Importance of taxes in India

Importance of Taxes in India: Role, Importance, and Impact

Taxes are crucial for funding government functions and public services, including infrastructure, healthcare, education, & social welfare programs.

Written by : Knowledge Centre Team

2026-01-09

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6 minutes read

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Wondering why tax is important and what is the role of taxation in the Indian economy? The Government of every country requires funding to perform its necessary functions and duties. These include operating public institutions, developing the country’s infrastructure and financing public welfare initiatives and schemes. In exchange for providing these amenities, a government generates the revenue required for them by taxing its citizens.

To make this process efficient, every country has a proper taxation process laid out by its government. India, with its wide distribution of income earners and sources of revenue, is no different. The importance of Income Tax in India cannot be overstated.

Let us discuss the Indian tax system in more detail, the need for taxation, importance of taxes in India, and how you can save income tax in India.

Key Takeaway

  • Taxes fuel the growth of a nation. It is used for funding public services, infrastructural development, and welfare schemes for a well-functioning society.

  • Direct taxes are levied on your income, while indirect taxes are levied on goods and services. Understanding this can help you know your contributions to the economy.

  • From deductions on life insurance and health premiums to home loan exemptions, there are so many ways to reduce your tax burden.

  • Late tax payments can lead to non-compliance, which can be as high as concealment of income. Evasion can lead to hefty fines, frozen bank accounts, and even imprisonment.

  • Every single rupee paid in taxes promotes income equality, helps economic growth, and ensures access to essential services, allowing tax compliance to be a shared national responsibility.

Tax System in India

India has a structured tax system, and the importance of taxes is defined by two attributes: progressive and proportional. It is progressive in that the tax is levied at increasing rates on increasing brackets of income and revenue. Meanwhile, it is proportional in that the rate of tax levied is in proportion to the amount of income or revenue it is being levied upon.

Any changes in tax rates, brackets and slabs are determined largely by the central and state governments and must be accompanied by a law passed by the Parliament or State Legislature.

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Recent Updates in India’s Dual Tax Regime (FY 2025–26 / AY 2026–27)

Starting FY 2025–26, India’s new tax regime under Section 115BAC is the default for individuals and HUFs, unless they pick the old one. This new system has simpler tax slabs and removes most exemptions and deductions. Plus, the rebate under Section 87A means no tax for people earning up to ₹12 lakh, making it great for those who don’t have many deductions. But if the old regime saves you more with exemptions like 80C, 80D, or HRA, you can still choose that instead. Now, let's discuss: why taxes are important?

Types and Importance of Taxes

From income tax to customs duty, there are a variety of taxes applicable to Indian citizens under the nation’s taxation system. However, almost all taxes under the Indian taxation system can be primarily distinguished under two categories: direct and indirect taxes.

  • Direct Taxes: These forms of taxes are levied directly on the taxable income generated by individuals and corporations. The importance of these taxes is that they are paid directly to the government and make up a significant portion of India’s tax-generated revenue. An important thing of note is that while they are known as ‘direct’ taxes, the responsibility of submitting these tax amounts rests on the taxpayers themselves.

    Some of the most important direct taxes are the income tax, Corporate Tax, capital gains tax, property tax, entitlement tax and such.

  • Indirect Taxes: The other form of taxes is not levied directly on a taxpayer’s income but rather indirectly when they avail or purchase goods and services. These taxes are included and paid by the consumer to the service provider or goods seller. The same amount is then paid by these parties to the government, hence the term ‘indirect’.

    One of the most important indirect taxes is the Goods and Services Tax (GST), which has subsumed a large number of indirect taxes that existed before 2017. Apart from GST, there is also Custom Duty, Securities Transaction Tax and such.

Importance of Taxes

Now that we understand the types of taxes in the Indian tax structure, let us review the importance of taxes as understood by this distinction.

  • Importance of Direct Taxes: Direct taxes display the importance of taxes by reducing income inequalities with their progressive tax structure. Citizens are taxed in proportion to their economic circumstances, thereby encouraging social and economic equality.

    Moreover, with direct taxes, taxpayers remain aware of how much tax they can be expected to pay in a financial year and prepare well in advance. Direct taxes are also useful in controlling inflation, as any change in their rates can help in regulating demand and supply in the economy.

  • Importance of Indirect Taxes: The importance of taxes for the government when it comes to indirect taxation is that they are an automatic function that accompanies the buying and selling of goods and services across the country. They are easy to collect and convenient for both taxpayers and the tax collection authorities.

They also help broaden the country’s net of tax liabilities, gathering contributions from those sections of society that are exempted from direct tax.

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Did You Know?

In 1970-71, personal income tax had 11 slabs, with the highest rate at 85%. With a 15% surcharge, the marginal rate hit a whopping 97.75%.


Source: ET

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Why is It Important for Every Citizen to Pay Taxes?

The need and importance of income tax in India are evident. Taxes are the government's primary revenue source, enabling it to fund critical public services and drive the country's development. They enable the government to fulfil its responsibilities and drive the country's progress. By paying taxes promptly and honestly, citizens can contribute to the overall development of India and secure a better future for all.

Here are some key reasons why paying taxes is important in India:

  • Funding Public Services and Infrastructure: Taxes collected by the government finance a wide range of public services and infrastructure projects, such as healthcare, education, transportation, and social welfare programs. Without adequate tax revenue, the government would be unable to provide these essential services to citizens.
  • Promoting Economic Growth: Taxes are crucial in shaping the country's economic policies and promoting sustainable growth. Higher direct tax rates can encourage saving and investment, while indirect taxes can boost producer efficiency and consumer choice.
  • Reducing Income Inequality: India's progressive tax system, where tax rates increase with income levels, helps reduce income inequality and promote social and economic equality.
  • Fulfilling Civic Responsibilities: Paying taxes is a fundamental civic duty that demonstrates one's commitment to the nation and its development. It is a shared responsibility that all citizens must uphold.

  • Accessing Government Benefits: Timely tax payment is often a prerequisite for various government benefits, such as obtaining loans, securing government tenders, and obtaining tax clearance certificates for high-value transactions.

  • Funding Welfare Schemes: A significant portion of tax revenue is allocated towards running social welfare programs and schemes that benefit various segments of society, from employment initiatives to subsidies on essential commodities.

Tax Benefits and Exemptions in India

The government of India has a structured taxation system that also involves tax benefits and exemptions. It is only to motivate the citizens to include savings, investment, and long-term financial security in their future planning. They allow citizens to reduce their taxable income, which in turn helps them lower their tax burden.

The following provisions are a part of the tax saving:

  • Deductions under Section 80C: If you are investing a part of your income in Life Insurance Premiums, Employees’ Provident Fund (EPF) & Public Provident Fund (PPF), and Equity Linked Savings Scheme (ELSS), Section 80C deductions are applicable for you. It allows exemptions of up to ₹1.5 lakh for these premiums in a financial year.
  • Tax Deductions on Health Insurance (Section 80D): Having health insurance is a form of financial security when it comes to medical expenses and unexpected emergencies. Another good thing about having health insurance is the tax exemption under Section 80D of the Income Tax Act. All premiums you pay for an individual, spouse, children, or parents fall under this category. The exemption limit varies up to ₹25,000 for self and family and an additional ₹50,000 for senior citizen parents.
  • Exemptions on House Rent, Home Loans and Leave Travel Allowance (LTA): Salaried individuals living in a rented house can claim an HRA (house rent allowance) exemption while filing their tax return. Even home loan deductions are possible for those who pay interest for home loans of up to ₹2 lakh annually under Section 24(b). It encourages people to save up better while also having a roof over their heads. If, as a salaried employee, you get a Leave Travel Allowance (LTA) from the employer, then these expenses are also tax-exempt. 
  • Exemption on Long-Term Capital Gains (LTCG): Reinvesting gains from property sales into new residential properties is considered an investment made under section 54. It helps taxpayers to reduce or even eliminate the Long-Term Capital Gains (LTCG) liabilities. These exemptions, if used in the right manner, can help you save big on your financial planning.

Penalties for Not Paying Taxes in India

There are always consequences for non-payment of taxes and penalties for late payments. Failure to comply with the tax obligations in the country can lead to fines, charges, and even legal complications. As per the Income Tax Act of 1961, all must abide by their tax commitments. Here are the outcomes of not doing so. 

  1. Interest on Late Payment (Sections 234A, 234B, and 234C): Underpayment or non-payment of taxes can lead to heavy penalties; check these out:
    • Section 234A states that if you file your income tax returns late, an interest of 1% is levied per month. 
    • As per Section 234B of the Income Tax, 1% interest per month is applicable if you have not paid at least 90% of the total tax liability by the end of March. 
    • Section 234C goes for an interest penalty for delay in the payment of advance tax. 
       
  2. Penalty for Concealment of Income (Section 270A): Taxpayers who intentionally hide, underreport, or misreport their income fall under Section 270A, which states that you are liable to pay 50% to 200% of the total tax payable. It is imposed according to various factors. 

  3. Prosecution for Tax Evasion (Section 276C): Now, you should know that tax evasion not only has consequences but is considered a criminal offence. The outcomes can be as severe as imprisonment between 6 months and 7 years, with fines, if evasion of over ₹25 lakh is registered. Meanwhile, for lesser amounts, imprisonment may range from 3 months to 2 years.

  4. Late Filing Fees (Section 234F): If you pay the income tax return after the due date has passed, you are liable to pay the following late fees:
    • ₹5,000 if the deadline is passed, but you pay it before 31st December.
    • ₹10,000 if you file it after 31st December.
      Here, a reduction of ₹1,000 is applicable for taxpayers with an income below ₹5 lakh. 
       
  5. Freezing of Bank Accounts and Assets: In extreme cases of tax evasion, where the defaulters are accountable for large income concealment for a prolonged period, the income tax department has the authority to freeze their bank accounts. They may as well seize assets or initiate recovery proceedings.

  6. Disqualification from Government Benefits: Those who do not comply with the country's tax regulations often face adverse consequences due to the impact on their eligibility for various government schemes. You may not be eligible for participation in schemes, loans, and even financial services where tax clearance is necessary.

Conclusion

While the importance of taxes to the country’s government cannot be overstated, the central government also makes various provisions to help citizens save income taxes in India. One of the most effective means of saving income tax in India while safeguarding the financial future of your loved ones is to avail of a trusted term insurance plan.

To that end, consider availing the iSelect Smart360 Term Plan by Canara HSBC Life Insurance. This term insurance plan provides useful features such as extensive coverage options and add-on covers. Moreover, it also helps you save income tax in India by availing deductions of up to ₹ 1.5 lakh in a financial year under Section 80C.

Glossary

  1. Proportional Tax: A tax system where the tax rate is fixed and does not change as the taxable base amount increases or decreases.
  2. Progressive Tax: A tax system where the tax rate increases as the taxable base amount increases. 
  3. Tax Liabilities: The amount of money or debt that a person or organisation owes the government in taxes.
  4. Advance tax: is the tax you pay in instalments during the financial year if your total tax liability exceeds ₹10,000
  5. PPF: It is a long-term savings scheme offering tax-free returns, safety, and deductions up to ₹1.5 lakh under Section 80C
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FAQs

The importance of taxation can be understood by its primary purpose of financing government spending. Throughout history, many arguments and explanations for taxes have been put forth. Early taxes were used to finance the construction of defences, armies, and governing classes. The government requires funding for a variety of public services, including social welfare schemes, healthcare, education, and infrastructure. Taxes gathered from both individuals and corporations account for the majority of this revenue.

The three most important taxes are:

  • GST: The Goods and Services Tax (GST) is an indirect tax that is applied to different types of goods and services. The removal of the tax-on-tax or cascading impact of the former tax regime is one of the main advantages of the GST.

  • Excise Duty: Excise duty is a levy levied on the manufacturing, licensing, and sale of specific domestically produced items.

  • Sales Tax: When a seller sells or trades a taxable good, they may charge the buyer sales tax, which is a form of indirect tax. On behalf of the buyer, the seller then reimburses the government for the tax. 

Taxation can be used to direct or influence citizens' consumption habits. It also encourages or discourages investment in particular economic areas. The government can greatly decrease the quantity of "harmful," "antisocial," but lawful economic activity through this. In addition, it can be used to shield regional and small companies from larger, international competitors and to reposition them for success.

 

Section 234A of the Income Tax Act of 1961 states that you will be responsible for paying 1% interest on the unpaid tax balance each month if you fail to make your tax payments on time. The date on which you file your return for the applicable fiscal year and the deadline for payment determines how much interest you will pay.

 

The different types of taxpayers can be categorised as follows:

  • Individuals

  • Hindu Undivided Family (HUF)

  • Companies

  • Association of Persons(AOP) and Body of Individuals (BOI) Firms

The objectives of taxation in the Indian government revenue are to fund infrastructure, defence, education, healthcare, and welfare, while redistributing income and regulating the economy for balanced and inclusive national development.

Paying taxes helps build roads, schools, hospitals, and security systems, promotes social justice, reduces inequality, and supports collective growth and long-term progress of the nation.

Direct taxes like income tax strengthen government finances, reduce income gaps, control inflation, encourage responsible savings, and support GDP growth through sustained public spending and investments.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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