What is tax? What are the types of taxes in India? Advantages and disadvantages of taxes? Read further to know more
The Central Government and the State Governments each levy their different types of taxes in India under India’s system of taxation. Local governments like the Municipality and Local Governments also impose a few small levies.
Money is needed to handle a state’s business and administer its government. Therefore, the government levies taxes in many different ways on the revenues of people and businesses.
Let’s see what are the different types of taxes in India.
What is Tax?
The cost of some transactions, goods, and services is increased by types of tax in India, which the Indian government imposes on corporate profits and worker income in addition to other costs.
To raise money for commercial endeavors that would boost the nation’s economy and elevate citizens’ quality of living, the government levies taxes on its constituents.
The Indian Constitution, which gives the State and Central governments equal authority to impose different types of taxes in India, is the source of our nation’s right to taxation. Every tax levied within the nation must be supported by a law established by the State Legislature or the Parliament.
Types of Taxes in India
Different types of taxes in India are broadly classified into two types:
- Direct Taxes
- Indirect Taxes
A direct tax is imposed directly upon the taxpayer and is paid by individuals who are subject to it by the government. Levying and collecting direct taxes as well as developing other direct tax regulations fall within the purview of the Central Board of Direct Taxes.
A taxpayer may be required to pay a direct tax to the government for several different reasons, including real estate taxes, personal property taxes, income taxes, asset taxes, gift taxes, capital gains taxes, and others. One of the government’s two primary sources of income is direct taxation.
The other is indirect tax. Direct taxes generate around half of the government’s revenue each fiscal year. The government sets fiscal year-specific goals for direct tax collection to raise income.
Examples of Direct Tax
Examples of direct tax include Income tax, corporation tax, minimum alternate tax, capital gain tax, securities transaction tax, commodities transaction tax, alternate minimum tax, estate duty, wealth tax, gift tax, and fringe benefit tax.
- Income tax is levied on individuals, Hindu undivided families, unregistered firms, and other groups of people.
- In India, the income tax system is progressive.
- All forms of income are aggregated and taxed by the individual’s income tax brackets.
- Depending on the amount of net income, different rates of income tax are applied. For instance, if net taxable income is between Rs. 5 and 7.5 lakhs, an income tax of 10% is levied.
- There is a 10% surcharge on income tax in cases when the total income is greater than Rs 50 lakh but not greater than Rs 1 crore.
Note: Agricultural income is not subject to tax.
- It is a tax levied against the earnings of businesses and corporations. Additionally known as corporate tax.
- A company must pay a separate tax from its owner’s income tax since it is recognized as a separate entity for tax purposes.
- Both public and private companies that are registered in India under the Companies Act 1956 are required to pay corporation tax.
- All domestic enterprises must pay corporation tax at a rate of 22% as of January 2022.
Minimum Alternate Tax
- By utilizing the various incentives and exemptions made available by the Income-tax Act, businesses with high profits and sizable dividends to shareholders who were not paying corporate tax to the government were required to pay a set percentage of book profit as minimum alternate tax, according to the concept of Minimum Alternate Tax (MAT).
- As a result, the government levies an advance tax on these companies called the Minimum Alternate Tax, or MAT. Businesses must therefore pay at least a specified amount of tax.
- According to the Income Tax Act, a portion of a company’s booked earnings is automatically deemed taxable income, and tax is required if the company’s taxable income is less than a specific percentage of those profits.
- The rate of MAT is 15% as of January 2022.
Capital Gain Tax
- Any profit or gain realized from the sale of a capital asset is referred to as a capital gain.
- Taxation is imposed on capital sale profits.
- Capital assets include things like land, structures, homes, jewelry, patents, and copyrights.
- A capital asset held for less than 36 months is referred to as a short-term capital asset.
- Long-term capital asset – An asset that has been held for longer than 36 months is referred to be a long-term capital asset.
- The 36-month minimum for immovable property (land, buildings, and houses) has been lowered to 24 months as of FY 2017–18.
- For instance, if you sell a house after owning it for 24 months, any income you receive if you do so after March 31, 2017, will be regarded as a long-term capital gain.
- Transportable items are free from this adjustment, though, including jewelry and mutual funds that invest in debt.
- They will be categorized as long-term capital assets if held for some time greater than 36 months.
- Depending on the amount of income received, different capital gains taxes are applied to short- and long-term profits.
Securities Transaction Tax
- Gains on securities including shares, options, and futures traded on the domestic stock exchange are subject to a tax known as the securities transaction tax.
- It is a direct tax that the federal government imposes and collects.
- During his tenure as finance minister, P. Chidambaram introduced the Securities Transaction Tax (STT) first in 2004.
Commodities Transaction Tax
- In India, the exchange-traded non-agricultural commodity derivatives buyers and sellers are both subject to the commodity transaction tax.
- Based on the size of the contract, it is determined.
- Commodities covered by CTT include non-farm items including metals (gold, silver, and copper) and energy products (crude oil and natural gas).
Alternate Minimum Tax
- Alternate Minimum Tax (AMT) is to limited liability partnerships what Minimum Alternate Tax (MAT) is to corporations.
- Other commercial entities, such as sole proprietorships, partnerships, and associations of people, are exempt from this tax.
- It was initially presented in 1953. When a person passes away, it is imposed on all of their possessions.
- The entire estate of the decedent is regarded as his wealth and is taxable.
- The tax hasn’t been in place since 1985.
- It was initially shown in 1957.
- Individuals, combined Hindu families, and companies with a surplus of net value were subject to it.
- Wef 2015, the tax was abolished.
- It was initially released in 1958.
- The only donations exempt from the gift tax were those made by public and private organizations that support charitable institutions.
- The tax hasn’t been collected since 1998.
Fringe Benefits Tax
- To reduce the profit on booked entries, many businesses provide their staff with various bonuses and maintain them below their input cost.
- As a result, there is less profit, which lowers government taxation.
- The Fringe Benefits Tax (FBT), which is effectively a tax that an employer must pay instead of the benefits granted to his or her employees, was enacted by the government as a response to this.
- It was an effort to tax all perks that were being used to avoid paying taxes.
- The fringe benefits tax was eliminated in India’s Union budget for 2009.
Advantages of Direct Tax
- Economic Balance: To achieve economic and social balance, the government establishes tax brackets based on an individual’s income and age. The tax rate is determined by the nation’s economic situation. People are given exceptions to balance out economic inequalities.
- Ensures equality: For the government to help the poor and vulnerable in society, higher taxes must be paid by people and enterprises with higher profits. This keeps the economy in balance.
- Gives Certainty: The direct tax gives both the government and the taxpayers confidence because both parties are aware of the exact amount of tax that must be paid and collected.
- Addresses inflation issues: In times of high inflation, the government boosts taxes to reduce demand for goods and services, which causes inflation to decline.
- Makes Government Accountable: People are aware that paying taxes is necessary. As a result, he or she is involved in the government’s use of taxes and is aware of his or her rights. By doing this, accountability for the government is ensured.
Disadvantages of Direct Tax
- Can be easily evaded: Not everybody wants to pay taxes. Some people are willing to file a false tax return to avoid paying taxes. These people can simply conceal their income since they are not subject to state law.
- Tax slabs are arbitrary: If taxes are progressive, they are set at the Finance Minister’s discretion. If it is proportional, it significantly burdens the underprivileged.
- Obstructs growth: High taxes discourage people from investing and saving, which hurts the nation’s economy. It harms enterprises and industries by impeding their expansion.
- Inconvenience: A direct tax’s major drawback is that it hurts the taxpayer. He senses that his hard-earned money has been stolen away when a large sum is taken from his pocket. Direct tax payment is therefore rather inconvenient.
- Indirect taxes are levied against the party who will ultimately bear the financial burden of the tax through the use of an intermediary.
- The taxpayer has the option to transfer it to another party.
- The middleman creates a tax return and sends the government’s tax revenue with it.
- In this regard, an indirect tax is distinct from a direct tax, which is paid by the government directly to the people (whether legal or natural) who are subject to it.
- Instead of using a person’s income, indirect taxes are calculated using their expenses.
- Suppliers of products and services are subject to indirect taxes, but consumers are ultimately responsible for paying them.
Examples of Indirect Tax
Examples of Indirect tax include customs duty, sales tax, excise duty, service tax, value-added tax, and dividend distribution tax.
- Customs duties are imposed as a tariff or fee when goods are transported across international borders.
- Its objective is to protect the nation’s economy.
- Under customs regulations, several different types of duties are levied, including Basic Duty, Countervailing Duty, Protective Duty, Anti-Dumping Duty, and Export Duty.
- Import taxes are used to control business as well as to bring in money for the government.
- Ad valorem calculations are used in India to determine import taxes.
- A national indirect tax known as GST (Goods and Services Tax) is levied on the production, sale, and consumption of goods and services.
- All indirect taxes imposed on products and services by the federal and state governments have been replaced by it.
- A sales tax in India is a sort of tax that the government imposes on the sale or purchase of a certain good inside the nation.
- Both the federal government and the state governments impose a sales tax.
- IGST has since taken its place.
- Excise duty is a commodities tax in the true sense of the word because it is levied on the production of goods rather than their sale in India.
- The federal government levies a clear excise duty on all goods except alcoholic beverages and illegal drugs.
- CGST has since taken its position.
- All rendered services in India are subject to a service tax.
- A service tax was introduced in 1994–1995 on three services: stockbroking, general insurance, and telephone services.
- Since then, the service net has been wider as new services are added every year. We now have an exclusion criterion known as a “negative list,” where certain services are not included in the tax net.
- Before being replaced by the Goods and Services Tax, the service tax rate in India was 15%.
Value Added Tax
- Because of the way it is designed, the VAT does away with distortions.
- As a result, VAT has been imposed in all of India’s states and union territories (except UTs of Andaman Nicobar and Lakshadweep).
- The state determines the amount of the tax, which is levied on a range of goods sold in the state.
- State Sales Tax had been replaced with State VAT, which was in effect until July 1, 2017.
- SGST has since taken its position.
Dividend Distribution Tax
- A dividend is a payment made from a company’s profits in a certain year to its stockholders. Dividends are income in the eyes of the shareholders, hence they ought should ideally be taxable.
- The amount of dividends given to shareholders is the basis for the tax that the Indian government imposes on Indian firms.
- When DDT was originally made available in 1997, it was governed under Section 115 O of the Income Tax Act.
- In Budget 2020, the Finance Minister got rid of the Dividend Distribution Tax.
- Now that corporations are no longer required to pay dividend taxes, individuals must.
Advantages of Indirect Tax
- Everyone can contribute: Indirect taxes are levied on everyone who purchases a product, unlike income taxes, which are paid by some income groups but not by others. Tourists and persons from lower socioeconomic backgrounds who are not employed in India must pay it because they will buy items in some capacity.
- Indirect Taxes are convenient: They are quite practical when it comes to collecting indirect taxes. Customers do not feel forced to spend such small amounts even though taxes may be extremely cheap. Additionally, they are an affordable fee that is included in the cost of the goods sold.
- They are unavoidable: Indirect taxes cannot be avoided because they are part of the product’s price. Anyone who buys the good will therefore be liable for the tax.
- They cover a wide range: The consumer will notice and suffer greatly if a service or product is heavily taxed on only one characteristic. Because they are applied to more products and are paid in smaller sums in this situation, indirect taxes may be favorable.
Disadvantages of Indirect Taxes
- Indirect taxes have the potential to be regressive: It can be argued that it is unfair to the poor because everyone pays the same indirect tax. Indirect tax is imposed on all purchases, and while the wealthy may be able to pay it, the poor will also be responsible for it. Indirect taxes may therefore be viewed as regressive.
- They are inflationary in effect: The precise percentage of tax that applies to every item that a seller sells might not always be possible to calculate and collect. To ensure that every customer pays the indirect tax, they purposely charge more than the tax amount. But over time, this drives up the cost of commodities.
- They do not raise civic consciousness: Because they are buried in the price, millions of people who pay indirect taxes aren’t even aware that they are doing it, which lowers civic consciousness.
Difference Between Direct and Indirect Taxes
Levied directly on the individuals or corporations.
Levied on one entity but is passed on to the final consumer
The incidence and impact of the direct tax fall on the same person.
The incidence and impact of the tax fall on different persons.
Income Tax, Wealth Tax, and Corporation Tax.
Excise duty, VAT, entertainment tax, Customs Duty, GST
Cess and Surcharge
The Union Government imposes cess and surcharges as taxes to generate revenue for administrative costs. Even though cess and surcharge increase the government’s revenue, they differ in many ways.
- In its most basic form, a cess is a levy on tax.
- It is crucial to keep in mind that a cess may only be used for the intended purpose.
- For instance, the Indian government only utilizes money collected from an education cess for education.
- Furthermore, all taxpayers must pay this tax.
- To the Consolidated Fund of India, cess taxes are paid.
- In general, cess is anticipated to be levied up until the government has a strong enough reason to do so and to disappear after that reason has been achieved.
- Since a cess is imposed in addition to the present tax, it differs from other taxes like excise duty and income tax (tax on tax).
- For instance, adding a 5% education tax to a 20% income tax will increase the entire tax to 21%. (20% base tax + an additional 5% cess).
- The main cesses that are currently in effect are those for education, roads, infrastructure, clean energy, Krishi Kalyan, and Swachh Bharat.
- Individuals with net taxable salaries of more than Rs 1 crore are subject to a 10% surcharge on their tax obligations.
- If net income is between Rs 1 crore and Rs 10 crore, domestic corporations must pay a surcharge of 5%. 10% of the net revenue over Rs 10 crore is subject to a surcharge.
- If the net income is between Rs 1 crore and Rs 10 crore, a 2% surcharge is imposed on international firms.
- The surcharge is raised to 5% if the net income surpasses Rs 10 cr. If the net income surpasses Rs 1 crore and Rs 10 crore, both domestic and foreign enterprises receive a margin of relief.
- A tax surcharge on income is a significant source of funding for the state.
- The Union Government may use this money for any purpose it sees fit.
- It’s important to note that just the tax that must be paid, not the entire income, is covered.
- The Consolidated Fund of India receives this payment, which may be used for any purpose.
A 10 percent surcharge on a 30 percent income tax rate, for example, brings the tax burden to 33 percent.
Benefits of Taxes
Different types of taxes in India are intended to give the government money for expenditure while preventing inflation. Various types of income, including wages, business profits, rental income from real estate, and others, are subject to taxation.
Wealth taxes, sales taxes, property taxes, payroll taxes, value-added taxes, service taxes, and so on are additional taxes.
Types of taxes in India are used by the government for several things, including:
- Public sector investment for infrastructure
- projects for welfare and development
- Defense budget
- Using data from scientific studies, public insurance
- Government and state workers get a range of pay.
- the running of the public transportation network of the government
- Unemployment benefits
- pension schemes
- the application of the law
Examples of public utilities include systems for managing garbage, water, electricity, and public health.
Different types of taxes in India therefore have both benefits and drawbacks, but there is no denying that they are necessary to raise money. While the wealthy can pay direct taxes, the poor have the chance to make a small contribution through indirect taxes.
There is a lot of potential to change things by controlling these tax systems. These factors make a nation’s taxation system crucial to its economy.
Article written by: Remya