What are Some Basic Things Every Indian Must Know About Taxes in India?

Taxes are one of the most challenging & ambiguous subjects in any financial system. This difficulty emerges from the various forms of taxes with varying tax rates and the constant adjustments in the tax laws, which are, at times, retrospective and progressive. We prefer to give a blind eye to the taxes we pay in the constant hustle and bustle of life. However, we should know where our hard-earned money goes and what taxes we pay as India’s citizens.

We will define various types of taxes in India associated with the Indian accounting system and their importance through this post.

The Tax System in India

India has a formal tax system, and two characteristics describe the significance of taxes in India—progressive and proportional. In the progressive tax, the tax rate is directly proportional to the increasing wage and income brackets. In the proportional tax, the tax rate is proportional to the amount of income or revenue from which it is levied.

The central and state governments in India decide any changes in taxes, brackets, and slabs.

Types of Taxes

At predefined rates and frequency, taxes in India reflect the sum of money we contribute to the government. Taxes are the primary source of revenue that the government uses to provide taxpayers with different services. The CBEC (Central Board of Excise and Customs) and the CBDT (Central Board of Direct Taxes) mostly regulate the two forms of taxes—direct tax and indirect tax.

Check out the different types of taxes in India:

1. Direct Tax

These forms of taxation are paid by individuals and companies directly to the government. Such taxes are paid directly to the government and form a large portion of Indian tax revenue. A significant point is that while they are known as ‘direct’ taxes, the taxpayers themselves are responsible for filing these tax numbers.

Taxes paid directly to the government of India by individuals and organisations fall under direct tax. Taxes collected under the following heads come under direct tax:

• Personal income
• Capital gains
• Securities transactions
• Perquisite
• Corporate income
• Marginal
• Agricultural rate, etc.

Significance of direct tax in India:

By reducing income equality and its inclusive tax structure, direct taxes demonstrate the significance of taxes. In accordance with their economic conditions, people are taxed, thus fostering social and economic equality.

Also, taxpayers remain conscious about how much income tax they will be expected to pay in a financial year for direct taxes and plan well in advance. Direct taxes are also useful for inflation control, as any improvement in their rates will help control the economy’s demand and supply.

2. Indirect Tax

Indirect tax is the other form of taxation that is not explicitly imposed on the taxpayer’s income, but indirectly when goods and services are used or purchased. These taxes are based on the service provider or the commodity seller and are borne by the customer. Those parties pay the same amount to the government and hence the word indirect.

The service tax in India is collected by the Government of India and is given by businesses and service companies. Under Section 66B of the finance act, the Central Government controls the taxability of services rendered by an individual or a corporation. Currently, the service tax is paid at the rate of 15 per cent. Taxability occurs if the value of services during the financial year reaches Rs. 10 lakh.

Significance of indirect tax in India:

In the indirect taxation policy, the importance of taxes is that they are an automatic process following the world-wide buying and selling of goods and services. They are also easy to track and convenient for all stakeholders.

They also help broaden the country’s net tax liability by raising contributions from those parts of society that are otherwise excluded from direct taxation.

3. Goods and Services Tax

The tax generally referred to as GST is an indirect tax in India for the supply of goods and services. GST is implied at all stages of the manufacturing process. Depending on the characteristics of goods or services, the tax has distinct slabs.

While the central government collects GST, taxes on petroleum products, alcoholic beverages, and electricity are collected separately by the state government.

Taxes Imposed by the Central Government

1. Income Tax

In addition to agricultural revenue, the central government primarily collects income tax. It is levied on persons or organisations that differ according to their income or profits, which falls under taxable income. The income tax law prescribes the rate at which one needs to pay income tax. Income from capital gains, salary, and other sources come under this form of taxation.

2. Custom Duty

The CBEC levies the customs duty. This tax in India applies to goods both imported and exported from India. This taxation grants the right to collect duties on imports and exports.

3. Excise Duty

The central excise duty is a tax imposed on goods manufactured and intended for home use in India. This tax in India is based on manufacturing, and as soon as the products are made, the implementation for central excise duty starts. It is a manufacturing tax charged by the manufacturer, which transfers its effect to the consumers.

In India, excise duty is applied to different goods like Petroleum crude, Diesel, petrol, Natural gas, Aviation turbine, etc.

4. Corporation Tax

Corporate tax in India applies to the revenue of listed corporations and organisations, whether Indian or International.

The government has divided companies into two different categories:

• Domestic company

An Indian company founded or registered in accordance with the Law on Companies, 1956, or any company that would have to pay tax on its taxable income under the Income Tax Act. A public corporation or private company can be a domestic company.

• Foreign company

A  foreign company has control and management entirely outside of India and has not entered into the prescribed payment agreements for dividends in India.

Taxes Imposed by the State Government

1. Electricity Duty

The electricity tax can vary from state to state, as the individual state government collects the taxes.

2. Value Added Tax (VAT)

The introduction of VAT is one of the main components of post-liberalisation fiscal reforms. VAT is a multi-point taxation mechanism based on the destination, with value-added tax being imposed at each transaction level in the production or distribution chain.

The State Governments are responsible in the individual States via taxation departments for the collection and levy of VAT. Simultaneously, the role of a facilitator for the effective implementation of VAT is played by the Central Government. The Ministry of Finance is the primary agency for collecting and executing VAT, both at the level of the Centre and the State.

The term value-adding implies an improvement in the value of products and services at each stage of growth or transformation. It is a multi-stage tax with a provision providing an earlier VAT liability tax credit for future sales.

3. Sales Tax

Sales tax is the tax in India that is charged for the selling of goods and services. Sales tax can be of various forms, depending on the sale to the consumer of the product from the producer to the wholesaler or retailer.

4. Entertainment Tax

The state government charges a tax on entertainment services, such as film tickets, concerts, trade shows, fun parks, etc.

5. Toll Road Tax

Toll fee, a charge paid by the rider, is also referred to as toll road tax. The toll is collected for the recovery of road-building costs, maintenance, etc.

Final Words

Though the importance of tax in India for the government cannot be overstated, as an Indian citizen, you should keep your eye open as the tax regulation changes very frequently in India. It will also help you save money, as the central government also provides various means to help the people save the income tax in India.

Also Read:

1) How to Prepare Your Business for Tax Season?
2) How To Reduce Your Taxable Income?
3) What Kind of Benefits do We Get by Paying Taxes in India?
4) What Is Lower Tax Deduction Certificate?
5) How are the mutual funds taxed in India?