If you are a student, a businessman or employer, a salaried employee or any other individual who has started earning in India, you’ll have to pay taxes. However, there are a lot of people who get misled by terms such as “direct tax,” “indirect tax” or “tax slab. In the present article, the tax concept in India will be explained most simply so that even a beginner can understand how taxation works in India.
What is Tax?
To put it simply, tax is a compulsory amount paid by citizens and businesses to the government. The government uses this money for the construction of roads, operation of schools and hospitals, payment of government employees’ salaries, defence, and a wide range of other public services. If the government didn’t collect taxes, it would be nearly impossible to get any government business done.
The Indian tax principle rests on the notion that any individual who has income or has to spend has to pay a small portion of it to the development of the country. This is overseen by legislation passed by the Parliament of India and is applicable to individuals, companies and other organisations.
Two Main Types of Taxes in India
Indian tax system can be broadly classified under two heads: Direct Tax and Indirect Tax. Let’s explain both in simple terms.
1. Direct Tax
A tax paid directly to the government by a person or business. As such, this tax can not be shifted to another party, it is always borne by the party that is paying it.
Direct tax in India includes some examples as follows:
- Income Tax – Tax levied on income earned in a financial year by an individual/company.
- Corporate Tax – Tax paid by companies on their profit.
- Capital Gains Tax – Tax paid on profits from selling an asset such as gold, shares or property.
Direct tax is collected under the direct tax regime in India through the Income Tax Department, under the control of the Central Board of Direct Taxes (CBDT).
2. Indirect Tax
Indirect tax is different. In this case, the tax is levied at the time of sale or provision of the goods or services, but the actual incidence of the tax is borne by the buyer or consumer. That is, this tax is hidden in the cost of the goods or services that you purchase.
India today has the most important example of indirect tax as:
GST (Goods and Services Tax) – A new tax that was established to replace several of the taxes that were previously in place, including VAT, service tax, and excise duty. GST is levied on nearly all the goods and services you purchase, including food, mobile recharge and much more.
Before the implementation of GST in July 2017, India had a complex tax structure comprising of various indirect taxes levied by both the central and state governments. GST managed that by consolidating most of them under a single roof.
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Who Collects Taxes in India?
In India, the taxes are levied on three levels of government:
- Central Government – taxes income tax, corporate tax and GST (central).
- State Governments – collect state GST, stamp duty and vehicle tax.
- Local Bodies – collect property tax and other small local fees.
The division of tax collection has been laid down by the Constitution of India, which clearly specifies the authority of collection of which tax.
What is a Tax Slab?
Many beginners get confused with one term when it comes to filing taxes, that being “tax slab. A tax slab is nothing but a slab of income covered by a definite percentage of tax. Income tax is not levied as a uniform tax in India. Rather, the government has segmented income in several brackets and those with higher income are taxed at a higher rate. This is known as a progressive tax system and it is intended to impose a lower tax rate on those with lower incomes and a higher tax rate on those with higher incomes.
The Finance Minister can also alter these tax rates as and when required every year during the Union Budget and hence it is important to keep track of current rates for every financial year.
What is the importance of PAN Card in Tax?
PAN (Permanent Account Number) is a 10-digit unique number provided by the Income Tax Department. It is a sort of identity card for all your financial and tax-related transactions. PAN is a must whenever a person files his income tax return, opens a bank account or purchases property worth more than a specific limit. It assists the government in monitoring monetary transactions and ensures that taxes are not evaded.
What is a Tax Return?
An Income Tax Return, also known as ITR, is a document that you submit to the government that details your income and taxes for the year. It can be beneficial to file a return even if you don’t earn the amount required to be taxed, such as applying for a loan or a visa or claiming a tax refund.
It is important to grasp the concepts of taxation.It is important to understand the concepts of taxation.
There are a lot of individuals who do not want to learn about tax because they believe it is complex or dull. However, with a basic understanding of the Indian tax concept, you can help:
Produce a better financial plan.
No late fees or non-filing penalties!
Leverage on the tax benefits such as insurance, provident fund and some investments.
Make decisions regarding the purchase of property, business or investment dollars based on information.
Final Word
Though the Indian tax concept may seem complicated at first look, it essentially is a set of direct and indirect contributions made to help the country function. Direct taxes are levied directly on income or profit, and indirect taxes are paid through the goods and services tax. To make every Indian citizen more financially conscious and responsible, it is important to be aware of these basics.
Students, working professionals and business owners alike can benefit from gaining a clearer understanding of how taxes operate, as it will aid in financial planning and help to alleviate tax season stress.
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