Tax in India

To run a nation judiciously, the government needs to collect tax from the eligible citizens; paying taxes to the local government is an integral part of everyone’s life, no matter where we live in the world.

Now, taxes can be collected in any form such as state taxes, central government taxes, direct taxes, indirect taxes, and much more. For your ease, let’s divide the types of taxation in India into two categories, viz. direct taxes and indirect taxes. This segregation is based on how the tax is being paid to the government.

What is Tax and its Types?

A tax is a mandatory fee or financial charge levied by any government on an individual or an organization to collect revenue for public works providing the best facilities and infrastructure. The collected fund is then used to fund different public expenditure programs.

If one fails to pay the taxes or refuses to contribute towards it will invite serious implications under the pre-defined law.

Types of Taxes

Be it an individual or any business/organization, all have to pay the respective taxes in various forms. These taxes are further subcategorized into direct and indirect taxes depending on the manner in which they are paid to the taxation authorities.

Let us delve deeper into both types of tax in detail:

Direct Tax

• The definition of direct tax is hidden in its name which implies that this tax is paid directly to the government by the taxpayer
• The general examples of this type of tax in India are Income Tax and Wealth Tax.
• From the government’s perspective, estimating tax earnings from direct taxes is relatively easy as it bears a direct correlation to the income or wealth of the registered taxpayers.

Indirect Tax

• Indirect taxes are slightly different from direct taxes and the collection method is also a bit different. These taxes are consumption-based that are applied to goods or services when they are bought and sold.
• The indirect tax payment is received by the government from the seller of goods/services.
• The seller, in turn, passes the tax on to the end-user i.e. buyer of the good/service.
• Thus the name indirect tax as the end-user of the good/service does not pay the tax directly to the government.
• Some general examples of indirect tax include sales tax, Goods and Services Tax (GST), Value Added Tax (VAT), etc.

Recent Reforms in Taxes

In the year 2017, the government introduced the Goods and Services Tax (GST) which is considered the most revolutionary tax reform in independent India to date.

Earlier also, governments levied various state and central taxes for availing various services or buying different goods. The problem with the earlier reforms was the taxation process was complex and the contradicting rules enabled some people to evade taxes through loopholes in the system.

After the introduction of GST, a higher percentage of assessees was brought under the taxation umbrella and it took a toll on evaders as escaping from paying taxes became tougher.

What is Income Tax?

The most common type of tax that eligible citizens have to pay to the government. A part of your income is paid to the government every year and the government uses this money to fund support the growth and development activities across the country.

• Income Tax Assessee

Any individual who is liable to file taxes and fall in the payable income tax slab is an income tax assessee.

An individual who is having a regular income is exempted from paying tax if his/her included annual income is below the threshold level determined by the government from time to time or income from exempted sources such as agriculture.

• Income Tax Slabs

As mentioned earlier, not all individuals shall pay the same amount of tax; the general rule is – the higher your income, the higher amount of tax you will have to pay.

In order to ensure that tax rates and rules are fair rather than uniform, the government uses income tax slabs to determine the rate at which each individual tax assessee is liable to pay income tax.

• Income Tax Deductions

Citizens having taxable income in excess of Rs. ₹ 2.5 lakhs are liable to pay income tax as per their applicable slab. However, there are a few tax savings options such as ELSS, Mutual Funds, PPF, EPF, tax saver fixed deposits, and others that can be used to reduce the income tax payable by the individual. A majority of these tax saving schemes are available under sections 80C and 80D of the Income Tax Act, 1961.

• Tax Deducted at Source

TDS, short for Tax Deducted at Source is considered one of the most common ways of deducting tax by the government from any salaried individual. Other cases of TDS can be seen in the case of interest provided on fixed deposits. However, in this case, also, the tax assessee can get a refund after filing the Income Tax Return (ITR).

• Tax Evasion Laws and Implications

Various acts related to taxation have been framed by the Government of India and every citizen is liable to comply with these rules, failing which strict actions may be taken against them. Some of the sections of the taxation laws and penalties imposed for non-compliance are:

• Section 140A (1): If an assessee fails to pay the taxes, be it partially or wholly on principle amount of interest, he will be considered as a defaulter. The assessing officer can levy a fine equal to the arrear as per section 221 (1)
  
  
• Section 271 (C): In case an assessee doesn’t reveal the actual income or earning, a fine of 100% to 300% can be imposed on the defaulter in this section.
  
  
• Section 142 (1) and 143 (2): Under these sections, an income tax notice is sent to the defaulter and if he/she does not respond to it, the assessing officer can ask the assessee to file the return or furnish all details of assets and liabilities in writing.

Paying taxes is an integral part of all the citizens’ life and it helps in the upliftment of every section of the country by providing proper services and provisions. There are many other types of taxes such as GST, value-added tax (VAT), property tax, service tax, sales tax, entertainment tax and so on, that also constitute government funding.