The Indian Constitution grants the government the right to levy taxes in accordance with the Indian tax system. Tax revenues from the citizens of India are collected by the government to finance public works projects and improve the country’s economic standing. In India, the tax system is divided into three levels: central, state and local government.
The Indian tax system allows taxpayers to plan their taxes as well as earn maximum tax savings. There is also a provision for tax exemption on investments made into tax saving instruments. Let’s explore the different types of taxes in India and their benefits in detail.
What are the different types of taxes?
Types of taxes levied by the government fall into two broad categories: direct taxes and indirect taxes. Both are implemented differently. Most of them you pay directly like income tax, corporate tax, wealth tax, etc., while some of them you pay indirectly like sales tax, service tax, value added tax, etc. If you require assistance with tax filing or want to know more about different types of taxes in India, connect with our members on CoffeeMug and have your questions answered.
Direct taxes are levied on individuals or a taxpayer’s income and are paid directly to the government. This tax is governed by the Central Board of Direct Taxes (CBDT).
Among the most important types of direct tax are:
- Income tax:
An income tax is a tax levied on an individual’s or an entity’s annual income or earnings. Individuals under the age of 60 are also eligible for a tax exemption of up to Rs.2.5 lakh per year under the Indian tax system.
Similarly, the Indian tax system allows a tax exemption ceiling of up to Rs.3 lakh for those aged 60 and over but under the age of 80. Individuals aged 80 and up have a ceiling of Rs.5 lakh. The tax slabs differ according to income.
- Tax on security transactions:
A securities transaction tax is levied under the Indian tax system on the stock market and securities trading. Shares and securities traded on the ISE (Indian Stock Exchange) are subject to this tax.
Types of direct tax
- Wealth Tax
- Gift Tax
- Estate Duty
- Expenditure Tax
- Fringe Benefit Tax
In India, indirect taxes are levied on goods and services when they are purchased and sold. These taxes are collected by the vendors of the service or product under the Indian tax system.
In India, some important forms of indirect taxes are:
- Goods and Services Tax
GST has been the biggest change to the structure of indirect taxation in India. Since the goods and services tax is charged where consumption occurs, it is a consumption-based tax. At every stage in the supply chain, value-added services and goods are subject to GST. It will be the vendor’s responsibility to make payment of the GST on the applicable rate but he can claim it back via the tax credit method for the GST charged on the acquisition of the goods and services.
Value Added Tax (VAT), OCTROI, CENVAT and customs and excise duties have all been repealed in India as a result of the adoption of GST.
Electricity, alcoholic beverages and petroleum items are exempt from the Indian tax system because they are not taxed under GST. This tax is imposed in line with past tax frameworks set up by various state administrations.
- Sales Tax:
A sales tax is a tax levied on the purchase of goods. Taxes are imposed on the seller of a product, who then passes them on to the purchaser, with the tax added to the price. This tax has the disadvantage that it is placed on a specific product which means that the thing cannot be resold if the tax has been paid.
In India, each state has a distinct Sales Tax Act that establishes a rate, specially for that state itself. Furthermore, some states levy additional taxes such as work transaction taxes, turnover taxes, purchase taxes and the like. Paying taxes and completing ITR not only allows for speedier loan approval but also helps in gaining a good credit score and quicker VISA processing.
Types of indirect tax
- Value Added Tax (VAT)
- Customs duty
- Toll tax
- Octroi duty
- Excise Duty
Who is in charge of collecting taxes?
The authority to collect taxes in India is delegated to three regulatory agencies:
- Income tax, customs charges and central excise duty are all collected by the central government.
- Agricultural income tax, professional tax, state excise duty, value-added tax and other taxes are collected by the state government.
- Water taxes, property taxes and other taxes are collected by local municipal bodies.
What are the advantages of paying taxes?
According to the Indian tax system, paying income tax is mandatory and it is extremely beneficial for individuals who receive taxable earnings.
- Speedier loan approval: When you apply for a loan, whether it’s a home loan or a car loan, major banks will ask for a copy of your income tax records.
- Quicker VISA processing: Most foreign embassies require income tax returns for the preceding years as part of the visa interview process.
- Faster Refund claims: Through the ITR mechanism individuals can claim refunds owed from the Income Tax Department, as specified by the Indian tax system.
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Q. Is there a penalty for failure to pay taxes?
A. Fines are imposed by the government on anyone who fails to pay taxes, whether it be an individual or a formal entity. The penalty is based on the type of tax that was evaded.
Q. What does the term “entry tax” mean?
A. An entry tax is applied in places like Uttarakhand, Madhya Pradesh, Gujarat, Assam and Delhi. Under this law, all commodities entering the state via e-commerce establishments are taxed.
Q. Distinguish between direct and indirect taxes?
A. Direct taxes are paid after the taxpayer generates an income, whereas indirect taxes are paid before the service or commodities reach the taxpayer.
Q. What taxes are included in the “other taxes” category?
A. Other taxes category includes the following:
- Professional tax
- Municipal property tax
- A tax on entertainment
Q. How does TDS work?
A. It is a specific amount that is deducted when certain payments are made to an individual such as salary, commission, rent, interest, professional fees etc.