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Taxes in India – What is Tax?, Types, Definition, Benefits

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Taxes in India

Tax is fees levied on products and services by an individual, an organization, or a government to generate revenue. The amount accumulated through tax is used for executing public welfare programs. Penalty charges apply to those evading tax if a tax notice goes unacknowledged by the taxpayer, if the taxpayer provides false information regarding their income to evade tax, or those who refrain from paying tax or default on payments. There are provisions in the IPC to take strict actions against tax evaders and defaulters.

Classification of Taxes:

Taxes may be broadly classified into direct and indirect taxes. This classification is based on the mode of payment.

  • Direct taxes are those that the taxpayer pays directly to the government.
  • Income tax comes under the classification of direct taxes.
  • Indirect taxes are fees/charges levied on goods and services when they are bought and sold.
  • The end consumer of the product/service pays the tax on the product he/she consumes to the seller of the given product/service. The seller pays the fee to the government as an indirect tax.
  • Therefore, the end consumer is indirectly paying the fee to the government as an indirect tax through the medium of the seller. GST, Value Added Tax, excise duty are all examples of indirect taxes.

Types of Direct Taxes:

Tax

Levied on

Eligibility

Income Tax

Annual Income/profits*

Below 60 years of age – earnings above 2.5 L per annum.

Between 60 – 80 years – earnings above 3 L per annum.

Above 80 years – earnings above 5 L per annum.

Capital Gains Tax

Money received through the sale of property or an investment.

Short term or long term capital gains from an investment

Securities transaction tax (STT)

Money received through stock market/trading securities.

Levied on the price of shares/securities

Prerequisite Tax

Benefits provided by an organization to its employees

 

Corporate Tax

Dividend distribution tax: levied on dividends the company pays to its investors.

Fringe benefits tax: levied on fringe benefits received by employees of the company, including employees’ accommodation expenses, transportation expenses, employee welfare funds etc. This form of tax does not exist. It was abandoned in the year 2009.

Minimum Alternative tax:  All companies except power and infrastructure companies must pay MAT.

Paid by a company

*Tax rates differ for different tax slabs.

Types of Indirect Taxes:

Tax

Levied on

Eligibility

Sales Tax

Product price; levied on the seller, who passes it onto the buyer at the time of purchase, added to the price of the product.

 

Service tax

Levied on services offered by a company. Service tax paid only when the customer pays the bill. The service provider must pay service tax once the invoice is raised, even if the customer does not pay the bills.

 

GST

Levied on the consumption of any goods or services. It is a consumption-based tax as it is chargeable only when the consumption of goods and services take place. Added to value-added services and goods at each stage of consumption in the supply chain.

GST or Goods and services tax is a recent introduction by the government to the list of indirect taxes. GST was introduced in 2017 to ensure that no citizen evades tax and put tax evaders on red alert.

The vendor can claim GST back with a tax credit.

Value-Added-Tax (VAT)

Imposed on all supply chain participants from manufacturers, dealers, distributors, wholesalers, retailers until the end-user.

 

Customs duty

Levied on imported goods. Chargeable on all goods that come via air, sea and land, from a foreign country.

 

Octroi

Levied on goods from another state within the country.

Levied by the state government.

Excise duty

Levied on all goods manufactured in India. Also called CENVAT or Central Value Added Tax.

Levied from the manufacturer, dealer and distributor of the chargeable products

Other Taxes:

Tax

Levied on

Eligibility

Property tax (Real Estate/Municipal tax)

Residential or commercial properties.

Residential and commercial property owners.

Professional tax

Earnings of professional practitioners.

Professionals (lawyers, chartered accountants, doctors).

Entertainment Tax

Gross collection received from exhibitions, movies, and television series.

 

Registration fees/stamp duty/transfer tax

Supplement to property tax at the time of property purchase.

 

Education cess

For funding Government of India’s education programs.

 

Entry tax

Levied on products that come from a different state through e-commerce establishments.

 

Road tax/Toll tax

For funding maintenance of roads and toll infrastructure.

 

Paying tax basically ensures that the government has sufficient funds to execute various public welfare programs and infrastructural improvements. Other benefits include funding for the following:

  • Public welfare projects
  • Public infrastructure development projects
  • Public health & education
  • Public utilities, including water, electricity, and sewage systems
  • Public insurance
  • Defence weaponry
  • Scientific research
  • Pension schemes
  • Unemployment benefits
  • State government employees’ salary

Advantages of Paying Tax:

There are several advantages of paying taxes that the taxpayer gets to enjoy. For instance, it is possible to use tax return documents of income tax as a proof document to apply for a loan/financial assistance.

  • Loan approvals:  While applying for bigger loans like home and vehicle loans, a copy of ITR from the previous 3 years is requested by banks. If you attach a copy of your income tax returns filing from the last 3 years, you can apply for a higher loan amount or reapply if your application got rejected the first time. The reason for this being the banks calculate your repaying ability and credit risk based on your income. ITR is a document that can be used as proof of your income to receive bigger loans quickly.
  • Visa: Foreign consulates request for your ITR returns at the time of visa interview to ensure that you are not escaping your country to evade paying taxes. If you are traveling abroad, especially to countries like UK, US, Canada, Middle East and European countries, it is advisable to keep your ITR receipts with your passport.
  • For self-employed/freelancers/consultants: If the annual income is above the exemptions limit, ITR receipts may be used as proof of their income for any financial/business transactions.
  • Government tenders: ITR receipts are used as proof of income while applying for government tenders.
  • Tax refunds:  You can claim tax refunds only if you have filed your Income Tax Returns. If your income is below the exemption limit, you can claim refunds from savings instruments like fixed deposits.
  • Life insurance: If you have a life insurance policy worth a larger amount, like 50L or 1 crore, you have to furnish your IT returns to avail of the benefit.
  • Compensations for accidents: In the case of a vehicle accident, self-employed individuals must furnish Income Tax Return receipts for claiming compensation.

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Taxes in India FAQs:

1. Difference between exempt income and taxable income?

Taxable income is chargeable for tax. Exempt income is income that is exempted from tax.

2. What is the definition of ‘profession’ with regard to the Income Tax Act?

With regard to the Income Tax Act, the profession is a vocation wherein a person uses his/her technical skills independently. For instance, engineers, doctors, lawyers, architects, consultants, freelance writers and artists come under the term ‘profession’.

3. How to claim a refund of excess taxes paid?

Firstly, you have to file your Income Tax Returns. Then, through the ECS (Electronic Clearing System), the amount will be credited to your bank account.

4. Which taxes were replaced by GST?

Central and state indirect taxes, including VAT, excise duty and service tax, were replaced with GST, with effect from Jul 1, 2017.

5. When to start filing an income tax return in India?

On or before Jan 10, 2021, of this financial year.

6. How to file Income tax returns in India?

Go to https://www.incometaxindiaefiling.gov.in/home. Complete registration. Login to your account with your user ID, which will be the PAN card number, password, date of birth, and enter the captcha displayed. Once you are logged in, click on the e-file tab and press of the Income Tax Return link.

7. Who collects taxes in India?

Revenue authorities are responsible for collecting taxes in the country. The Central Board of Direct Taxes (CBDT) and the Central Board of Indirect Taxes and Customs (CBIC) are two statutory boards under the Department of Revenue.

8. How to save taxes in India?

Reduce your taxable income by investing 1.5 L INR under Section 80 (C). Purchase medical insurance and claim a deduction on insurance premium of up to INR 25000/INR 50000. A home loan can also help in saving taxes by deducting your taxable income.

9. Which country has no tax?

Bahrain and Brunei do not levy corporate or income taxes.

10. Where does the tax money go?

It goes to developing our country’s public sector undertakings and public welfare activities, and infrastructure.



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