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Every government needs to provide good infrastructure and services to its people. But to do this the government needs to have separate funds earmarked for development. To gather funds, governments opt to levy taxes on their citizens. Many types of taxes in India are levied on the public.
In India, the taxation system has a proper structure where the taxes are divided into two categories: Direct taxes and Indirect taxes are the two main types of taxes in India. Different types of taxes in India are categorized under each type for better clarity.
The taxation system is implemented by the central government, state government, and local municipalities. These three tiers of government play a major role in the Indian taxation system. Each tier of government has the authority to impose a specific tax.
More details about the types of taxes in India and the Indian Taxation System have been discussed in this article. Read further to understand the different types of taxes and the benefits of the Indian taxation system.
When was the Income Tax introduced in India?
Income Tax in India was first introduced in 1860 by the then Finance Minister Sir James Willson. The British government suffered heavy losses during the 1857 mutiny in India. Income tax was introduced in India to recover from those losses.
The Indian Income Tax Act of 1860 marks a significant moment for taxation in Indian history. With the introduction of this Act, the British government started to collect taxes from the public.
Under this Act, Income Tax was divided into four categories based on the source of income. They were:
- Land
- Profession/Trade
- Securities
- Salaries/Pensions
Although this Act has been revised and replaced over time, it is still considered to be the basis for Indian Taxation Laws.
Who Collects These Types of Taxes in India?
The authority to collect these taxes in India is bestowed by the Indian Constitution. The taxes are collected by the three tiers of the government: Central, State, and Local Municipalities. Each tier of the government has the authority to levy specific categories of taxes on the public. A few examples of types of taxes in India that can be levied by each tier of the government are listed below:
Central Government: Income Tax, Customs Duty, Excise Duty, Corporation Tax etc.
State Government: Land Revenue, Tax on Agricultural Income, Tolls, Estate Duty, Stamp Duty, etc.
Local Municipalities: Property tax, Service tax including water, drainage, sanitation, etc.
Let’s Understand the Types of Taxes in India
There are different types of taxes in India that are levied. These taxes are broadly classified into two categories based on how they are collected.
1. Direct Tax
Direct taxes are charged against the individual’s income and profits. These taxes need to be paid directly to the authority imposing the tax. Direct taxes cannot be transferred to another individual or entity for collection. The taxpayer who is charged needs to pay the liability himself/herself.
Direct taxes come under the purview of the Central Board of Direct Taxes (CBDT). Several income tax acts that preside over different aspects of direct tax are taken into account by CBDT.
The Department of Revenue, which has the authority over Direct Taxes in India, governs the CBDT. It also plays a pivotal role in providing input to the government regarding direct taxes and their implementation.
Types Of Direct Tax in India:
Different types of direct taxes are levied on taxpayers in India. These taxes are based on the different income sources of the taxpayer.
Income Tax
The income generated from any source such as salary, profit from investments, business, etc is taxed. The Income Tax Act of 1961 governs the income tax rules in India.
Wealth Tax
The taxation on an individual or a company’s net wealth is called Wealth Tax. This tax is governed by the Wealth Tax Act, of 1951.
Gift Tax
Under the Gift Tax Act of 1958, valuable gifts received by a person are subject to tax. But, under the new guidelines certain exemptions have been added to this Act. Gifts received from local authorities and family members are now not subject to Gift Tax.
Expenditure Tax
The services availed by an individual in a restaurant or hotel are subject to tax. The Expenditure Tax Act came into force in 1987 and levies tax on expenditures over Rs. 3000 in hotels and restaurants.
Interest Tax
This tax was charged to taxpayers on interest earned by them in certain situations. After the recent amendment to this Act, the Interest Tax cannot be levied on interest earned after March 2020.
2. Indirect Tax
Indirect taxes, as the name implies, are not levied directly on the taxpayer. Instead, these types of taxes in India are charged on goods and services.
As indirect taxes are imposed on the goods and services, they are added to the final price. As a result, the prices of these products shoot up making them more expensive for the end user.
The Central Board of Indirect Taxes and Customs(CBIC) looks into the administration of Indirect taxes in India. The CBIC is also governed by the Department of Revenue.
Types Of Indirect Tax in India:
Different types of indirect taxes are levied on goods and services in India. Some of the most common types of Indirect taxes are:
Sales Tax
One of the types of Taxes in India is the Sales tax, which is imposed on the sale of products manufactured in the country or imported. Sales tax can also include the services provided by the seller for the sale of the product. This tax is often added to the price of the product, which results in an increase in its sale price.
Service Tax
One of the most popular types of tax in India is Service tax, which can be levied on the services provided by a company to its customers is called Service tax. This tax is also added to the price of the service and as a result, the customer ends up paying more.
Value Added Tax(VAT)
Similar to the other types of taxes in India, Value Added Tax, also known as Commercial Tax, as is charged on the supply chain. All parties in the supply chain including the manufacturers, dealers, distributors, and end users have to pay VAT. The State governments decide the amount of VAT to be levied.
Customs Duty and Octroi
Many types of Taxes in India are imposed on the import of goods that come from abroad or those which cross State borders. Taxes imposed on imported goods are called Customs Duty. The tax imposed on goods that cross State borders is called Octroi.
Excise Duty
One of the main types of taxes in India is the Excise Duty tax, which is imposed exclusively on goods that are manufactured in India and must be paid when such goods are ‘removed’. The tax is levied on manufacturers and is passed on to consumers.
Also Read: Understanding Direct Tax and Indirect Tax: What You Need to Know
Classification of Taxes in India for GST
The Goods and Services Tax(GST) is an Indirect tax that is levied on the sale of goods and services. This tax system was created to reduce the effect of multiple Indirect taxes. It was created by merging the above-mentioned forms of indirect taxes. GST is applicable all over the country under the policy of a one-nation, one-tax regime.
A detailed explanation of how GST works is given below:
- Manufacturer: The manufacturers need to pay GST on the raw materials purchased by them. Tax is also charged on any extra value that has been added by the manufacturer to make the final product.
- Service Provider: The service provider is charged GST based on the product’s purchase price and the value added to it. Here, the manufacturer’s tax payment can be deducted from the total GST due.
- Retailer: GST is levied on the retailer based on the price of the product bought from the retailer and the margin added by them. The GST paid by the retailer can however be deducted from the total GST due.
- Consumer: GST is levied on the final price of the product.
Four different types of GST are applicable in India. The taxation rates differ from one type of GST to another. Here is a brief write-up about the different types of GST.
CGST – Central Goods And Services Tax
The Central Goods and Services Tax(CGST) is levied on intrastate transactions. As these transactions are carried out within the state, CGST is levied along with UGST or SGST. The revenue generated is collected by the Central government and is distributed between the State and Central governments.
To understand how CGST works, let us consider this example. A trader in Hyderabad has sold products to another trader in the city. Since this transaction is an intra-state sale both CGST and SGST are applicable here. The tax revenue generated from this transaction is divided among the State and Central governments.
SGST – State Goods And Services Tax
The State Goods and Services Tax(SGST) is levied on all goods and services transactions that take place within the state(intrastate). The revenue generated by levying the SGST is collected solely by the State government. CGST is also levied along with SGST and the revenue collected from it is deposited to the Central government.
For a better understanding of how SGST works, let us consider this example. A manufacturer in Gujarat has supplied goods to a dealer in Gujarat. Here GST is levied on the transaction but as this is an intrastate transaction, the revenue is deposited to both the Central and State governments. The revenue sent to the Central government is collected as CGST while the revenue sent to the State government is collected as SGST.
IGST – Integrated Goods And Services Tax
The Integrated Goods and Services Tax (IGST) is levied on interstate transactions of goods and services. This tax can also be levied on imports and exports. Since the transactions take place within the state, the SGST and CGST are also applicable here.
The IGST can easily be understood with the help of a simple formula:
IGST = CGST + SGST
The IGST is paid by the person who is receiving the goods or services. This tax amount is then collected by the sender and sent to the Central government through CGST. The revenue is shared between the Central and State governments.
Benefits of the Indian Tax System
The Indian tax system is designed with the aim of redistributing income among the population. The tax revenues are used to develop proper infrastructure and to run social welfare programs. Tax revenues help the country to better its economic position and boost its morale.
With different types of taxes in India, the economic burden of the country can be successfully distributed among all classes of society. The tax revenues are spent by the State and Central governments on various developmental projects. It is essential for taxpayers to pay their taxes on time to ensure proper revenue generation for the government.
Some of the significant benefits of the Indian tax system are:
- Better infrastructure and services for the general public.
- Development of social welfare programs like public education, health, and nutrition.
- Funding public education systems including the payment of teachers’ salaries, improving school infrastructure, etc.
- Allocation of more funds for defense expenditures like the purchase of the latest equipment, defense research, and development.
- Salary and pension payments for government employees.
- Improvement of health and medical infrastructure.
Contribute to Building a Better India by Paying Taxes
Paying taxes should not be considered an unjust burden. The tax revenues help the government to build better infrastructure and fund more social development programs. Keeping the marginalized and underdeveloped sections of society in mind. Every citizen who is earning an income should strive to pay their taxes dutifully on time. This will help to build a better India faster.
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Frequently Asked Questions (FAQs)
Taxes can be divided into three distinct types.
1. Sales Tax: Charged to the consumer who is buying the goods and services.
2. Income Tax: Levied on the income earned by working for a company or a business.
3. Property Tax: Levied on the value of the property owned by an individual.
No. TDS(Tax deducted at source) is not a direct tax. This is an indirect tax method that is collected by the Indian government based on the Income Tax Act, of 1961.
GST(Goods and Services Tax) is an indirect tax that is charged on the supply of goods and services. This tax system was started as a part of the one-nation, one-tax philosophy.
The Goods and Services Tax(GST) is an indirect tax that is charged on the price of goods and services. This tax is added to the price of the product and the consumer ends up paying the GST along with the sale price.
The full form of TDS is Tax Deducted at Source. The TDS is deducted by the payer from the income source(gross salary) before paying it to the earner.
The Goods and Services Tax(GST) was introduced with the aim of reducing the burden of indirect taxes. With GST, tax administration has become easier for the government.
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