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Tax: What is Tax, Types of Taxes in India

Tax: What is Tax, Types of Taxes in India

Tax Collected at Source | Payment, Exemption, Rates
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The government of every nation needs to collect taxes from its citizens to run the country. You have to pay taxes to your local authorities, no matter which part of the world you are living in. You may not like to pay taxes because it lowers your total income, but it is essential to run the nation judiciously. Once you understand - what is tax and its different types, you can manage taxation better.

What is Tax?

Taxes are a way for the people of a state to undertake projects for the benefit of a large population. These projects are usually too big for a few individuals to undertake in a private capacity. Also, such projects may not have huge commercial benefits, such as providing a regular supply of clean drinking water.

Thus, the state must collect funds from the public and other sources to fund such activities. Gradually, such contributions have been standardized as a tax on income and expenditure. Few salient features of tax in India include:

a) Taxes can be levied annually, or on each transaction
b) Local, state and central authorities can levy taxes
c) All taxes must be deposited with the central or state tax authorities
d) Only state and central governments can reallocate the tax collection pool for investment and other purposes

Example of tax: When you pay Rs 80,000 to buy a new 55-inch television, 28% of the total amount paid by you goes to Goods and Service Tax (GST). It is one type of tax. There are different tax categories in India, and we will learn about each.

As a citizen of a state, you must pay your due taxes on time. If you fail or refuse to make the due contribution, you can be penalized financially or with incarceration.

Types of Tax

Whether you are an individual or a business owner, you need to pay taxes in a different form. The taxes in India are divided into two categories as below:

a) Direct Taxes

As the name suggests, these are taxes that you directly pay to the government. You cannot transfer direct taxes to any legal entity or other individuals.

These come under the Central Board of Direct Taxes (CBDT). Examples of direct tax are the Income Tax and Wealth Tax.

b) Indirect Taxes

These are different from direct taxes concerning the collection method. These are consumption-based and apply to goods and services sold or bought.

The government collects the indirect tax from the seller of goods or services. The seller collects the tax from the end-user - goods or service buyer. Hence, these are taxes that you pay but not directly to the government. Examples of indirect tax include GST, VAT, etc.

Types of Direct Taxes

Direct taxes are divided into the following categories:

Direct Tax Type Description
Income Tax It is levied on your annual income or the profit you make. It is paid directly to the government. If you earn any kind of income and if it is above the exemption limit, you will have to pay income tax. If your age is below 60 years, the tax exemption limit is Rs 2.5 lakh, and for senior citizens, it is Rs 3 lakh.
Capital Gain Tax If you have sold a property or stocks (mutual funds) and made a profit in the transaction, you pay capital gain tax on the gains. Capital gain taxes can vary based on the years you held the investment - it could be short-term or long-term capital gain taxes. The definition of the short and long term depends on the investment type.
Prerequisite Tax You may receive some perks from your company over and above your salary - could be food coupons, fuel reimbursement, etc. These are taxed separately and come under Prerequisite Tax.
Corporate Tax The taxes paid by the company come under the corporate tax. The tax rate depends on the company's revenue in a financial year.
One of the corporate taxes is Dividend Distribution Tax (DDT) which is taken on the dividends companies pay to their investors.
DDT has been discontinued from FY 2020-21. Therefore, recipient of the dividend will be liable to pay tax per month if the company is not distributing dividend. It applies to the net income that an investor receives from the investment.

Types of Indirect Tax

There is only one indirect tax now charged by the government.

Indirect Tax Type Description
Good and Service Tax (GST) GST is a consumption tax introduced in 2017 to replace many other indirect taxes like Value Added Tax (VAT), Service Tax, Excise Duty, etc. The tax is added to a product's (or service) final price. Hence increases the final price. Manufacturers have to pay GST on the raw material they purchase. Service providers pay GST on the amount paid for the product. Retailers need to pay GST on the product being purchased from the distributor.

What are the Benefits of Paying Tax?

Below are the benefits of taxes to the government and citizens:

a) Taxes help the state and central government provide public services and develop amenities such as parks and schools. Also, a part goes to enhance the defence sector of the nation.
b) It improves the living standards of citizens as taxation improves healthcare, education, and other sectors.
c) Taxes allow the government to offer various public schemes like unemployment benefits, pension schemes, etc.
d) Taxation documents help you get loans and credit cards as ITR return serves as income proof.
e) Taxes also help citizens in their Visa application form as it is one of the important parameters considered in the visa process.

Why should you Pay Taxes on Time?

Every individual and business owner must pay taxes on time to the government. If you fail to do so, the government can impose penalties on you or your business. The tax penalty will depend on the tax category under which you have not paid tax.

Below are some situations in which you have to pay a penalty, and a corresponding penalty.

a) Income not Disclosed Completely

If you have not disclosed your 100% income, you can be charged a penalty of 50% of tax payable on under-reported income. If under-reporting was because of misreporting, you have to pay 200% of the tax payable.

b) Penalty on Fake Documents

If you have shown falsified documents such as a fake invoice or documentary evidence in your returns, you need to pay a penalty of the amount equal to the sum of such false or omitted entries.

c) TDS

If a business fails to deduct Tax at Source, they will be liable to pay a penalty equal to the tax amount.

You cannot avoid tax. However, you can better plan your taxes and reduce your tax burden. Section 80C, 80D, and other section 80 provisions of the Income Tax Act, 1961 give you options to save tax. You can build your wealth, look after the financial safety of your family and incur other necessary expenses and save tax.

Calculate your income from different income sources, calculate your tax liability and file your taxes on time.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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