Taxes are an essential part of any nation to promote its economic growth. The taxes that we pay 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.
Now that we know what taxes are, let’s look at the type of taxes in India.
Different 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.
Direct Taxes comprise taxes that you pay directly to the government. These taxes are levied directly on an individual and therefore can’t be transferred to another entity or person. The Central Board of Direct Taxes (CBDT) under the Department of Revenue is responsible for the governance of this tax.
There are various types of Direct Taxes, which include:
Income Tax came into force with the Income Tax Act of 1961. All the rules of income tax are set by this act. This tax will apply to any income you generate for profits, owning a property, salary, investments or business.
Besides stipulating from where income tax is to be collected, this act has provisions that allow tax benefits for taxpayers through fixed deposits and life insurance premiums. This act also determines your position on the income tax slab.
In 1958, the Gift Tax Act was originally introduced. According to the act, if you receive presents of any kind, then you will have to pay a tax of 30%. This was later tweaked to exclude gifts from family such as spouse, parents and blood relatives. If anyone else gives a gift whose value exceeds Rs. 50000, then you will have to pay tax.
Amongst the various types of taxes, Wealth Tax is applicable not only on an individual but also on a Hindu Unified Family (HUF) and businesses.
For example: If your net wealth is more than Rs. 1 crore, then you have a surcharge of 12%. Companies whose turnover exceeds 10 crores will also have to pay wealth tax.
Capital Gains Tax
This is a type of Income Tax levied on the gains you make after the sale of an investment or property. There are two types of Gains Tax – Long Term Capital Gains Tax and Short Term Capital Gains Tax. The former is applied when the holding period of the investment exceeds 36 months. The latter is applicable if the duration of the investment is less than 36 months.
Securities Transaction Tax
Share trading on the stock market is subject to this tax. For every share purchase or sale, you pay the Securities Transaction Tax.
Another type of Income Tax, the Corporate Tax is levied on the earning of businesses. An Indian firm whose turnover is less than Rs. 1 crore is not subject to this tax. There is a corporate tax slab according to which companies pay tax. Moreover, the tax structure for international firms is different from domestic firms.
Unlike Direct Taxes, these taxes are not levied on individuals but on goods and services. This tax is not levied on profit, income or the revenue of an individual or an entity. Also, this tax can be transferred from one person to another.
Here’s a list of various types of Indirect Taxes:
Any product being sold is subject to Sales Tax. The product can be either produced domestically or be imported. The government subjects the seller of the product to the sales tax, who can then pass it on the buyer.
Sales Tax is different for different states. Also, the central government levies the sales tax. For some states, sales tax is one of their largest revenue sources.
Service Tax is applicable on services provided by companies. Unlike Sales Tax, it is not charged on every sale. This tax is charged with on a monthly or quarterly basis. Service providers pay this tax once their customers clear their bills.
Goods and Service Tax
The Goods and Services Tax was introduced in 2017. This tax is applied at the consumption stage. GST is applied at every stage of the supply chain wherever consumption takes place.
Value Added Tax (VAT)
VAT is levied on products other than commodities such as food and essential drugs. This tax is placed at stages in the supply chain where value is added. This tax comes under the purview of the state government.
If you buy a product from a different country and import it to India, then you have pay tax on it. This tax is called Customs Duty.
Toll Tax is levied either by the state or central governments on roads and bridges. The purpose of the tax is to fund road construction and maintenance activities.
Both Direct and Indirect Taxes are essential for the economic growth of the country.