The government needs funds to run and manage the country, including developing infrastructure, operating public institutions, and launching various schemes for the benefit of different segments of society. While there are many ways in which the government sources these funds, taxes* are one of the biggest contributors.

Around the world, countries have elaborate taxation systems that help the government run the country efficiently. In this article, we will talk about the importance of taxation in India and why every citizen must ensure that taxes* are paid on time.


Taxation in India

The taxation system in India is highly structured and based on two core attributes:

• Progressive – tax* rates increase as the income/revenue of the taxpayer increases

Here is an example:
The annual income of three friends is as follows:

• Rahul: ₹2 Lakh

• Vijay: ₹10 Lakh

• Ravi: ₹30 Lakh

Progressive tax* means that the tax* rate will increase as income increases. Therefore, the tax* rates will be as follows (illustrative):

• Rahul: 10%

• Vijay: 20%

• Ravi: 30%
  
  

• Proportional – tax is levied in proportion to the amount of income/revenue

Here is an example:

The annual income of three friends is as follows:

• Rahul: ₹2 Lakh

• Vijay: ₹3 Lakh

• Ravi: ₹4 Lakh

They fall in the same income tax* bracket of say 10%. Proportional tax*means that they will have to pay different amounts based on their income. Therefore, the tax* liabilities will be as follows:

• Rahul: ₹20,000

• Vijay: ₹30,000

• Ravi: ₹40,000
  
  

Further, the government changes the tax* brackets, slabs, and rates based on the requirements of the country’s economy.

Types of Taxes in India

While there are different types of taxes* in India, they can be broadly classified into two categories: Direct and Indirect Taxes.

• Direct Taxes
  

These taxes are levied directly on the income generated by companies and individuals where taxpayers pay taxes directly to the government. They are a significant part of the government’s revenue. Taxpayers are responsible for ensuring that they pay the tax* in time. Some examples of direct tax* are corporate tax, income tax*.

• Indirect Taxes
  

The second category of taxes* is levied when taxpayers avail of services or purchase goods. These are called Indirect Taxes. Consumers pay these taxes* as a part of the purchase price of a product or service. The sellers of the services/products are required to pay the collected tax* to the government. Hence, the government collects these taxes indirectly from you. The Goods and Services Tax (GST^@) is an example of an indirect tax.

Importance of Taxation in India

For a developing country like India, taxes can play a huge role in its development. Without taxes, governments will be unable to govern and manage societies. Here are some factors that highlight the importance of tax in India.

• Direct Taxes
  

  • Helps in the formation of capital in the country

  • Higher direct tax* rates induce the habit of saving and investment

  • Direct taxes* help the government plan its expenses for a fiscal year

  • With a lower disposable income being available, inflation rates are kept under control
    
    

• Indirect Taxes
  

  • Boosts the efficiency of producers since they have to factor in taxes* while keeping the value of the product attractive to consumers

  • Encourages healthy competition in the market

  • Freedom of choice for consumers

  • Optimum utilisation of resources in the economy
    
    
    

A Quick Note on the Importance of Income Tax

Income tax payment is the responsibility of every Indian citizen. While it is mandatory to file returns, payment of tax* on income depends on your total earnings during a financial year and the tax* slabs specified by the government. In India, Income Tax* is one of the sources of revenue for the government.

It helps them manage the costs associated with civil operations, including running and maintaining infrastructure, government units, social development, and other government expenses. India is a vast and diverse country.

Hence, the government needs to run social welfare programs regularly to help different sections of society. It also offers medical care to people living in remote regions via government hospitals. All these activities need funds.

Additionally, the government allows people to reduce their tax* liability by saving in various instruments, including a life insurance policy. At Tata AIA life insurance, we offer a range of policies to cater to the varying needs of people. When you purchase a Tata AIA Life insurance policy, you can get tax* benefits under Section 80C of the Income Tax* Act, 1961.

What are the Tax Benefits of a Life Insurance Policy?

Section 80C offers tax* deductions for savings made in a range of instruments like PPF, NSC, repayment of the principal component of the home loan, and premium paid for a life insurance policy, etc. The total allowed tax* deduction across all eligible investments is ₹150,000.

When you buy a life insurance policy, you can claim deductions under Section 80C for the premium paid on your policy. However, it is important to note that the deductions are restricted to a certain percentage of the sum assured. Hence, make sure that you understand the maximum allowed deduction while planning your tax*-saving investments.

Conclusion

Taxes* are the backbone of the development of a country as it gives the government the funds needed to run and manage the country efficiently. While many people find taxes* to be an unnecessary burden, the fact is that the government uses the funds collected as taxes* to offer us a stable economy, better infrastructure, and security that help us live good lives. Therefore, as responsible citizens, we must ensure that we pay our taxes* on time.

L&C/Advt/2022/Aug/1845