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Tax System in India - A Brief Explanation

Tax System in India - A Brief Explanation
Tax System in India - A Brief Explanation

  • Tax is the compulsory contribution by the people to Government to defray expenses in common interest. 
  • It is the duty of tax payer to pay the taxes he/she is liable to pay. It imposes the personal obligation on the tax payer.
  • It is collected by the Government and are spent the money for the welfare of the people of the country.
  • Taxes can be divided in two categories i.e. Direct Taxes and Indirect Taxes.
Direct Tax-  
  • These taxes are paid by person on whom it is levied. The burden of these taxes cannot be shifted to anybody else.
  • Generally it is levied on the income and wealth of the person.
Advantages -
  • The Direct taxes are equitable and are charged on the basis of level of income of people.
  • The Direct Tax is economical in nature because no extra expenditure is to be incurred in collecting the taxes.
  • In this tax system the certainty characteristics is present.
  • The direct taxes are elastic in nature.
Disadvantages -
  • These taxes are inconvenient in nature as people are not directly benefitted by these taxes.
  • The encouraged tax evasion in India is a problem of this tax. Accounts are manipulated to evade tax-liability. Problem of black money is the result of this tax evasion.
  • The direct taxes are levied only on the certain groups of persons.
Indirect Tax- 
  • These taxes are levied on the commodities either on their sales or production is indirect taxes.
  • The incidence of such taxes can be shifted to other person and these taxes are ultimately not paid by the persons on whom they are levied.
Advantages –
  • These taxes are convenient to pay.
  • It is not possible to evade Indirect Tax.
  • Indirect Taxes are more productive and elastic than Indirect Tax.
Disadvantages -
  • It promotes economic inequality.
  • It is uneconomical in nature.
Tax Structure in India-
  • Both of Direct and Indirect Taxes are levied in India.
  • Direct Taxes include Income tax, Wealth tax and Gift tax. 
  • Indirect Taxes include Custom Duties, Excise Duties, Sales Tax and Service Tax.
Income Tax-
  • It is levied on a people’s income.
  • It is payable by every person with a taxable income.
  • It is levied on the income earned in the previous year.
  • As it is a direct tax, it cannot be shifted to others.
  • It is levied on the total taxable income (TTI) as calculated as per the Income Tax Act.
  • It is levied at the rate applicable during the current year at per slab system.
  • Income Tax is of two types i.e. Personal Income Tax and Corporate Income Tax.
  • Personal Income Tax is levied on an individual, local authority a family, an association of persons, a body of individuals etc.
  • Corporate taxes are levied on registered companies and corporations. They pay tax on behalf of shareholders.
Wealth Tax-
  • This includes estate duty, annual tax on wealth and gift tax.
  • Estate Duty was introduced in 1953 in India.
  • It was introduced to levy taxes on the property which passed on the heirs on death of a person.
  • It was abolished in 1985.
Annual Tax on Wealth –
  • These taxes are levied on the houses those are used as the residential houses, commercial houses, farm houses or guest houses.
  • Gift Tax-
  • It was introduced in 1958 and was abolished in 1998.
  • It was levied on all donations to recognized charitable institutions, gift to women dependents, gifts to wife etc.
Securities Transaction Tax-
  • It was introduced in 2004.
  • It is levied on the sales and purchases of the equities by the Government of India.
  • The Income of a person generated from the securities market comes under this tax.

Banking Cash Transaction Tax-
  • This tax is charged on debit entries of the Bank accounts.
  • This tax is collected by central third party in case of settlement or clearing process automatically.
Custom Duties-
  • The tax is levied on export and import items.
Excise Duties-
  • The tax is levied on production by the Central Government.
Value Added Tax (VAT) –
  • It is levied on the goods and services based on the services based on the value added to them.
  • This tax is simple, neutral on resource allocation and there is minimum scope of tax evasion.
  • This tax was introduced in the 2000-01 budgets.
  • It helps to reduce the cascading effect of input taxation.
Goods and Service Tax (GST) -
  • It is a kind of Value Added Tax introduced in 2017.
  • It has replaced all kind of indirect taxes on goods and services which are levied in India by the Central and State Government.
  • It is an indirect tax which can decrease the burden of other indirect taxes.
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