Running a country, particularly one with such a large population as India, is expensive. The government is able to carry out civic operations only from the taxes we pay. In other words, without taxes, the government would be unable to manage the country.
One of the most important sources of revenue for the Indian government is income tax. If people begin to view income tax as a burden and refuse to pay it, it will have a direct influence on our nation’s progress as well as societal breakdown. So, here are 5 reasons why we pay tax in India:
- To run the government smoothly
- Help the underprivileged community
- Serve the families of the soldiers, army, defense, navy and others
- Contribute to the overall infrastructure development
- Contribute to the welfare of the nation
So, who should pay tax in India?
Any Indian citizen under the age of 60 who earns more than 2.5 lakhs is obligated to pay income tax. If a person is above 60 years old and earns more than Rs. 3 lakhs, he or she must pay taxes to the Indian government. Connect with CoffeeMug, a leading virtual networking platform to know more about how taxation works in India.
Why do we pay taxes to government?
Taxes paid by us are income for the government of India. The government uses the taxes to fund essential expenses like the defence forces, police, judiciary, public health and infrastructure of the nation. Tax money is largely used to fund recurring and non-recurring expenses of the country.
Recurring expenses take the form of salaries paid to government employees in the country while non-recurring expenses are those that are utilized to build long term assets such as airports, railways, roads, bridges, schools, colleges, factories etc. As a growing economy, the country focuses on non-recurring expenses which is also known as capital expense or CAPEX.
In order to fully understand what the government does with tax money it is important to comprehend the Union Budget.
What is the Union Budget?
The Union Budget is where the government declares its expenses and receipts. Just as companies declare their income and expenses in their P&L accounts, the government does declare how it is going to utilise funds in the Union Budget. In the Union Budget, the government of India declares the total revenue foreseen in the coming fiscal year. There are basically three kinds of income for the government namely tax receipts, non-tax receipts and capital receipts.
Apart from tax collection, the government of India generates income from other sources as well. Income tax, GST, customs duty etc. that we pay to the government come under the category of Tax Revenue. We Indian residents do not pay for all expenses of the nation; capital receipts such as recovery of loans, disinvestment, debt etc. and non-tax revenue which include dividends and interest also accounts for a significant percentage of the total receipts.
Revenue break-up
A number of compelling facts are unearthed when we take a look at the revenue break-up.
- Income Tax – This accounts for about 21% of the total revenue of the government. It is a form of direct tax that is levied on all Indian residents who form the workforce of the country such as professionals, HUF and freelancers.
- Corporation Tax – This is also a direct tax that companies and businesses are compelled to pay to the government. This tax is 22.4%of the total revenue of the Indian government.
- GST – This tax comes under the umbrella of indirect taxation and is the largest tax generator out of all the indirect taxes generating 22.7% of the total income of the government of India.
- Debt Receipts – The government finances a large part of its capital expenses using the debt receipt route. Cash flow in the form of debt accounts for 26.2% of the total income of the government.
Expenditure Heads
The Union Budget is divided into two segments: revenue and capital expenditure.
- Revenue Expense – This contributes about 68.4% of the government’s expenses each year. These are recurring expenses that neither creates assets or liabilities. These expenses have to be met in order to successfully run the day to day activities of the government. Examples of such expenses can be salaries of government employees, bills of government offices, operational costs of all public ventures and interest payments against debts.
- Capital Expense – These are expenses which the government spends in order to create assets in the country. The greater the capital spending the more will be the income and the infrastructure will be more robust in the future. Roads, public buildings, bridges, dams, airports, railway stations, bus stations, power plants, steel plants and passport offices all come under the umbrella of assets to the government that help to generate income.
Expense break-up
The expense break-up indicates the major areas where taxpayers money is being spent.
- Interest expense
- Defence
- Transfer to states and union territories
- Pension
- Transport
- Home affairs
Fiscal Deficit
This is the difference between the government’s income and expenditure. If a government’s income is lower than its expenditure then it is a condition of fiscal debt. There should ideally be no fiscal deficit in an economy. But in cases like India where there is huge capital expense there is usually a condition of fiscal debt to some extent.
In order to make up for this fiscal debt the government borrows money. Borrowing to fund the country’s capital expenditure is not a bad thing really as it is controlled borrowing that is capable of creating assets at a later stage and generating more revenue thereby making the country more efficient.
Conclusion
Paying taxes in India is a necessity and an obligation. The cumulative tax that we all pay to the government is then used to improve upon the existing model of the nation. There are major benefits of paying taxes, including quick processing of home loan applications, visa approvals, tax exemptions and more.
In order to be able to understand how taxation works in India and what exactly are your obligations as an Indian employee or business owner, CoffeeMug is an invaluable platform that provides a simple and easy-to-use interface for individuals and entrepreneurs or business owners to understand the requirements of taxation and pay their dues to the government. With its wide array of features, CoffeeMug makes understanding taxation easier than ever before by providing expert advice.
FAQs
Q. Why should we pay taxes to the government?
A. The tax we pay is a receipt (revenue) for the Indian government. They essentially put the money in strengthening the defense, police, the courts, public health and infrastructure.
Q. What would happen if we didn’t pay taxes?
A. If you keep avoiding paying your tax bill, the unpaid amount may be deducted from any future tax refunds you are due. In addition, the IRS has the authority to lay a claim on your property and assets. The debt could turn into a levy, meaning the IRS could seize your property to settle your debt.
Q. How taxes are paid in India?
A. The government collects income taxes in three ways: source-deducted taxes (TDS) source-collected taxes (TCS). Taxpayers make voluntary payments to selected banks.
Q. Who does not pay taxes in India?
A. People who annual salary or income is below 2.5 Lakhs are exempted from paying the taxes in India.
