What are Types of Tax in India: Its Structure and Working
Tax is an economic instrument and the greatest income source for the Government of India. The money collected in the form of taxes is primarily used for financing public infrastructure and enhancing development projects. The tax system in India has a 3-tier federal structure.
Want to know more about the different types of taxes? Keep reading!
What is Tax?
Tax refers to an obligatory contribution of the citizens of India that improves a nation’s economy and elevates its residents’ standard of living. The Constitution of India permits the Central and State Governments to impose taxes on its nationals. If an individual fails to make a tax payment, certain penalties will be applicable under the pre-specified laws.
Types of Taxes in India
There are two major types of taxes, namely direct and indirect taxes. Further, these categories are sub-divided into other types. The provisions of different acts under the Income Tax Act regulate and govern such taxes.
1. Direct Tax
A direct tax refers to a tax that a legal entity or an individual pays to the government directly. The CBDT (Central Board of Direct Taxes) oversees these taxes. You cannot transfer direct taxes to any other legal entity or individual.
The following are the different types of direct taxes:
1. Income Tax
The government directly imposes this tax on the profits or yearly income. If you earn any sort of income, you are liable to pay this tax. There exist different income tax rates for different ranges of income and ages. For people over 80 years, Rs. 5 lakh is the tax exemption ceiling per annum. For people in the age range between 60 and 80 years, Rs. 3 lakh is the exemption limit. For people below the age of 60 years, Rs. 2.5 lakh is the exemption limit.
Besides, legal entities will be paying taxes as well. These comprise local authorities, local firms, companies, AOP (Association of Persons), BOI (Body of Individuals), HUF (Hindu Undivided Family) and artificial juridical persons.
2. Corporate Tax
Every company has to pay the income tax, popularly called corporate tax. This depends on the various tax brackets that the income comes under. Following are different sub-categories of these taxes:
- MAT (Minimum Alternative Tax)
The Section 115JA of the IT Act mandates that a company has to pay MAT (Minimum Alternative Tax) to the IT Department. Companies in the infrastructure and power sectors are allowed to be exempted from paying MAT. - FBT (Fringe Benefit Tax)
The IT Department imposes this tax on fringe benefits that a company offers to an employee. This includes costs associated with ESOP (Employee Stock Ownership Plan), employee welfare, employee’s contribution to a retirement fund, entertainment, leave travel allowance, transportation and accommodation. - DDT (Dividend Distribution Tax)
The government levies Dividend Distribution Tax on dividends that investors receive from companies. It is applicable to the gross or net earnings that investors fetch from their investments.
This government has abolished the DDT with the introduction of the Finance Act, 2020.
3. Prerequisite Tax
Such taxes apply to the multiple perks and benefits that employees receive from their companies. The purposes of these perks and benefits, whether they’re personal or official, have to be specified.
4. STT (Securities Transaction Tax)
STT is applicable to securities trading and the stock market. The government imposes this tax on the market price of securities and shares bought and sold on the Indian stock exchanges.
5. Capital Gains
The tax department levies these taxes on property sales or money obtained through investments. It can be from long-term or short-term capital gains of investments. All exchanges in kind (weighted against their values) are applicable under this.
2. Indirect Tax
The government also levies taxes on products and services, namely indirect taxes. A seller of a product or service collects such taxes. This tax gets added to a service’s or product’s price. Hence, it raises the price of a service or product. At present, there’s only one type of indirect tax, that is, Goods and Service Tax (GST).
1. GST
The IT Department levies this consumption tax on the regular supply of goods and services in the country. Every production procedure stage of any value-added services or goods will be subject to GST imposition. Such taxes get refunded to the dealers engaged in the production procedure (not the ultimate customer).
Services or products that aren’t taxable under this indirect tax are petroleum products, alcoholic drinks and electricity. The State Government as well as Central Government, imposes GST in the form of SGST and CGST for intra-state goods and services. In addition, the Central Government will levy an Integrated GST (IGST) for the supply of inter-state services and goods.
Apart from direct and indirect taxes, there are ‘Other Taxes’ as well that serve special agendas. Let’s know about them!
Other Taxes
Other taxes generate minor revenues and comprise cess taxes. Following are the sub-divisions of these taxes:
- Toll tax and road tax: The government uses these taxes for maintaining toll infrastructure and roads.
- Entry tax: The tax department levies such taxes on the goods and services that enter states, particularly via e-commerce establishments. Some of the states in which this tax is applicable are Madhya Pradesh, Gujarat, Assam and Delhi.
- Education cess: Such taxes are introduced to finance educational programs that the Government of India launches maintains.
- Transfer tax, stamp duty and registration fees: These taxes are applicable while buying a property. They are a supplement or an addition to property tax.
- Entertainment tax: The government imposes this tax on exhibitions, movies and television series. It applies to gross collections from the income.
- Professional tax: Such an employment tax is applicable for individuals practising a profession or earning a salary. Doctors, chartered accountants and lawyers may fall under this category. These taxes vary from state to state. However, all states do not impose this tax.
- Property tax: This tax is applicable to commercial and residential property owners. The government utilises these taxes to maintain civic services. The municipal bodies of every city impose such taxes.
Also Read
Benefits of Tax Payment
You can avail the following advantages if you pay income tax on time:
- Claiming Compensation
If a self-employed person faces a motor vehicle accident leading to accidental death or disability, furnishing the ITR receipts will ensure compensation. The person’s income has to be established to receive the compensation. - Availing Life insurance with an Extensive Coverage
You can avail a term policy or life cover with a high sum assured ranging between Rs. 50 lakh and Rs. 1 crore only after income verification through ITR filing. Insurers will provide a high coverage only after they establish that you have a high income. - Carrying Forward of any Loss
On filing the tax returns, you can carry forward your long-term or short-term losses for adjustments against your capital gains in the upcoming years. - Opting for Government Tenders
Certain government departments may ask you to furnish your tax return receipts while opting for government tenders. - Claiming Your Tax Refunds
You will be eligible to receive any refunds from the tax department after filing your ITR. You can claim tax refunds from various savings instruments, if applicable. - Offering Credibility to Self-employed Individuals
Partners of firms, entrepreneurs, consultants and freelancers do not qualify for Form 16. The ITR receipts will act as their income proof and facilitate financial transactions. - Required in Visa Applications
Several foreign countries require visa applicants to submit the ITR receipts of the last 2-3 years at the time of visa interview. - Loan Approvals
Financiers will check your tax returns for the previous 2-3 years before approving your loans. The ITR receipts will act as proof of your financial stability and repayment capacity.
Final Word
It is beneficial, mandatory and efficient for earning individuals (earnings that exceed the tax exemption ceiling) to file income tax returns every year. The tax payment is essential for welfare activities, upliftment of the society, infrastructure betterment and overall development of the country.
FAQs
Ans: The government may impose various penalties on a legal entity or an individual who evades income taxes. This penalty is based on the type of tax that is not paid. That means in case of a penalty, the amount of tax coupled with an interest or fine is applicable.
Ans: If you are an Indian resident below the age of 60 years, you will have to pay taxes if your annual income is above Rs. 2.5 lakh. If your age is above 60 years and below 80 years, you will be liable to pay taxes if your income exceeds Rs. 3 lakh. In the case of individuals above 80 years, if the income exceeds Rs. 5 lakh, taxations are applicable.
Ans: First, you need to calculate your gross income, which would include your earnings from house property, capital gains, salary, other sources and profits from business or profession. Next, subtract deductions under Sections 80C to 80U to get the net taxable income. Finally, calculate the income tax as per the tax slab you fall into.
Ans: The State Governments fulfil their financial requirements with sales tax. These taxes are levied on the purchase and sale of goods inside a specific state. All dealers require paying this tax after the sale of products. It is applicable even if there are no tax implications as per the state’s tax laws. Sales tax varies from state to state.
Ans: You can claim tax exemptions while filing your income tax returns every year. The Income Tax Department will verify and examine your details before approving. Tax exemptions are essential options to help you save on your income tax.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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