direct Taxes is the governing body of direct taxes in India who looks after the levy and collection of the taxes. Also, the CBDT is the statutory authority which is responsible for the administration of direct tax laws through the Income Tax Department.
Below are some of the examples of Direct Taxes in India-
This tax is levied on the one’s annual income or profits. Income tax is one of the most common types of direct taxes that is paid directly by taxpayer to the government of India. Under this tax system, individual pays a portion of his/her income every year as per the tax slabs decided by the government. The amount collected by the government is used for development and growth of the economy, infrastructure and well-being of the citizens of the country. To regulate Income Tax is India, government proposed the Income Tax Act in 1961, which is commonly called Income Tax Act, 1961 or the IT Tax Act of 1961 to set rules and regulate the tax slabs in India.
This tax is levied by the government of India on the income of national and international companies under the Income Tax Act, 1961. It is paid as per the slabs the companies fall under. Also, corporate tax is levied on the net income of company registered under the Companies Act, 1956.
There are some sub-categories of Corporate Tax in India as mentioned below-
- Dividend Distribution Tax
- Fringe Benefit Tax
- Minimum Alternative Tax
Capital Gains Tax
Any amount of money received through investments or sale of a property attracts capital gains tax. The capital gains tax could be from short or long term gains made through investment. Capital gains tax is not applicable to the inherited property, as there is no sale of property involved except the transfer.
This type of tax is imposed by the local government on the real estate projects along with the land. It is collected by the present owner of the house. As per the norms of property tax, it is collected with different slabs in different states. At the local level, municipal body is given the authority to collect the property tax. The rate of property tax depends upon the use of the property, whether it is used for industrial purpose or domestic purpose.
Professional tax is another type of direct tax that is levied on all the professions, employment and trades on employees, freelancers and professionals, etc. Professional tax is levied by the state government and differs from state to state.
Indirect tax refers to the tax that is imposed on all goods and services and the government collects the indirect tax payment from the seller of the goods and services. Under this taxations system, the tax rate is added to the price of goods and services which ultimately increases the price of the products and services. The implementation of policies and collection of the indirect tax is made by the Central Board of Indirect Taxes and Customs. The CBIC is a part of the Department of Revenue under the Ministry of Finance, Government of India.
There is only one indirect tax that is levied by the government currently i.e. Goods and Services Tax (GST).
It is the only indirect tax that is used in India and is implied on the supply of gods and services. This tax was implemented from July 2017 in India. The GST is designed in such a way that it offers uniformity to taxes levied on the products and services across the nation. In India, GST have been divided into four GST rates- 5%, 12%, 18% and 28%.
With the implementation of GST, it has replaced all other taxes levied by the state and central governments such as Central Excise Duty, Services Tax, VAT, Octroi and so on.
Other Types of Taxes in India
There are also some of the other types of taxes that are operational in India. However, these taxes are minor revenue generators and are small cess tax. Below give are sub-categories of other taxes in India:
This type of tax is levied on entertainment activities such as movies, theatres, private festivals, exhibitions, and many others. Entertainment tax is levied by the state governments and it differs from state to state. But now, entertainment tax has been compiled under GST and it attracts a tax of 18% on theatre, films, circus and classical shows and so on.
Toll Tax and Road Tax
This tax is levied for the maintenance of roads and toll infrastructure in India.
Registration Fees, Stamp Duty and Transfer Tax
These tax are levied at the time of purchasing a property in addition to the property tax.
Benefits of Taxes in India
The prime aspect of collecting taxes from the citizens of the country is to provide better infrastructure and growth to the economy of the country. However, these taxes are used by the government for variety of purpose such as-
- Defense Expenditure
- Scientific Research
- Removal of Unemployment
- Public Health
- Public Education
- Welfare Projects
- Public Infrastructure
Penalty of Non-Payment of Taxes
The Government of India imposes various degrees of penalties on an individual, entity or institutions who tries to avoid payment of taxes. The penalty imposed depends upon the category of tax that has not been paid. This clearly means that one has to pay the penalty fees as well as interest along with the principal tax amount to the government in case one fails to pay the tax on time.
What is Tax: FAQs
The income tax needs to be paid by every person. Every citizen of India making a living is liable to pay income tax to the government.
The government collects taxes in three different ways.
– Voluntary payment to the designated banks, which includes advance tax and self-assessment tax.
– Tax deducted at source (TDS) from the total income.
– Tax collected at source (TCS)
You can estimate the tax you need to pay by looking at the income tax slabs laid out by the government. There are income tax calculators available online that are accessible to everyone.
There are a few ways to save taxes in India:
– Under section 80C of the IT Act, you can avail tax deductions of up to Rs. 1.5 lakh.
– Under section 80D, individuals can avail tax deduction on the premium paid towards medical insurance.
– Under Section 80EE, the interest charged for a home loan is tax deductible.
The period starting from April 1 to March 31 is considered as the financial year. The income earned during this time is used to estimate the income tax.