Category : New to Investing December 19, 20235 minutes read
Over more than 75 years, the landscape of taxation in India has been evolving and changing constantly. Old tax practices are removed and new ones are added and it can get confusing to follow the different types of taxes in India. Tax can be divided into two different categories:
1. Direct Tax
2. Indirect Tax
In this guide, we’ll look at all the types of tax, both direct and indirect tax that affect the average Indian citizen.
Introduction
Whether it is the income tax on salary, or the different types of gst in India, almost every Indian citizen has paid some kind of tax at some point of time, many times without even realising it. From chocolate, to cars, a lot of products in the market are indirectly taxed. Even the money you earn, whether it is as a business or an income tax on salary, any individual or business must pay the tax as it becomes applicable.
What is the meaning of tax? Paying taxes is a practice of civilisation that can be traced back to as far as 3000 BC. Think of it this way, the government of India protects its citizens from threats both outside and inside the country. It builds and maintains infrastructure as well as provides a framework in which citizens can live peacefully and earn their livelihoods. The Govt. is only able to afford the cost of providing these services because of the different types of taxes in India.
There are a few different types of taxes in India, but they can all be split into two categories, direct and indirect. Income tax is one of the direct types of tax that is charged against incomes and profits earned in India. Indirect tax examples include GST (formerly VAT), luxury tax and customs tax in India. The major difference between direct and indirect tax is that direct tax is collected by the government on income earned, whereas indirect taxes are collected on purchase of goods and services by intermediaries before going into the Indian tax system.
What is the meaning of tax in this modern era? Indian tax systems have changed a lot in the past decade to adapt to the ever changing modern economy. Many different types of taxes in India have been modified to improve ease of business and create a wider tax net.
The money obtained by taxes are used for maintaining the infrastructure within the country and protecting the country from external threats. Taxes in India can be broadly divided into two main categories, namely:
- Direct Tax: Collected by the government on earned income
- Indirect Tax: Collected on the purchase of goods and services
Whether it is an income from salary, business, sale of property, rent or any other source, there are a number of different types of direct tax in India that will apply. There are different methods, slabs and tax rates for different classes of taxpayers like individuals, HUF’s (Hindu Undivided Family), partnerships and corporate entities.
Income tax, corporate tax, capital gains tax, dividend distribution tax, gift tax and estate tax are some of the different types of direct tax in India. Income tax on salary, profits from the sale of assets, income from house property, profits from business & profession and other sources are the different types of income tax paid in India. Corporate tax is paid by companies on their profits at a flat rate of 30% with surcharges applicable on profits in excess of 1 crore.
Tax planning efforts are aimed at minimizing the amount of direct types of tax using different provisions within the Indian tax system. ELSS funds are a popular tax saving investment tool. Investors can lower their taxable income by Rs. 1,50,000 by investing in ELSS Mutual Funds through deductions under section 80C of the Income Tax Act, 1961. ELSS or equity linked saving schemes which invest the majority of their fund value into equity or equity related instruments. Since the fund has a lock-in period of 3 years, capital gains earned under this fund will be subject to the long term capital gains tax rate of 10%, if the income earned is more than 1 lakh for the year of assessment.
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There are several other good tax saving investment options like the Public Provident Fund (PPF) and the National Pension System (NPS) that are another way to secure funds for the later stages of life. Both these investment options may be able to stay ahead of inflation and provide returns to investors.
There are a number of direct taxes in India. These include income tax, corporate tax, capital gains tax, dividend distribution tax, gift tax, estate tax etc. There are different slabs and tax rates for different classes of taxpayers. Tax-planning efforts are aimed at minimising the amount of direct tax. Mutual fund schemes such as ELSS funds are a popular tax-saving instrument. Other tax saving schemes are Public Provident Fund and the National Pension System.
The indirect taxes are those levied through intermediaries on the sale of goods and/or services. Examples of indirect tax include GST and customs tax in India. There are also others like entertainment tax, luxury tax.
GST is the most common indirect tax and there are 4 different types of tax under GST in India.
UTGST – Union Territory Goods and Services Tax is applicable in a small list of union territories.
IGST – Integrated Goods and Services Tax is applicable on inter-state transactions where goods have been bought and sold from one state of India to another.
SGST – State Goods and Services Tax is applicable on transactions within the state.
CGST– Central Goods and Services Tax like SGST is applicable on the transactions within the state. All intra-state sales attract CGST as well as SGST.
Customs tax in India is applied on certain classes of goods that are entering the country on an import basis.
VAT and service tax in India are the old goods and services taxes that have been overhauled by the introduction of GST. This unified the different types of vat and service tax in India for a simpler tax system that can be implemented nationwide. Like GST, there were both input and output types of VAT and slab rates for different items. In today’s context, both VAT and service tax are nothing more than historical indirect tax examples.
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Entertainment tax in India is levied on movies, concerts, music festivals and many other entertainment services. In 2017, entertainment tax in India was combined with GST and is levied at 18% plus an extra tax rate levied by states which can go upto 40% in total in certain states. Entertainment tax in India is among the highest tax rates on any sector.
GST is an input-output-based indirect tax system where a service provider or goods seller can claim the benefit of GST on goods purchased against goods sold. Ultimately, the extra cost of GST is borne by the final purchaser of the good or service.
Indirect taxes are levied through intermediaries on the sale of goods and services. GST is the most common indirect tax. There are 4 types of taxes under GST:
- UTGST (Union Territory Goods and Services Tax)
- IGST (Integrated Goods and Services Tax)
- SGST (State Goods and Services Tax)
- CGST (Central Goods and Services Tax)
VAT and Service Tax are the old goods and services tax which have been overhauled by GST. Entertainment tax is another type of indirect tax levied in India. It is one of the highest tax rates on any sector.
- Tax is a way for the government to earn an income that can be used to spend on the provision of facilities to the people of the country.
- The Indian tax system can be broadly categorised into two types of tax, direct and indirect.
- Direct tax is collected directly by the government and it includes income tax, estate tax, corporate tax and gift tax.
- Indirect tax is collected by the government through intermediaries on the sale of goods or services. The most common indirect tax examples are GST, luxury tax, entertainment tax and customs tax in India.
- There are 4 types of taxes within GST that are applicable based on whether a transaction is interstate, intrastate or conducted in a union territory.
- The Indian tax system has several provisions that individuals can claim in order to reduce their tax burden. Investment on ELSS mutual funds, approved pension funds and provident funds can give taxpayers a deduction in taxable income to the tune of Rs 1.5 lakhs under section 80C of the income tax act.
