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Taxation is a crucial aspect of any country's financial system, as it provides the government with the necessary revenue to fund public infrastructure, welfare programmes and other essential services. Taxes influence every aspect of our daily lives. As a responsible citizen, it is important to fulfill your tax obligations and understand the different types of taxes in our country. It's not just a duty but also an opportunity to grasp the various tax systems that exist.
In India, the taxation system is divided into two main categories: direct tax and indirect tax. Each type of tax serves a different purpose and has distinct characteristics. Let’s explore the differences, types and benefits of direct and indirect taxes in India.
Direct taxes are levied directly on individuals or entities based on their income, profits or gains. These taxes are imposed on the person responsible for paying the tax and cannot be shifted to others. Direct taxes contribute significantly to the government's revenue and play a crucial role in redistributing wealth and ensuring a more equitable society.
Following are some of the major direct tax examples in India:
Income Tax: Income tax is the most prominent form of direct tax in India. The Income Tax Act, 1961 and the rules and regulations made thereunder are the governing laws for income tax in India. It is imposed on the income earned by individuals, Hindu Undivided Families (HUFs), companies and other entities. The income tax rates vary depending on the income brackets and the type of taxpayer. Individuals and entities are required to file income tax returns annually, declaring their income and paying the applicable tax. Some of the major components of income tax include self-assessment tax, tax deducted at source (TDS), tax collected at source (TCS), advance tax, surcharge and cess, etc.
Securities Transaction Tax (STT): Another major direct tax example in India is the STT. It is a direct tax imposed on the purchase and sale of securities such as shares, derivatives, equity-oriented mutual funds and bonds in recognised stock exchanges. It aims to curb tax evasion and facilitate efficient and transparent trading in the securities market. The rates of STT differ based on the type of security and the transaction.
Indirect taxes are taxes imposed on the production, sale, or use of goods and services. They are indirectly paid by consumers through the prices of goods and services. These taxes are collected by intermediaries like manufacturers, wholesalers, and retailers, who then transfer the tax burden to the end consumers.
India saw a major revolution in the indirect tax regime after the introduction of the Goods and Services Tax in 2017. It subsumed most of the erstwhile indirect tax laws. Following are some of the significant indirect tax examples in India:
Goods and Services Tax (GST): GST is a comprehensive indirect tax system that subsumed various central and state taxes into a single tax structure. It is levied on the supply of goods and services throughout the value chain, from the manufacturer to the end consumer. GST has simplified the tax regime, eliminated cascading effects and improved tax compliance.
Customs: Another important example of an indirect tax is customs duty. It is a tax imposed on goods that are imported into or exported from a country. Customs duty is distinct from GST and serves the purpose of regulating international trade, safeguarding domestic industries and generating government revenue. The amount of customs duty varies depending on the type of goods and their classification under the Customs Tariff Act. While customs duty is a significant factor in import transactions, the government has exempted most exports from this tax to promote and incentivise export activities.
Value Added Tax (VAT): VAT is a state-level tax levied on the sale of goods within a particular state. It is levied at each stage of the supply chain, and businesses can claim input tax credits for taxes paid on purchases. Although GST has replaced VAT for most products, it still applies to certain goods such as petrol, liquor and tobacco. VAT rates may vary among states, so businesses must register under their respective state's VAT regime as per the mandatory requirement.
Excise: Another significant type of indirect tax is excise duty. Excise duty is a tax levied on the production or manufacture of goods within the country. While it was also subsumed under GST, like VAT, it is still imposed on specific commodities such as tobacco, alcohol and petroleum products. Excise duty is collected from the manufacturer or producer and is eventually passed on to the consumer through higher prices.
As stated earlier, direct and indirect taxes form a significant component of the government’s revenue, thus they are imperative for running the country. Direct tax is important for the redistribution of wealth as it is imposed on high-earning individuals which is then used for the development of the nation. Indirect taxes are levied on every transaction of supply. With the advent of GST, the cascading effect was eliminated, thereby reducing the tax burden on the end consumer.
While we understood the meaning and types of direct and indirect taxes, let’s look at some of the key differences between both these taxation regimes:
|Parameters||Direct Tax||Indirect Tax|
|Nature||Levied on income, profits or gains||Levied on the sale, consumption, or production of goods and services|
|Borne by||Taxpayers (individuals or entities)||End consumers|
|Tax incidence||Cannot be shifted||Passed on to the consumer|
|Impact on redistribution of wealth||Plays a significant role in redistributing wealth||Does not directly impact redistribution|
|Governing Body||Central Board of Direct Taxes (CBDT)||Central Board of Indirect Taxes and Customs (CBIC)|
Direct and indirect taxes play crucial roles in India's taxation system. Direct taxes like income tax and STT are levied directly on individuals and entities based on their income or profits. On the other hand, indirect taxes like GST, customs, VAT and excise are imposed on the production, sale or consumption of goods and services. The burden of indirect taxes is ultimately borne by the end consumer.
Understanding the differences and types of direct and indirect taxes is essential as well as the responsibility of individuals and businesses to fulfil their tax obligations timely and accurately. Further, understanding of taxes in India also plays a vital role in tax planning. For more such useful information, you can visit TATA Capital.
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