TYPES OF TAXES IN INDIA – INDIAN TAX SYSTEM FOR FY 2024-25

TYPES OF TAXES IN INDIA

What is Tax?

Taxes, termed as obligatory contributions, are made by individuals or corporations falling under the tax slab to the Government of India. These taxes, applicable from local to national levels, serve as major sources of income for the government.

The government levies taxes on citizens to generate income for business projects, enhance the country’s economy, and uplift the standard of living. The authority to levy taxes is derived from the Constitution of India, empowering both State and Central governments to do so.

Income in India is categorized into different heads for taxation purposes. Here’s a breakdown:

• Income from Other Sources: Includes interest on savings, fixed deposits, and lottery winnings.
• Income from House Property: Generated from renting out residential or commercial spaces.
• Income from Capital Gains: Profits from selling assets like mutual funds, shares, or real estate.
• Income from Business and Profession: Profits earned by self-employed individuals or professionals.
• Income from Salary: Earned from employment, covering salaries and pensions.

TYPES OF TAXES-

There are mainly two types of taxes;

1. DIRECT TAX
2. INDIRECT TAX

DIRECT TAX

Direct taxes in India are levied directly on individuals or entities by the government. These taxes are based on the taxpayer’s ability to pay, meaning those with higher incomes or more valuable assets pay more. The main types of direct taxes include income tax, wealth tax (now replaced with a surcharge), and corporate tax. The Central Board of Direct Taxes (CBDT), under the Department of Revenue, oversees the administration of these taxes. They cannot be transferred to another person or entity.

Direct Taxes in India:

1. Income Tax Act:
   • Also known as the IT Act, 1961.
   • Taxes income from various sources such as salaries, investments, property ownership, business profits, etc.
   • Determines tax benefits on life insurance premiums, fixed deposits, and savings through investments.
   • Sets tax slabs for income tax.
2. Wealth Tax Act:
   • Imposed on individuals with net wealth exceeding Rs. 30 lakhs.
   • Abolished in 2015, replaced with a surcharge for high-income individuals and companies.
3. Gift Tax Act:
   • Established in 1958, repealed in 1998.
   • Initially taxed gifts like shares, jewelry, and property.
   • Current rules exempt gifts from family members and local authorities; gifts exceeding Rs. 50,000 from others are taxable.
4. Corporate Tax:
   • Levied on profits of companies registered in India.
   • Current rates: 30% for domestic companies, 40% for foreign companies.
   • Various deductions and exemptions available.
5. Types of Corporate Taxes:
   • Securities Transaction Tax (STT):
     • Levied on purchase and sale of securities on recognized stock exchanges.
     • Rates vary based on the type of security traded.
   • Capital Gains Tax (CGT):
     • Tax on profits from the sale of assets.
     • Rates depend on the holding period and type of asset.

INDIRECT TAX

Indirect taxes in India are those levied on goods and services, unlike direct taxes that individuals pay directly to the government. Instead, indirect taxes are added to the price of products, which sellers collect and then remit to the government. Common examples include Sales Tax, taxes on imported goods, and Value Added Tax (VAT). These taxes are embedded in the product’s price, potentially increasing its overall cost to consumers. This system helps generate revenue for the government without requiring direct payment from individuals.

Types of Indirect Taxes-

1. Sales Tax:
   • Levied on the sale of goods and services.
   • Typically a percentage of the retail price.
   • Collected by the seller and remitted to the government.
2. Service Tax:
   • Charged at a rate of 15% on services provided by companies.
   • Individual service providers pay when bills are settled, while firms pay upon invoicing.
   • Restaurants often charge service tax on a portion of the total bill.
3. Goods and Service Tax (GST):
   • Consumption-based tax levied on goods and services at each stage of the supply chain.
   • Offset against subsequent GST charges using the tax credit method.
   • Significant reform in India’s indirect tax structure.
4. Value Added Tax (VAT):
   • Imposed on goods at all supply chain stages, excluding zero-rated items.
   • Determined by state governments with varying tax rates.
5. Customs Duty and Octroi:
   • Customs duty applied to imported goods to tax products entering the country.
   • Octroi, imposed by state governments, focuses on goods crossing state borders within India.
6. Excise Duty:
   • Also known as Central Value Added Tax (CENVAT), imposed on manufactured goods.
   • Applies only to domestically produced goods.
   • Payment mandated by the Central Excise Rule.

Under the New Tax Regime, many deductions and exemptions are not applicable. However, there are some exemptions and deductions available, such as:

1. Transport allowances for specially-abled individuals.
2. Conveyance allowance received for work-related travel expenses.
3. Compensation for travel costs during tours or transfers.
4. Daily allowance for regular expenses during absence from the regular place of work.