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.

CENVAT-

• 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.

NOW ALL THESE TAXES WERE REPLACED WITH ONE TAX I.E GST (Goods & Service Tax).

• GST In India an Overview
• Pros & Cons of GST 
• Frequently Asked Questions in GST