Types of Taxes in India and their Functioning

By | January 7, 2022
Types of Taxes and their functioning

Last Updated on by Admin LB

In this article ‘Types of Taxes in India and their Functioning,’ we will explore the prevalence of several types of taxes. In India, taxes may be direct or indirect. However, the sorts of taxes vary depending on whether they are imposed by union, state, or local governments.

Types of Taxes in India and their Functioning

India has a complex and vast tax system. Its primary characteristic is the occurrence of several taxes. There are federal and state government levies. The tax system is composed of both direct and indirect levies. In the case of states, indirect taxes account for the lion’s share of tax income. Among India’s direct taxes, the most significant is the income tax. Other notable taxes include wealth tax, capital gains tax, and gift tax.

India’s indirect taxes Includes excise taxes, customs charges, and so forth. The union government levies a variety of taxes, including income tax, corporate tax, central excise charges, wealth tax, gift tax, and customs duties.

The following are some of the most significant Indian taxes:

1. Direct Taxation

Direct taxes are a collection of several taxes that we pay directly to the government. Because these taxes are levied on one individual, they cannot be transferred to another individual. The Central Board of Direct Taxes (CBDT) is responsible for the administration of this tax, which is administered by the Department of Revenue. It is so named because it is paid directly to the Indian Union Government. The evident increase in both tax receipts and tax rates demonstrates India’s solid economic development. Additionally, it demonstrates compliance with a high tax rate as well as improved tax management. Among the direct taxes levied by the Indian government are the following:

  • Income Tax – The Income Tax Act 1961 introduced income tax. This statute establishes all income tax laws and regulations. Income tax is levied on all income, whether it is derived from earnings, property, salaries, investments, or a company. The Income Tax Act 1961 has provisions allowing taxpayers to earn tax advantages on fixed deposits and life insurance premiums.
  • Tax on Gifts – Originally enacted in 1958, the gift tax was repealed in 2004. According to this statute, if the value of the present/gift you get exceeds Rs 5 lakh, you would be required to pay 30% of the tax. The tax did not apply to presents made by a spouse, family, parents,
  • Taxes on transfers – The estate tax is the most prevalent kind of transfer tax. This tax is charged on the taxable part of a dead individual’s property, which includes trusts and bank accounts. A gift tax is another kind of tax in which a specified amount is collected from individuals who transfer property to another person.
  • Tax on the entitlements – This form of direct tax is how social programs like Medicare, Medic aid, and Social Security are funded. The entitlement tax is collected by payroll deductions and is referred to as the Federal Insurance Contributions Act collectively.
  • Tax on real estate – property taxes are levied on property and buildings and are used to fund public services such as police and fire departments, schools and libraries, as well as road maintenance.

2. Indirect Tax

Indirect taxation is collected on products and services rather than on persons. The middleman pays the tax to the government, and the amount is added to the value of goods and services. In contrast to direct taxes, such a tax is often imposed on certain services or items inside a country. No specific organization or person is subject to an indirect tax. Almost all operations that come under the scope of indirect taxes are covered, from producing products and providing services to those intended for consumption.

Apart from them, this spectrum includes a variety of activities and services associated with import, trade, and so on. This breadth results in the engagement and execution of indirect taxes in almost every sector of industry.

Tax on Goods and Services

In 2017, the Goods and Services Tax was implemented. Some of the taxes that are replaced by GST are:

  • Central excise duty.
  • Central sales tax.
  • Service tax
  • VAT or Sales tax
  • Purchase tax
  • Tax on lottery or betting or gambling
  • Additional duties of customs.
  • Additional duties of excise.
  • Excise duty levied under the textiles and textile products

GST is levied at every level of the supply chain, regardless of where consumption occurs. There are four categories of GST under the new tax system:

  1. Integrated Tax on Goods and Services (IGST)
  2. State Goods and Service Tax (SGST)
  3. Central Goods and Services (CGST)
  4. Tax on Goods and Services in the Union Territory (UTGST)

1. Integrated Goods and Services Tax (IGST)

When items are provided from one state to another, the integrated goods and service tax is imposed. It is levied by the Central Government to cover the cost of interstate transportation of goods and services. Apart from preserving the integrity of the input credit chain, IGST guarantees that all taxes received from the public are distributed fairly between the State and Central Governments.

2. State Goods and Services Tax (SGST)

When commodities are supplied inside a state, the state goods and service tax is levied. If a dealer sells products inside a state, he is required to pay both GST and SGST. For instance, if a merchant in Maharashtra sells items to a consumer in Maharashtra, the merchant is obligated to pay SGST. SGST is a state-level indirect tax imposed and collected by State Government on intra-state goods. These supplies exclude alcoholic beverages intended for human consumption. Additionally, the State Goods and Services Tax (SGST) Act, 2017 governs this tax levy.

3. Tax on Central Goods and Services (CGST)

Central Goods and Service Tax is levied in the same manner as State Goods and Service Tax on goods provided inside a state (intrastate). CGST is imposed and collected by the Central Government in accordance with the provisions of the Central Goods and Services Tax Act, 2017 read in conjunction with the CGST Rules, 2017. Additionally, under the GST legislation, the need to pay CGST arises when goods or services are supplied in the manner described in sections 12 and 13 of the CGST Act, 2017.

4. Goods and Services Tax in the Union Territory (UTGST)

The Union Territory’s goods and services tax is comparable to the State’s. It is imposed on products and services supplied in the Union Territories of Andaman and Nicobar Islands, Chandigarh, Daman Diu, Dadra and Nagar Haveli, and Lakshadweep. This Act is administered by the UTGST Act, and the Union Territory Government collects the money. The UTGST is an Act that provides for the assessment and collection of tax on all intrastate goods and services. The Central Government collects UTGST.

Generally, indirect taxes in the Indian Republic are a complicated process including several laws and regulations that are all interrelated. These tax rules also contain certain legislation that is exclusive to certain states in the United States. Indirect taxation includes a variety of various types of taxes. Various indirect taxes include the following:

  • Retail Sales Tax – Any goods that a business sells is subject to sales tax. The product may be sold locally or imported into another nation. The sales tax varies per state, and the central government collects it. For certain states, sales tax is a significant source of income.
  • Tax on Services – Service tax is levied on the services provided by the business. This tax is assessed monthly and quarterly. It is collected when their clients settle their accounts.
  • Tax on the Value -Added (VAT) – A value-added tax is levied on non-commodity items such as food and necessary pharmaceuticals. It is located at points throughout the supply chain where the product’s value is added.
  • Duty on Customs – If you purchase goods from another nation and import it to India, you will be required to pay customs duty on that commodity.
  • Toll Tax – Toll taxes are imposed on highways and bridges by the state or federal governments. The toll tax’s primary aim is to fund road development and maintenance operations.

Conclusion

Both indirect and direct taxes in India are crucial for the nation since they are inextricably related to the country’s overall economy. It is essential for the government to collect these many forms of taxes for the country’s well-being. According to the Indian tax system’s directives, the federal and state governments collect both direct and indirect taxes in India, depending on the kind of tax levied.


References


  1. Law Library: Notes and Study Material for LLB, LLM, Judiciary and Entrance Exams
  2. Legal Bites Academy – Ultimate Test Prep Destination
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Author: Mayank Shekhar

LLM, Faculty of Law, University of Delhi, UGC NET (Law) qualified. Under Mayank's leadership, Legal Bites has been researching and developing resources through blogging, educational resources, competitions, and seminars.

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