Indian Tax Structure Simplified
Irrespective of whatever nation you might be living in the world you cannot avoid having to pay taxes to the local or national government. If you look at the etymology, the word tax comes from a Latin word “taxare” meaning ‘to censure/ charge/ compute’. Taxes come in various forms like state taxes, central government taxes and so on. In India, GST is the most ‘famous’ and functional tax nowadays. Since 1st July 2017 when GST was first introduced, it has changed the face of Indian taxation. That’s the reason GST training to pursue various GST careers like GST consultant among others is quite popular in our country.
What is a Tax
What is a tax anyway? In layman terms, tax is a compulsory fee or financial charge levied by a government on an individual or an organisation to raise revenue for various activities. The amount collected is then used to fund different public expenditure programs. Thus indirectly the money paid for only contributes to general public value in return. Inability or failure to pay taxes in any way sooner or later invites punishment under the law of the land.
As per Indian taxation, tax is levied by both the Central Government and the State Governments. Minor taxes are also imposed by local authorities including Local Governments and Municipalities.
(Source – Taxmann)
Benefits of Paying Tax
Outside of legal bindings, why pay taxes in the first place? Does it really make sense to pay taxes? Turns out it does. Here’s why :
- Payment of taxes makes it possible for the Govt. to run developmental activities (‘vikaas’) for the public on a regular basis. Without taxes, the Govt. coffers would have been significantly emptier which would have seen the masses bear the brunt of it.
- There are indirect tax benefits too. Income Tax Return documents can be utilized to apply for a loan or credit card.
- All kinds of civic amenities are funded from the general taxpayers’ tax money which makes it possible to uphold or upgrade the standard of living.
- The Govt. needs tax funds to run the country. Tax money is used to invest in military, infrastructure, administrative services, disaster management and mitigation etc.
Tax Evasion Laws in India
The Indian Constitution has some provisions against tax evasion as follows :
- As per Section 140A (1), if a tax payer fails to pay taxes, partially or wholly, on principle amount or interest, he will be considered as a defaulter.
- The concerned officer would impose penalty amounting to the outstanding limit according to Section 221 (1).
- When the tax payer hides his earnings, a fine of 100% to 300% can be imposed on the defaulter under section 271 (C).
- If a defaulter does not respond to a tax notice under section 142 (1) or 143 (2), the assessing officer can ask the assessee to file the return or furnish all details of assets and liabilities in written.
Types of Taxes in India
Taxation in India is classified into the following : Direct Taxes and Indirect Taxes.
The implied meaning of Direct taxes can be derived from the name which implies that these taxes are paid directly by the taxpayer to the government. Talking 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.
Common direct taxes in India are Income Tax and Wealth Tax.
The total direct tax collection for April-September 2019-20 period stood at Rs 5.5 lakh crore against Rs 5.25 lakh crore during April-September 2018-19. The net collection (deducting refunds) was about Rs 4.5 lakh crore (against Rs 4.3 lakh crore for corresponding period of previous year).
Indirect taxes are different from direct taxes in that these are consumption-based taxes that are applied to goods or services when they are bought and sold. Indirect tax payments are received by the Govt. from the seller of the product/service. The seller of the same then passes on the tax to the end user i.e. buyer of the product/service. Therefore the name indirect tax as the end user of the good/service does not pay the tax directly to the government.
Examples of indirect tax include Sales Tax, Goods and Services Tax (GST), Value Added Tax (VAT) etc.
Accumulated indirect tax collections are about Rs. 11,19,247 crore in 2019-20. Of this, the government has estimated to raise Rs 6,63,343 crore from GST.
Some Important Taxes in India
Income Tax (Direct Tax)
Perhaps the most common type of tax that a citizen has to pay, the underlying concept is that a portion of the an individual’s income is paid to the government every year and this money is used by the government to fund its growth and development activities across the country.
As per GoI stats, in 2015-16, the total income tax collected by the government was north of Rs. 3 lac crores. This accounted for approximately 39% of the total tax collected by the government from all available routes i.e. direct and indirect.
VAT (Indirect Tax)
VAT or value-added-tax is a commercial tax not applicable on zero-rated commodities or those that fall under exports. This tax is charged at all levels in the supply chain. This includes manufacturers, dealers and distributors and finally the consumer.
VAT is a tax that is levied at the discretion of the state government and not all states implemented it when it was first announced. This is charged on various goods sold in the whole state. The amount of the tax is decided by the state itself. For example in Gujarat the government split all the good into various categories called schedules.
Sales Tax (Indirect Tax)
Sales tax is an indirect tax charged on the sale of goods or services and is an integral tax during the pre-GST period. As opposed to VAT, sales tax is calculated on the gross value of the sale even if there is no value addition. Sales tax is often considered to be a tax on tax or double taxation situation as it is levied every time a good or service is sold irrespective of whether there has been an increase in value or not.
Service Tax (Indirect Tax)
Service Tax was introduced in the country by the Finance Act of 1994. This tax is best defined as an indirect tax payable to the government by a pre-determined group of service providers. Like sales tax is added to the price of goods sold in India, service tax added to services provided in India. After many years of service tax rate remaining constant, in the 2015 Budget it was announced that the service tax will be raised from 12.36% to 14%.
Service tax does not apply to goods. It applies on companies that provide services, and is collected monthly or quarterly based on how the services are provided.
Toll Tax (Direct Tax)
Toll tax is the tax imposed by authorities for travelling on a specific stretch of National Highways.
The rates differ from one toll plaza to another.
Toll plaza rate are revised annually in line with National Highways Fee (Determination of Rates and Collection Rules, 2008). VIPs and dignitaries are exempted from mentioned in the exemption list.
Entertainment Tax (Indirect Tax)
Any tax levied on entertainment activities such as movies, theaters, amusement parks, private festivals, etc. is clubbed under entertainment tax. It is levied by state governments and the rate is different for different states.
It has now been brought under the ambit of GST and a tax of 28% is levied on movies, amusement parks, etc. whereas 18% tax is levied on theater, drama, circus and Indian classical shows.
Professional Tax (Direct Tax)
Professional tax is charged on all professions, employment and trades on employees, freelancers, professionals, etc. in case the income exceeds a preset limit.
It is levied by state governments and is different in different states. As per the Income Tax Act, 1961, it can be deducted from the taxable income.
This tax is is relevant even post-GST regime but the ceiling is set to ₹ 2,500.
Goods and Services Tax or GST (Indirect Tax)
And now the baap of all taxes – GST!
GST has proved to be India’s largest reform in the indirect tax structure since the days of liberalization in 1991.
GST is a tax based on consumption. GST is liable to paid on the purchase of goods and services throughout the nation. The merchant has tp pay the rate of GST applicable but there are provisions to claim it back through the tax credit mechanism.
Thus, uniformity in tax collection can be achieved throughout India.
GST has replaced most other taxes levied by the state and central governments. Goods and services are taxed as per pre-agreed rated rates of 0%, 5%, 12%, 18% or 28%, while a few other goods/services have been classified as ‘exempt’.
GST regime was implemented on 1st July 2017, and India has adopted the dual GST model in which both the Center and States levy taxes.
(Source – InvestIndia)
So, clearly GST is the top dog of taxation in India. If you’re interested in taking your learning experience further and enroll in a good GST training course, you are welcome to try ours.