Tax is a charge enforced and collected by the central or/and state government to pay for the basic amenities it offer such as hospitals, schools, roads, military production and law enforcement. The tax emerges when there is an ownership of an asset, goods and services trade or where income arises. The amount of tax paid by a taxable person fairly depends upon its spending and earnings.
The scope of this content includes
Types of Taxes in India
A. Types of Direct Taxes in India
A. Types of Indirect Taxes in India
Types of Taxes in India
Taxes are broadly catalogued into two categories: Direct and Indirect Taxes
1. What is Direct Tax?
Direct taxes are those taxes that are directly imposed on the person from whom it is collected. These taxes completely depend on the income and wealth of a taxpayer.
A. Types of Direct Taxes in India
Direct taxes are of the following types:
Income Tax: Central government imposes and collects the income tax on the income of a taxable person. Income tax slabs have been structured relying on the various income groups & types.
Corporation Tax: Domestic corporate is liable to pay corporation tax on the surplus earned in the course of a particular duration. Corporation tax has a flat rate structure.
B. Merits of Direct Taxes
- Lower tax burden on the lower level of income group.
- Under direct tax distribution of wealth is equal and just
- Direct tax rates helps in controlling inflation
C. Demerits of Direct Taxes
- Direct taxes might restrain savings and investments
- Filing & Payment procedure of direct taxes is bit complicated
2. What is Indirect Tax?
The indirect taxes are imposed on the supplier but the ultimate burden is transferred to the ultimate consumer of the goods. This tax is imposed and collected by the Central government or State/UT government or both.
A. Types of Indirect Taxes in India
The major indirect tax in India includes
Goods and Services Tax: 17 indirect taxes have been subsumed under the GST law which was implemented on 1st July 2017.
Central level
- Central Excise Duty (CENVAT)
- Service Tax
- The Excise Duty levied under the Medicinal and Toiletries Preparations (Excise Duties) Act 1955
- Additional Excise Duties
- Additional Customs Duty, commonly known as Countervailing Duty (CVD)
State level
- VAT / Sales tax
- Luxury tax
- Entertainment tax (unless it is levied by the local bodies)
- Taxes on lottery, betting and gambling
- State Cesses and Surcharges on the supply of goods and services
- Entry Tax
- Purchase Tax
B. Merits of Indirect Taxes
- Higher revenue to the government
- Transparent tax administration
C. Demerits of Indirect Taxes
- Increased prices of goods and services
- Equal tax burden irrespective of Income
Direct and Indirect Tax Collection in India
The taxes collection completely depends on the nature of taxes. Direct taxes (income tax and corporation tax) are imposed and collected by the central government. Payment of income tax is monitored by the Income Tax Department. In the contrary, Indirect Tax (Goods and Services Tax) is imposed and collected by the Central government or State/UT government or both. GST council is chaired by the finance minister along with state finance ministers for governing the GST rates, rules and regulations.
Distinction between Direct and Indirect Taxes
Direct and Indirect taxes can be distinguished based on various criteria
| Nature | Direct Tax | Indirect Tax |
|---|---|---|
| Tax payment and burden | The taxpayer is liable to pay the direct tax. | The seller or the service provider is liable to pay tax and the burden is transferred to the end consumer |
| Tax liability | The tax liability amount depends on the income group of the taxpayer | The tax liability amount depends on the type of goods & services supplied |
| Nature of taxes | Income or profit based tax | Consumption or destination based tax |
| Tax evasion | Tax evasion is possible due to the lack of administration, however measures are taken to reduce it to minimum | Tax evasion is possible due to common practices followed by tax payers, however measures are taken to reduce it to minimum |
| Society coverage | It is applicable on the taxpayers who falls under respective tax group or bracket | It is applicable on all the taxpayers irrespective of tax bracket |