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Tax

Taxation in India

Last Updated 25th Nov 2020

  • Tax is a financial charge imposed by the Central or the State Government on the citizens of a country to undertake developmental activities.
  • Taxes are of two types Direct and Indirect tax based on how it is paid to the authorities.
  • Examples of direct tax: Income Tax, Corporate Tax, Capital gain Tax, etc.
  • Examples of Indirect tax: Goods and Services Tax, Value added Tax, etc.
  • Paying taxes is beneficial for both the Government and the taxpayers.
  • Failure to pay the tax on time, may attract penalties.
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Taxation in India

Tax is a financial charge imposed by the Central or the State Government on the citizens of a country to undertake developmental activities. The tax is collected for the creation and maintenance of infrastructure, and for the welfare of the nation. Though tax is a compulsory fee that individuals or groups need to pay, yet it is collected from one’s who are capable of paying it. This means that the tax is collected as per the income slabs decided by the Government.

Types of Taxes

The distinction on the types of taxes is made based on to whom the tax is charged and who pays the tax to the concerned authorities. In other words, whether the burden of tax and its payment is done by the same person or different person. Thus, the tax is of two types- Direct tax and Indirect Tax. A detailed description of the type of taxes is listed as follows:

Direct Tax

Direct tax as the name suggests, it is the tax paid to the tax collecting authority directly by the taxpayers. Thus, the tax cannot be transferred to any legal entity or any other individual. Also, the direct tax is correlated to the income and wealth accumulation of an individual. Some types of direct taxes are:

  • Income Tax: Income tax is a tax collected by the authorities as per the annual income earned by an individual. It is charged based on various tax slabs as per income earned by an individual in a financial year. The Income Tax Rules also includes various exemptions as well, for lower-income groups and for senior citizens. The income tax is not only paid by individuals, but also by HUFs, local firms, and local authorities.
  • Corporate Tax: Corporate tax is the tax paid by a corporate entity. The tax is decided based on the dividend that a company pays to the investors, fringe benefits offered to the company’s employees, and alternative taxes paid by the company.
  • Capital gain Tax: The capital gain tax is the direct tax paid by the taxpayer on the sale of properties, and on profits earned on investments. The tax is paid on all short term and long term gains on investments.

Indirect Tax

The indirect tax is the type of tax that is paid indirectly to the Government or to the respective tax collecting authority. The tax is charged on the consumption of products and on availing of services. Thus, the tax is collected by the seller or by the service provider who collects it from the buyer as well. In contrast to a direct tax that is based on income and wealth, the indirect tax is consumption-based. Some examples of indirect tax are listed as follows:

  • GST: GST stands for Goods and Services Tax. It is levied on the supply of goods and services and at each stage of production. However, the tax is refunded to the parties involved in the production process and is ultimately collected from the ultimate point of consumption. GST covers almost all products and services, however, there are some areas that are not covered under GST. These are electricity, petroleum, and alcoholic drinks, among others.
  • VAT: VAT stands for Value-added Tax. VAT is also a consumption-based tax, however, what makes it different from GST is that there are different VAT rates for different states in the country, while GST rate is the same across all states but varies across products. The VAT is charged on products that are not covered under the GST, such as petrol or diesel.

Other Taxes in India

Some of the other taxes that generate income for the Government are listed as follows:

  • Entertainment Tax: The entertainment tax is collected on gross collection and earnings on entertainment mediums such as movies, television shows or series and exhibitions among others.
  • Entry Tax: The entry tax is the tax collected on the entry of goods and products in a state through services like e-commerce. It is applicable in the states like Delhi, Madhya Pradesh, and Assam amongst others.
  • Professional Tax: The professional tax is collected as per the earnings made by professionals such as doctors, chartered accountants, and architects among others.
  • Property Tax: Property tax is a charge levied upon by property owners of both residential or commercial properties. The tax is also called a real estate or municipal tax. It is collected by the local Governing bodies or Municipal corporation in a city for undertaking development and maintenance of basic amenities.
  • Stamp duty: Stamp duty is a one-time tax paid during the transfer of asset or property. The tax is collected for legal stamping of property or asset ownership documents.

Benefits of Taxes

As mentioned above, taxes are revenues earned by the Government that helps in the proper functioning of the society. Some of the advantages of paying taxes in India are listed as follows:

  • Taxes help the authorities to provide public services and develop amenities such as parks, Government hospitals, subsidies, and schools, among others.
  • Taxation adds more to the economy as the Government revenue’s increase due to tax.
  • Taxes help the Government develop the standard of living for people as paying taxes facilities sanitation, healthcare and education amongst others.
  • Apart from the Government, paying taxes is beneficial for the people as well as paying this compulsory charge on time helps one gets their Visa application to approve easily, as paying tax is important checkmate for making foreign visits.
  • Taxation documents such as Income Tax Returns, helps the taxpayers apply for loans and credit cards. This is because the ITR return document also acts as income proof.
  • Paying taxes also helps one to attain compensation in case of accidents or unfortunate incidents, as compensation can only be attained when one has no tax liability on his or her name.
  • Paying taxes on time can also help one high cover life insurance up to Rs 50 lakhs to 1 crore.

Tax Penalties

Paying taxes is a compulsory charge that the eligible income earners are bound to pay. Thus, not paying these taxes on time can thus attract penalties. Penalties for not paying taxes are listed as follows:

  • Partial or whole failure to pay the tax can lead to one’s termed as a defaulter, as per section 140A (1).
  • As per section 221 (1), one can even be asked to pay a penalty equal to the arrear.
  • In addition to that, in case any income source or earning is concealed or hidden, a fine of 100% to 300% can be imposed as per section 271(C).
  • When one fails to respond to the tax notice, the defaulter may be asked to submit the details of all assets and liabilities in writing. This is applicable under section 142 (1) or 143 (2).

Important Income Tax terms

TDS: TDS stands for tax deducted at source. TDS is the amount that is deposited to the income tax department on behalf of another taxpayer. TDS is charged on payments like rent, salary, commission, the interest rate earned from banks, interest on securities, and professional fee, among others. It is usually deducted by the employer or the deductor of an assessee. The deduction of TDS lowers the tax liability of the taxpayer since the charge on these taxable items is already paid at the time of payment.

Advance Tax: Advance tax as the name suggests, is the tax paid to the Income-tax department on a regular basis, instead of a lump sum. The tax under the advance tax payment is paid before the end of the financial year; thus, it is the tax paid in ‘advance’. This tax is also called the ‘pay as you earn tax’. This is because the tax is paid off by the taxpayer as and when the income is earned. The advance tax has to be paid by taxpayers when the TDS deducted is less than the total tax liability that has to be paid in a year.

The advance tax has to be paid to the income tax department if the total tax liability exceeds Rs 10,000 per year. It is to be paid by salaried individuals with other sources of income, by self-employed professionals as well. However, in some cases, the advance tax is exempted, such as in case of non earning senior citizens above 60 years of age and for salaried individuals who have only the salary as the source of income. Apart from that, if the TDS deducted is more than the tax liability, then one is exempted from paying the income tax.

HRA exemption: HRA stands for house rent allowance. It is a component of the income provided as a house rent that is mentioned under the salary provided by the employer to the employer. The HRA component provides a tax benefit to the employee every year under section 10 of the Income Tax Act, 1961. Salaried individuals can avail exemption with the HRA partially or fully, by opting the old tax regime.

Income Tax assessee: An income tax assessee is an individual who is liable for making tax payments for any income or losses incurred in a financial year. Thus, any person who has paid the tax in a previous year can be termed as the income tax assesse. The income tax assessee may pay the tax not only on his behalf but on behalf of others as well. Individual paying the tax on his or her own behalf is called the normal assesse, while that paying the tax on behalf of others is called the representative assessee. Representative assessee is usually required by the non-resident individuals, minors or lunatics.

Know More About Taxation in India

FAQs

What do you mean by tax?

A tax is a compulsory financial charge paid by the citizens of a nation to the Government authorities. Tax is charged by the authorities to maintain revenue for the developmental or infrastructural activities.

What is a tax in simple words?

In simple words, tax is the charge imposed by the Government on individuals, for the funds invested in the betterment and development of public amenities.

What are the types of tax?

Taxes are distinguished based on the method through which it is paid to the Government. Thus, tax is of two types, direct tax and indirect tax.

Which tax system is best?

GST or goods and services tax was launched with a view to unify the taxation scenario in the country. It offers benefits such as the elimination of the cascading effect of tax, digital taxation platforms, regulation of unorganized sector and composition scheme for small businesses among others.

How is the tax calculated?

Tax is calculated on the basis of income slabs that a person falls into. In addition to that, income tax calculation takes into account the income for all other sources such as salary, property, capital gains. All this is considered to determine the Gross Total Income,form which the taxable income is derived by deducting the exemption and deductions as per the tax slab.

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