Budget 2024: From Income Tax To GST; Understand India’s Tax System In Simple Terms

Taxes are mandatory payments imposed on individuals by the state and central governments, serving as crucial sources of revenue to develop our nation’s economy and infrastructure.

Types of Taxes in India

India’s tax structure operates across three tiers: local municipal bodies, state governments, and the central government. Taxes in India are broadly categorised into direct and indirect taxes.

I. Direct Taxes

Direct taxes are levied directly on individuals’ income or profits. Examples include income tax, personal property tax, and fringe benefit tax (FBT). These taxes cannot be shifted to others and are managed by the Central Board of Direct Taxes (CBDT).

II. Indirect Taxes

In contrast, indirect taxes are imposed by the government on goods and services. These taxes can be passed from one taxpayer to another. For instance, wholesalers pass these taxes to retailers, who then pass them on to customers. Therefore, consumers ultimately bear the burden of indirect taxes. The Central Board of Indirect Taxes and Customs (CBIC) oversees and administers these taxes.

Types of Direct Taxe

1. Income Tax: Income tax is imposed on profits and earnings during the financial year. It’s the most common direct tax, levied by the Central government on income generated by individuals and businesses. The amount you pay depends on your income from various sources and exceeds a basic exemption limit applicable to you.

a) Individual Income Tax: Also known as personal income tax, this is levied on salaries, wages, investments, and other income earned by individuals or households. It’s a progressive tax, with rates varying based on income thresholds.

b) Corporate Income Tax: Businesses incorporated under law are taxed on their profits (after allowable deductions). Corporate income tax is a major revenue source for governments, ranking third after individual income tax and payroll taxes.

2. Capital Gains Tax: This tax is applied to profits made from selling assets like property and stocks. Rates vary depending on income level and how long the asset was held-short-term gains (held less than a year) and long-term gains (held more than a year).

3. Wealth Tax Act: Previously, if an individual’s net wealth exceeded Rs 30 lakhs, they had to pay 1 per cent of the amount exceeding this limit as tax. However, this tax was abolished in the 2015 budget and replaced with a 12 per cent surcharge on individuals earning more than Rs 1 crore annually. The surcharge also applies to companies with annual revenues exceeding Rs 10 crores.

4. Gift Tax Act: Established in 1958, the Gift Tax Act initially imposed a 30 per cent tax on gifts like shares, jewellery, and property. However, this tax was discontinued in 1998. Currently, gifts from family members and local authorities are tax-free. Gifts from others exceeding ₹50,000 in value are fully taxable.

5. Securities Transaction Tax (STT): The Securities Transaction Tax (STT) is levied on buying and selling securities such as stocks, mutual funds, and derivatives on recognized stock exchanges in India. The rate of STT varies by the type of security traded.

Types of Indirect Taxes

1. Sales Tax: Sales tax is a consumption tax applied to goods and services at the point of sale. Once added to the price, it’s collected by the retailer from the end consumer and remitted to the government. Sales tax rates vary across states and local jurisdictions, making compliance complex for businesses.

2. Excise Tax: Excise taxes are imposed on specific goods like alcohol, tobacco, and fuel at federal, state, and local levels. Companies typically include these taxes in the price paid by consumers. Unlike sales tax, excise taxes are not always separately listed on receipts, which can make them less visible to consumers.

3. Value-Added Tax (VAT): VAT is a tax levied on the value added at each stage of the supply chain in the production of goods and services. Businesses along the chain pay VAT on their sales and are reimbursed for VAT paid on purchases. Ultimately, the end consumer bears the VAT cost. For example, if a product costs Rs. 1,000 and has a 10 per cent VAT, the consumer pays Rs1,100; the retailer keeps Rs. 1,000 and remits Rs. 100 to the government.

4. Gross Receipts Tax: This tax is imposed on businesses based on their total sales revenue, without deductions. While businesses pay this tax, they often pass on the cost to consumers.

5. Goods and Services Tax (GST): GST is an indirect tax on a wide range of goods and services. It replaced several taxes like excise duty, service tax, and state/central sales taxes, eliminating the cascading effect of tax-on-tax. GST is designed to streamline taxation and enhance transparency in India’s tax system.

Advantages of Direct Tax:

1. Direct taxes are progressive, meaning individuals with lower incomes pay lower taxes compared to those with higher incomes.

2. Direct taxes help in controlling inflation and reducing income inequalities.

3. Both the government and taxpayers have clarity on tax obligations, ensuring certainty in payment schedules.

Advantages of Indirect Tax:

1. Indirect taxes ensure every individual contributes to national development.

2. They are easily collected from the end consumer, streamlining the tax collection process.

3. Indirect taxes are perceived as fair, with essential goods taxed less than luxury items.

Disadvantages of Direct Tax:

1. Tax evasion and avoidance practices are prevalent among taxpayers, leading to lower tax revenues for the government.

2. The documentation required for direct tax compliance can be complex and time-consuming.

3. Direct taxes cannot be passed on to others in the economic chain, unlike indirect taxes.

Disadvantages of Indirect Tax:

1. Indirect taxes can increase the overall prices of goods and services, impacting consumer affordability.

2 . Consumers often lack awareness of the total taxes they pay on goods and services.

3. The revenue from indirect taxes can be unpredictable, fluctuating with changes in consumer spending patterns and tax rates on different products.

Source: oneindia