Tax is fees Levied on products and services by an individual, an organization, or a government to generate revenue. The amount accumulated through tax is used for executing public welfare programs. Penalty charges apply to those evading tax if a tax notice goes unacknowledged by the taxpayer, if the taxpayer provides false information regarding their income to evade tax, or those who refrain from paying tax or default on payments. There are provisions in the IPC to take strict actions against tax evaders and defaulters.
Classification of Taxes:
Taxes may be broadly classified into direct and indirect Taxes. This classification is based on the mode of payment.
- Direct taxes are those that the taxpayer pays directly to the government.
- Income tax comes under the classification of direct taxes.
- Indirect taxes are fees/charges levied on goods and services when they are bought and sold.
- The end consumer of the product/service pays the tax on the product he/she consumes to the seller of the given product/service. The seller pays the fee to the government as an indirect tax.
- Therefore, the end consumer is indirectly paying the fee to the government as an indirect tax through the medium of the seller. GST, Value Added Tax, excise duty are all examples of indirect taxes.
Types of Direct Taxes:
|
Tax |
Levied on |
Eligibility |
|
Income Tax |
Annual Income/profits* |
Below 60 years of age – earnings above 2.5 L per annum. Between 60 – 80 years – earnings above 3 L per annum. Above 80 years – earnings above 5 L per annum. |
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Capital Gains Tax |
Money received through the sale of property or an investment. |
Short term or long term capital gains from an investment |
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Securities transaction tax (STT) |
Money received through stock market/trading securities. |
Levied on the price of shares/securities |
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Prerequisite Tax |
Benefits provided by an organization to its employees |
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Corporate Tax |
Dividend distribution tax: levied on dividends the company pays to its investors. Fringe benefits tax: levied on fringe benefits received by employees of the company, including employees’ accommodation expenses, transportation expenses, employee welfare funds etc. This form of tax does not exist. It was abandoned in the year 2009. Minimum Alternative tax: All companies except power and infrastructure companies must pay MAT. |
Paid by a company |
Types of Indirect Taxes:
|
Tax |
Levied on |
Eligibility |
|
Sales Tax |
Product price; levied on the seller, who passes it onto the buyer at the time of purchase, added to the price of the product. |
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Service tax |
Levied on services offered by a company. Service tax paid only when the customer pays the bill. The service provider must pay service tax once the invoice is raised, even if the customer does not pay the bills. |
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GST |
Levied on the consumption of any goods or services. It is a consumption-based tax as it is chargeable only when the consumption of goods and services take place. Added to value-added services and goods at each stage of consumption in the supply chain. |
GST or Goods and services tax is a recent introduction by the government to the list of indirect taxes. GST was introduced in 2017 to ensure that no citizen evades tax and put tax evaders on red alert. The vendor can claim GST back with a tax credit. |
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Value-Added-Tax (VAT) |
Imposed on all supply chain participants from manufacturers, dealers, distributors, wholesalers, retailers until the end-user. |
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Customs duty |
Levied on imported goods. Chargeable on all goods that come via air, sea and land, from a foreign country. |
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Octroi |
Levied on goods from another state within the country. |
Levied by the state government. |
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Excise duty |
Levied on all goods manufactured in India. Also called CENVAT or Central Value Added Tax. |
Levied from the manufacturer, dealer and distributor of the chargeable products |
Other Taxes:
|
Tax |
Levied on |
Eligibility |
|
Property tax (Real Estate/Municipal tax) |
Residential or commercial properties. |
Residential and commercial property owners. |
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Professional tax |
Earnings of professional practitioners. |
Professionals (lawyers, chartered accountants, doctors). |
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Entertainment Tax |
Gross collection received from exhibitions, movies, and television series. |
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Registration fees/stamp duty/transfer tax |
Supplement to property tax at the time of property purchase. |
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Education cess |
For funding Government of India’s education programs. |
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Entry tax |
Levied on products that come from a different state through e-commerce establishments. |
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Road tax/Toll tax |
For funding maintenance of roads and toll infrastructure. |
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Paying tax basically ensures that the government has sufficient funds to execute various public welfare programs and infrastructural improvements. Other benefits include funding for the following:
- Public welfare projects
- Public infrastructure development projects
- Public health & education
- Public utilities, including water, electricity, and sewage systems
- Public insurance
- Defence weaponry
- Scientific research
- Pension schemes
- Unemployment benefits
- State government employees’ salary
Advantages of Paying Tax:
There are several advantages of paying taxes that the taxpayer gets to enjoy. For instance, it is possible to use tax return documents of income tax as a proof document to apply for a loan/financial assistance.
- Loan approvals: While applying for bigger loans like home and vehicle loans, a copy of ITR from the previous 3 years is requested by banks. If you attach a copy of your income tax returns filing from the last 3 years, you can apply for a higher loan amount or reapply if your application got rejected the first time. The reason for this being the banks calculate your repaying ability and credit risk based on your income. ITR is a document that can be used as proof of your income to receive bigger loans quickly.
- Visa: Foreign consulates request for your ITR returns at the time of visa interview to ensure that you are not escaping your country to evade paying taxes. If you are traveling abroad, especially to countries like UK, US, Canada, Middle East and European countries, it is advisable to keep your ITR receipts with your passport.
- For self-employed/freelancers/consultants: If the annual income is above the exemptions limit, ITR receipts may be used as proof of their income for any financial/business transactions.
- Government tenders: ITR receipts are used as proof of income while applying for government tenders.
- Tax refunds: You can claim
