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Tax Structure in India: Learn Indian Tax System & Taxation in India
Taxes are, without a doubt, the largest source of income for the government. The origins of it can be traced back to prehistoric times when farmers paid their taxes for agricultural produce in silver and gold. The money collected through taxes contributes to the growth and wellness of the country.
The Indian tax structure has been created in such a way that it allows common taxpayers to plan their taxes and earn maximum benefits. Furthermore, there is also a provision for tax exemption provided that an individual invests money into any tax saving instrument.
The tax structure in India is three-tiered, namely central government, state government and local municipal bodies. Let us see in detail what the exact role is of the government bodies in the tax structure in India.
What is the Role of the Central and State Government?
The roles and responsibilities of the central, as well as the state government, have been very clearly specified by the Indian tax system. The former has to levy taxes such as Income Tax, Customs Duty,, etc. On the other hand, the latter has to levy taxes ranging from Goods & Service Tax (GST), State Excise Duty, VAT, and Professional Tax.
Now that we have explained India’s tax structure, you would probably be wondering about all the different types of taxes.
What are the Different Types of Taxes in India?
In India, there are two types of taxes, namely direct and indirect. These two categories then get further subdivided into other categories. We have explained it in detail below:
Direct Taxes in India
Simply put, direct taxes can be defined as the ones that are directly levied on an individual or taxpayer’s income. It is the individual, HUF, or company’s responsibility to deposit the direct tax levied. Some examples of direct tax include income tax, capital gain tax and corporate tax.
Income Tax
For individual taxpayers, one of the most important direct taxes is the income tax. As per the Income Tax Act, 1961, it is mandatory for individuals to make income tax payments every year if his/her annual income is above the minimum exception limit. The income tax rate depends on the annual income of the individual.
Capital Gain Tax
Capital gain tax can be defined as the tax that applies to the profits from the sale of the capital asset only. The rate for this varies and is dictated by the type of capital gain. It can be further bifurcated into two basic types:
- Short Term Capital Gains Tax
- Long Term Capital Gains Tax
Corporate Tax
As the name suggests, corporate tax applies to the businesses and entities that are filing their returns as a company. The tax rate is decided depending on the annual turnover of the firm.
Apart from the above-mentioned ones, the following are the different taxes that come under the direct tax in India:
- Securities Transaction Tax
Indirect Tax
Taxes that are levied on products and services that are bought as well as sold is known as indirect tax. They do not involve direct payment to the government. The tax gets levied in addition to the original cost of the product / service thereby increasing its charge. Given below are some of the different types of indirect taxes in India:
- Goods and Services Tax
- Customs Duty
- Value Added Tax
- Professional Tax
- Property Tax
GST Goods and Services Tax
Goods and service tax or GST as it is called is a consumption tax imposed on services and goods supply. Implemented on 1st July 2017, this tax actually comprises several indirect taxes that are collected by both the central and state governments of India.
- GST features three components, namely CGST, SGST and IGST. Given below is a brief understanding of these components:
- CGST- This acronym stands for Central Goods and Service Tax. This tax is basically collected by the central government on the intra-state supply of goods and services.
- SGST- Full form for State Goods and Service Tax, it is collected by the state government on intra-state supply of goods and services.
- IGST- This stands for Integrated Goods and Services Tax. It is collected by the central government on the interstate purchase of goods and services.
As per the tax system in India, there are several products and services such as electricity, alcoholic drinks and petroleum products that are exempted from GST. Onev major advantage of GST is that it has simplified the entire tax system in India. Furthermore, it is levied on every stage of the supply chain right from when the raw materials are purchased to the final products that customers receive.
What is the Difference Between Direct and Indirect Tax?
To sum it up we can see the following differences between direct and indirect taxes:
| Direct Taxes | Indirect Taxes |
|---|---|
| It is levied on salaried income and conducted activities i.e business. | It is levied on goods and services. |
| The load for direct taxes in India cannot be shifted. | The load for indirect taxes in India can be shifted. |
| Direct tax is paid to the government directly by the concerned person. | Indirect tax is paid by one person who recovers the same from the other. Simply put, the burden falls ultimately on the consumer. |
| Direct tax is paid only after a taxpayer receives an income. | Indirect tax is paid before the finished product or service reaches the taxpayer. |
| Some examples of direct tax include income tax, capital gains tax, securities transaction tax, etc. | Some examples of indirect tax include GST, customs duty, VAT, professional tax, property tax, etc. |
Disclaimer:
Our content given in this article is as per the existing provisions, laws and regulations as per the Income Tax Act, 1961 and Income Tax Rules, 1962 issued thereunder. Tax laws are subject to amendments made thereto from time to time. The benefits / guidance mentioned herewith should not be considered as opinion / view of the Company. We request to seek independent view from your personal tax advisor on applicable tax benefits / guidance under the said article.
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