Tax – Policies, Types, Perks, Consequences, Recent Changes, FAQs & more

Tax or taxation is a very common word that most people know in the various context in India.

Every one of us whether directly or indirectly pays certain taxes every day which go to the government’s fund.

For running an economy especially in India, the government needs the support of the citizen and tax is one of the biggest of such economic support.

In this article, you will read about different types of taxes in India. We will cover the broad categories as well as the subcategories of taxes.

There will be information about the latest changes in the tax regime and others. Finally, you will know why it is important to pay taxes and its benefit to the economy.

What is Tax?

Tax is a charge or fee that the government takes from the citizen of the country to provide various facilities to them.

The infrastructures, medical facilities, education, ration, and all other facilities provided by the government are indirectly borne by our citizens.

Every responsible citizen has to pay their taxes duly to boost the growth of the country.

There are various consequences as well as not paying taxes or within the right time.

With the taxes we pay, the government fund the public expenditures. There are different types of taxes which will be discussed in the next part of the article.

Both the state government and the central government collect tax from the citizens.

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Different Types of Taxes

The two most fundamental types of taxes are Direct Tax and Indirect Tax. These two are the basic categorization under which there are many subcategories of taxes.

Direct Tax

It is the tax that a taxpayer pays directly to the government. It is how it can be explained in the simplest way possible.

The most common instance of direct tax would be Income tax which a taxpayer pays every year to the government.

There are other forms of direct tax as well which includes –

Income Tax

Income Tax department regulates the income tax collection and penalties and other related matters as per the Income Tax Act 1961.

It has come set rules. Income tax is generated from the incomes derived from multiple sources.

The sources include business income, income from salary, rent of your property, any income generated from the capital or investment gains, and others.

The government decides the tax rate according to various tax slabs. You have to pay taxes as per the tax slab you fall into.

Our finance minister and the government alter these tax slabs in every budget session. At present, income up to Rs. 5 lakhs is exempted from tax.

Gift Tax

In the year 1998, this tax was abolished but it was re-introduced in the year 2004.

According to this tax act, if any person receives a gift which values over and above Rs. 50000, then that amount will be treated as an income in the books of the recipient of the gift.

It will be taxed accordingly as well.

Wealth Tax

Another form of direct tax is the Wealth Tax. In the year 2015, the wealth tax was abolished from the Tax Act. It was levied on the income of the super-rich people.

Corporation Tax

Corporation Tax is also known as Corporate Tax is a form of direct tax. It is under Income Tax 1961 which is levied on both foreign and national companies through the rate differs.

While a domestic company has to pay 30% the foreign company needs to pay 40%. The companies which are incorporated as per Companies Act 1956, are liable to pay this tax.

However, the income taxable under this Tax Act got to be earned in India only. As per the revenues generated by these companies, a surcharge is also levied on corporate tax.

Capital Gains Tax

Capital gain Tax if simply described is a direct tax that needs to be paid on any profit generated from selling any capital assets.

There is short-term capital gain tax and long-term capital gain tax. The rate varies accordingly. It doesn’t include any gift or inheritance of property.

It is applicable when there are a sale and a change in ownership.

Property Tax

The government levies a tax on your property (if you are the owner) including the land. This is the property tax.

The municipal corporation collects the property tax. The rate of tax is decided as per the use of the property.

If the property is used for residential purposes, then the tax is lower and the tax rate goes up in case of industrial or commercial use.

Profession Tax

Profession Tax or Professional Tax is collected from professionals, freelancers, trades on employees, and all in some of the other professions.

It is collected when their income exceeds a certain limit. In different states, it is different as it is levied by the state government.

It is deductible from taxable income. It can be collected even after GST is applied if the maximum cap of Rs. 2500 is not reached.

Road Tax

You must have seen your father paying tax for the vehicles used at home, this is nothing but road tax.

The vehicles which are used on public roads are taxed by the state government at a rate of 28% as of now (GST).

There is 1% to 15% additional cess on the same which depends on the range of the engine of the vehicle.

The capacity of the engine, seating capacity of the vehicle, cost price, and others are the constituents of the calculation of this tax.

The electric cars have a lower tax levied on them which is 12% GST only. While it is a one-time fee for private vehicles, commercial vehicles need to pay annual road tax.

Stamp Duty

As per the Indian Stamp Act 1899, stamp duty is a direct tax and the government collects it from the buyer of the stamps.

Stamps duly paid are regarded as viable to make any document legal. If the stamp duty is not paid, the document can be invalid as well.

It can also attract a penalty of up to 200% of the deficit amount.

Indirect Tax

Indirect tax is collected depending upon the consumption of goods and services. It is levied on the price of the goods and services you purchase or sell.

The seller of the goods and services forward the tax collected to the government. Thus, there is no direct link between the taxpayer and the government.

Some of the most common indirect taxes in India are GST or Goods and Service Tax, VAT, or Value-added Tax.

Let us see some of the most important indirect taxes which we pay regularly –

Goods and Service Tax (GST)

On 1st July 2017, GST or Goods and Service Tax Act was implemented in the country. GST is applicable to goods and services.

It is a comprehensive destination-based tax, a multi-stage tax. Whenever there is value addition, there is an addition of GST.

It is the amalgamation of many indirect taxes like VAT, excise duty, and others. Now, there is a single domestic indirect tax which is GST prevailing in India.

It helps in removing the cascading effect which is one of the biggest reasons for introducing GST in India.

VAT

Value-added Tax or VAT was introduced in the country in the year 2005. It replaced the Sales Tax and then finally got replaced by GST in 2017.

It was an indirect tax that was levied on goods and services at every stage of value addition.

Custom Duty

It is a tax that is levied on goods when they are transported across borders. Custom Duty was also used for controlling or monitoring the entry and exit of foreign goods.

It varies from one country to another and from one product to another.

Excise Duty

This tax is levied on goods that are manufactured in the country for consumption inside the country only.

It was being levied under the Central Excise Tariff Act of 1985. Now, excise duty is not levied individually but collected as a part of GST only.

Sales Tax

Sales tax was one of the most crucial tax before GST. It was Sales tax which was levied on the sale of goods is no more relevant. VAT took over Sales Tax and finally there is GST.

Service Tax

When there was no GST, there was Service tax. It was levied on the services you purchase from a vendor.

It was paid by the service provider to the government which they used to collect from their customers.

Other Special Category Taxes

There are some other tax and cess which are also very important and some of them are –

Toll Tax

You must have noticed while crossing a highway or flyover, there are toll booths to collect the tax. It is collected for the maintenance of the highways and flyovers.

It can be a direct or indirect tax. If the government itself collects the tax and maintains the infrastructure then it can be called a direct tax.

But most often, the government passes on the duty to some private business firms and they take the responsibility of the same.

In that case, you pay the tax to them, that is paid to the government and then the government allocates funds for the maintenance of the infrastructure.

Education Cess

Whether it is an electricity bill or any other utility bill, you must have been paying education cess. If you are paying income tax, then also you have paid towards education cess.

At present, the total cess is 4 % out of which 2% is dedicated to education in the country. The remaining is for health facilities development.

Entertainment Tax

Though it is now under GST, you must have been noticing that after GST came into effect there is a rise in the tax amount in your entertainment bills.

For example, you are going to watch a movie, you have to pay 28% GST and the same goes for dining out in a posh restaurant.

Infrastructure Cess

It is levied by the Central Government on the goods which are specified in the 11^th schedule of the IT Act.

For financing the infrastructure products of the country, you pay this cess. Infrastructure Cess was introduced in the year 2016. It is now subsumed into Goods and Service Tax.

Swachh Bharat Cess

It is levied on any taxable services. The rate is 0.5% but it is also a part of GST now. It is collected to promote the Swachh Bharat Abhiyan.

Articles on Income Tax Planning and Policy

Benefits of Paying Tax

There are multiple advantages one can available paying taxes to the government –

• If you pay taxes on time, you get good deals on your home loans, personal loans, and other financial services.
• Your tax helps the government to run smoothly and take care of various aspects of public expenditure.
• It helps in improving the overall standard of living for the citizens
• It helps in improving infrastructure, healthcare facilities, educational facilities military facilities, and others in the country.

Consequences of not paying Tax

There are major consequences of not paying taxes and they are –

• You will be a defaulter as per section 140A (1) of the IT Act. If you fail to pay tax on time or partially pays the tax or the interest or principal amount.
• You may have to pay penalty fees as well as per section 221 (1).
• Under section 271 ( C), if an assessee conceals his or her income, then he or she may need to pay up to 300% of the amount as a penalty or fine.

Recent Changes in taxation in India

One of the major changes in recent times with the tax regime of the economy is undoubtedly the implementation of GST.

It is effective from July 2017 which helps to solve many problems associated with Sales tax and Vat earlier like double taxation, irregularities in taxation, etc.

The tax slabs alters every year (most of the time during the budget release).

Related Terms related to Tax

GST Return: Under GST Law, it requires the registered person to file the return within a specified time.

GST Rate: There are multiple rates for different goods and services. The Government and altered as required.

Income: Income here means the earning of a person whether by selling any goods or services.

Input Tax Credit: It is a mechanism that helps in claiming a reduction in tax paid.

Cascading Effect: In simple terms, it is the tax levied on tax or “taxation over taxes”. This needs to be eradicated from the system and thus GST has been implemented.

Ad Valorem Tax: It is one of the important sources of the government of earning revenue.

All about Tax – Conclusion

To summarize, taxation is an integral part of any economy to run. There are multiple types of tax as you seen above. We pay some of them directly to the government and others are indirectly being paid.

Tax is a major source of revenue for the government.  It helps the government to finance public utility services and to develop the economy as a whole.

More information related to GST and Tax Planning

Taxation in India FAQs

Ques – Who needs to pay tax?

Answer – Everyone pays tax in some or the other way. If not income tax or any direct tax, but indirect tax we all pay. In the case of income tax, if the minimum exemption limit is crossed, then one needs to pay tax. However, an indirect tax like GST is paid on the purchase of the goods or services.

Ques – Who receives the tax in the country and decides the rates of tax?

Answer – It is the finance ministry and the government of India which receives the direct as well as the indirect taxes. They also decide upon the rates and other aspects of taxes in the country. There is the GST council and Central Board of Direct Taxes to assist them and suggest the good and the bad.

Ques – What do you mean by progressive tax?

Answer – Progressive tax is something where the tax rate increases with the increase in taxable income. It is similar to the income tax slabs in our country. As the taxable income goes up of the taxpayer, the tax rate also inches up.

Ques – Which are the Key Tax incentives in India?

Answer – The key tax incentives in the country are –

• Start-up India Scheme
• Research and development expenditure-linked tax benefits
• Investment-linked tax incentives
• Concession on Capital gains or minimum alternative tax and others.

Ques – What is the purpose of imposing a tax by the government?

Answer – The primary intention of the government to impose the tax is to generate revenue. With this revenue, they fund various public expenditures.

Ques – What are the different types of tax?

Answer – There are various sub categories and hierarchies of taxes when we go in depth about different types of taxes. However, the two most important or fundamental kind of taxes which stand on the frontline are – Direct Tax and the Indirect Tax.

Ques – What are the benefits of paying tax on time?

Answer – Taxes are a very important part of our economy; they help the government deal with various aspects of public expenditure. When it comes to paying taxes, its best to pay them duly without any delay, as it can help the individual gain an easy root at the time of applying for various loans such as – home loans and personal loans.

Ques – What are the recent changes in taxation?

Answer – The tax slabs are always changing every year while the budget of the nation is fixed. Thus, the recent changes in taxation are nothing new to the economy. The biggest change that has been rooted to the tax has indeed been the GST.

Ques – Where does our money go after paying tax?

Answer – The tax money has been always subjected to improve the living standards of the citizens of the respective country. The tax money is utilised in constructing various medical facilities, education infrastructure and other such aspects.

Ques – What is progressive tax?

Answer – A progressive tax is constructed on the tax payers’ ability to pay tax. It sets various tax values for citizens with a lower income than those of higher income.

Ques – What is tax on regular assessment and how is it paid?

Answer – Tax on regular assessments is when the income tax department of the country sends an individual a notice of demand to pay the tax. It is paid exactly the same way, the only difference is the tax payer need to select ‘regular assessment’ while paying the tax instead of ‘self assessment’ on the official portal.

Ques – What is the difference between Form No. 16 and I-T Return?

Answer – When an employee receives a TDS certificate on their salary by their employer it is called form 16.  While The IT Return is simply a form taxpayers are required to file providing information about their income.

Ques – Can I compute my tax at lesser amount than shown in Form 16?

Answer – No, every taxpayer is expected to remain true to the tax regulations and pay the total tax on their Gross Total Income.

Ques – What are Part A and Part B of Form No. 16?

Answer – The part A of the form talks about the information of the employer and the employees with their name, address, PAN and TAN details. While the part B of the form portrays details of the employee’s salary paid, other income (if any) and also about the deduction allowed.

Ques – What is meant by ‘profits in lieu of salary’?

Answer – While various employers believe in giving their employee with various bonus or commission or cash incentives for either an exceptional performance or for some other professional carrying out. These added bonuses are called the profits in lieu of salary.

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