What is Tax?
The word tax is derived from the term "taxo" in latin. A tax is a mandatory fee or financial payment that a government levies on a person or an entity to collect revenue for funding the developmental activities of an economy. Failure to pay taxes calls for a punishment under the predetermined legislation.
Taxes are an essential part of any nation to promote its economic growth. The taxes that we pay to fill the coffers of the government, which are then utilized by it to deliver various services to the country’s population. The government has been given the authority to collect taxes by the Indian Constitution. All the taxes that we pay are backed by-laws passed by either the Parliament or the State Legislature.
Types of Taxes
India has two types of taxes, namely Direct Tax and Indirect Tax. The core difference between both the taxes lies in their implementation.
Apart from these types of taxation, there are other taxes or cess levied by the government for specific purposes, which are – Krishi Kalyan Cess, Swachh Bharat Cess, and Infrastructure Cess Tax.
1. Direct Tax
Direct taxes include taxes that you directly pay to the Government. These taxes are imposed on an individual personally, and therefore can not be passed on to any other individual or entity. The administration of this tax is the responsibility of the Central Board of Direct Taxes (CBDT) under the Revenue Department.
Types of Direct Taxes
Income Tax came into force with the Income Tax Act of 1961. The income tax laws are laid down by this act. This tax would apply to any taxable income you produce including house rent, salary, gains from business & investments,etc.
In addition to stipulating from where income tax is to be paid, this act includes provisions for providing tax benefits to the individuals on contributions made to specific investments & payments.
The Wealth Tax Act,1957 levied a wealth tax of 1% on the individuals, HUFs(Hindu Undivided Family), or a companies having earnings of more than 30 lakh per year.
The objective of wealth tax was to increase the amount of direct taxes raised from wealthy people to reduce wealth disparity across India, and to ensure that these people make a greater contribution to India 's tax revenue.
Note: This tax was abolished in the budget of FY2017 and was replaced with the additional surcharge of 2% on the individuals having taxable income of Rs.1 crore or above in a financial year.
With the enactment of the Gift Act, 1958, tax was levied on the gifts in the hands of the individual who receives it. But it was later repealed in 1988. Subsequently, pursuant to section 56(2)(V) of the Income-Tax Act, 1961, it was reintroduced for the taxation of gifts in recipient possession. '
Capital Gains Tax:
Capital gains tax is imposed on the gains on the sale of an investment property. That may be from an acquisition, either short-term or long-term capital gains. This includes all transactions that are made in kind, measured against their worth.
Securities Transaction Tax (STT):
STT is a direct tax imposed on the purchase and sale of securities listed on the recognized Indian stock exchanges. STT is governed by the Securities Transaction Tax Act (STT Act) and this Act specifically defines various transactions in securities on which STT is applicable. The securities mentioned by the STT Act for the purpose of taxation include derivatives, equities, bonds, etc.
This is the tax levied on the dividend earned from equities or mutual funds. Earlier, DDT (Dividend Distribution Tax) on dividends was levied by the Indian Government which was to be paid by the companies paying dividends. The tax was not borne by the individuals.
From 1st April 2020, DDT levied on companies has been abolished by the government. Now, the tax on dividends is levied on the shareholders and is applicable as per their income tax slab rate.
Corporate tax is a direct tax which is levied on the profits or net income of the corporates from their business operations. This tax is levied on domestic as well as foreign companies operating in India. The tax rate is applicable to an entity according to their income & entity type as specified under the provisions of the IT Act,1961.
Corporate tax is imposed on the business income after making deductions from the revenue such as COGS(Cost of Goods Sold), depreciation, and SG&A(Selling,General & Administration expenses).
These are taxes which are imposed on the various incentives and benefits offered by corporations to its employees. These perquisites include rent-free accommodation, water, electricity, medical reimbursements, etc.
2. Indirect Taxes
Indirect Taxes are basically the taxes which are not directly levied on the Income of an Individual but are indirectly imposed on the Expense incurred by the Individual. This tax is generally imposed on the seller of products or the service provider but, in most instances, it is passed on to the end-user and it is also the end customer who pays this in the form of an indirect tax.
Types of Indirect Taxes
Goods And Services Tax (GST):
In 2017, the Goods and Services Tax was implemented replacing the earlier applicable VAT tax structure on most of the goods & services.This tax is introduced to provide a uniform structure of taxes on goods & services across India. GST is levied at every point of the supply chain, wherever it is consumed.
Service Tax was a tax imposed by the government on the service providers on their services, however, it was actually passed on to the customers. This could include services offered by AC restaurants, hotels, etc.
Note: This tax is now a part of GST. It was replaced in 2017 with the implementation of GST.
Any goods sold were subject to taxes on sales. The product may either be made in the home country or imported. The government levied sales tax on the seller of goods, who can later, pass it on to the consumers.
Sales Tax varied across states. It was also imposed by the central government. Sales tax, for some nations, is one of their main sources of revenue.
Note: This tax is no longer applicable and is now replaced with GST.
Value Added Tax (VAT)
VAT is an indirect tax levied on goods & services at each stage of production involving some kind of value addition. This tax was replaced by the introduction of GST. However, VAT is still imposed on items like petrol/diesel, alcohol, cigarettes, etc.
The tax falls under the state government's purview.
Customs duties was a kind of Indirect Tax imposed on products imported into India. The basic Act governing the collection and levy of customs duties in India was the Customs Act,1962. It provided for levying and collecting duties on imports and exports, procedures for import/export, ban on the imports and sale of goods, fines, offenses, etc.
Note: This tax was also replaced with GST in 2017.
Stamp Duty is an indirect tax imposed by the State Governments on the purchase or transfer of property. It is also imposed on the other financial transactions including the purchase of shares, mutual funds etc. The prices for stamp duties vary from state to state. However, the Indian government has made a uniform stamp duty structure for the capital market instruments.
Toll tax is levied on roads and bridges, either by the state or central governments. The tax is intended to fund road building, construction, and repair activities. This tax needs to be paid by the individuals for traveling through the newly constructed roads levying toll tax to recover its expenditures.
In India, entertainment tax is imposed on any financial transaction relating to entertainment and is mainly reserved for state governments. Amusement parks, video games, arcades, concerts, Celebrity stage shows, sporting events, etc. are some types of entertainment on which entertainment tax is imposed.
Note: This tax has been replaced by GST in 2017 except for the taxes levied by local bodies.
Benefits of paying taxes
In fact, tax is the fuel a country works on and the government uses this tax revenue to fund its developmental projects which could ensure more employment & welfare of the public. The advantages of paying taxes are set out below:
If you intend to visit countries such as the US, UK, Europe or Canada, the foreign consultants ask you to present the Income Tax Return (ITR) receipts of the last couple of years to get your Visa accepted. This is because the ITR helps other countries ensure you don't leave India for tax evasion or other reasons.
2. Loan Approval
Many loans like home loans require you to share copies of your ITR documents as well. Provided that your income is one of the most significant loan approval factors, lenders confirm the same with your ITR document.
3. Proof of Income
The ITR receipt also serves as proof of income for self-employed professionals, such as consultants, business partners or freelancers. For those professionals who are not on any single company's payroll; ITR comes very handy in their business and financial transactions.
1. Public infrastructure
In most parts of the world, the development of transport networks, government institutes, public places, smart cities, etc. is in full swing at present. The Government finances these infrastructure projects with the help of taxes paid by taxpayers.
2. Schemes related to welfare
The government runs and frequently implements new public welfare projects to benefit people in the various sectors of the country from health,education, housing, employment generation, to food programmes. Income tax is one of the key sources of fundraising for these schemes.
3. Science Research & Defense
Every Indian is proud of the recent Chandrayaan 2 mission by the Indian Space Research Organisation (ISRO). But ongoing funding is required for these space missions and scientific developments. Likewise, tax revenue also lets the government allocate ample resources to sustain and strengthen our country's defense capabilities.
Frequently Asked Questions (FAQs)
1. What is the difference between taxable income and exempt income?
Taxable income is that which is taxable. Exempt income is income which the income tax department grants exemption from tax.
2. Who determines the Indian tax rate?
The ultimate decision to set tax rates remains with the Indian Government. However, there are several agencies and bodies that recommend tax rates and taxes for the government and enforce them. Two of the big ones are CBDT (Central Board of Direct Taxes) and the Council for Goods and Services Tax (GST).
3. Why do governments lay down taxes?
The primary purpose of taxation, such as income tax and goods and services tax (GST), is to generate revenues. Subsequently, this money is channeled into other fields such as road and public infrastructure rehabilitation, national security funding programs for public health, and more.
4. What is Tax?
A tax is a compulsory fee or financial charge imposed on a person or an entity by a government to collect revenue for public welfare.
5. How many types of taxes are present?
An individual needs to pay taxes in different ways. These taxes are divided into direct and indirect taxes, according to the way they are implemented by the tax authorities.
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