A Complete Guide to Different Types of Taxes in India
Taxes are the fuel for the development of a nation, especially a middle-income country like India. The Constitution of India gives wide-ranging powers to the Central government and State governments to levy and collect taxes. It also details the sharing of central tax revenues. The Union Budget every year includes tax proposals. You may so far have been interested in the Union Budget only to know the exemption for life insurance plan payment. Here is a complete guide to different types of taxes in India.
What are the basic types of taxes in India?
There are two basic types of taxes in India, namely Direct and Indirect taxes.
A direct tax is levied directly by the Central government. The Central Board of Direct Taxes under the Department of Revenue is responsible for framing the rules for tax laws passed by Parliament. The CBDT also provides guidelines for tax administration in the country.
Here are a few important direct taxes:
Income Tax*: It is a tax imposed and calculated on the income earned by individuals in a financial year. The Income Tax Act, 1961 is the basic law while the Union Budget makes amendments to it through the Finance Act every year. Tax-payers are called assessees and tax computation is made for every financial year.
Assessees are categorized as resident and non-residents. They are also classified as individuals, companies, firms, cooperative societies, Hindu Undivided Family (HUF), etc. The assessees are taxed according to the different tax slabs in India. Under Section 80C and Section 10(10D) of the Income Tax Act, various tax deductions and exemptions are available.
For example, the premium paid towards a life insurance plan qualifies for deduction under Section 80C and the proceeds under an insurance policy are exempt under Section 10(10D) subject to fulfilment of conditions. Tata AIA life insurance tax exemptions are disclosed in the policy purchase document. Education Cess and surcharge on super income are payable on the basic income tax*.
There are three types of Income Tax*.
Corporate Tax is the tax paid from on profit earned by companies. Some other types of corporate taxes are as follows:
Minimum Alternative Tax (MAT): It is the basic minimum tax a corporation has to pay irrespective of any deductions or exemptions. Power and infrastructure companies are exempt from MAT.
Dividend Distribution Tax (DDT): This is paid on the dividends distributed by the company.
Capital Gains Tax: This is levied on the profits attributable to the gains in the market value of assets when they are sold. The sale of immovable property, shares and securities is subject to capital gains tax. Capital gains can be short-term or long-term depending on the period of holding of the asset.
Gift Tax: It is a tax levied on any form of gifts exceeding Rs 50,000 received by a person in a given financial year.
Perquisite Tax: It is a tax levied on an individual considering any perks or privileges provided by the employer such as the car, bungalow etc.,
Indirect taxes are levied on goods and services. It is not based on the income or profit earned by an individual.
There are two types of Indirect Taxes.
Goods and Services Tax (GST@): It is a tax imposed on the sale of goods and services. It replaced the various sales tax laws and VAT laws of the states. It covers different stages of the production and sales transactions for goods and services. As the tax incidence moves through the stages of production, input credit is available for the taxes paid on the previous stage. Wherever there is value addition and transfer of ownership, GST@ is applicable. It is collected by the government where the end sale is made.
It has three basic components:
CGST@: The portion of GST allocated to the Central government for sales transactions within a state. The Central government then shares a portion of this with each State government.
SGST / UTGST@: The portion of GST allocated to the respective State or Union territory government
IGST@: This is the GST on inter-state sales.
When GST@ became applicable in 2017, it removed the following separate taxes and consolidated them into one entity:
Central Excise duty
2. Customs Duty: It is a tax levied on goods and services imported from another country.
Besides the above, a few other taxes are levied by the State governments.
Property Tax: It is a tax levied by the municipal bodies on residential and commercial properties to maintain city services.
Professional Tax: It is a tax levied on all kinds of trades, professions and employment.
Entertainment Tax: This tax is computed on the gross earnings from television series, exhibitions, movie shows etc.
Entry Tax: Tax levied on every product that enters a state, especially through the e-commerce process.
Road Tax and Toll Tax: Tax collected for the maintenance of roads and associated infrastructure
Registration Fees, Stamp duty, Transfer Tax: This levy is made on the registration of certain documents such as property sale deed, settlement deed, rental agreement exceeding 1 year and so on.
Taxes in India are levied by the Central and State governments on various grounds. Therefore, it is important to abide by such tax* laws and make the necessary payments on time in the country’s interest. The tax rate in India remains relatively consistent. Make sure you pay your taxes promptly and file the tax returns accurately for every financial year to avoid unnecessary investigation, legal action and heavy fines. Consider it a moral responsibility towards nation-building. Pay taxes, get pride and help India!