Meaning of TAX:

Tax is a compulsory payment to be made by every resident of India. It is a charge or burden laid upon persons or the property for the support of a Government. Government decided the rates and the items on which tax will be charged, like income tax, GST, etc

Tax can be defined in very simple words as the government’s revenue or source of income. The money collected under the taxation system is put into use for the country’s development through several projects and schemes.

> The Indian Constitution authorizes the Central and the State Governments to levy taxes.

> The Parliament passes laws to approve taxes collected by the Central Government. In the case of the State Governments, the State Legislature holds this power.

> By the State Government: Also, the local governing and civic bodies too have the right to levy certain taxes.

Word TAX on wooden table and calculator with coins

BACKGROUND OF TAXATION SYSTEM IN INDIA

The taxation system in India traces its roots to ancient texts like Manusmriti and Arthashastra. As prescribed by these texts, artisans, farmers, and traders hundreds of years ago would pay taxes in the form of silver, gold and agricultural produces. Taking clues from these texts and with some added tweaks, the basis for the modern tax system in India was laid by the British when Sir James Wilson introduced income tax in 1860. At the time of independence, the newly-formed Indian Government cemented the system to catalyze the economic progress of the country and also to eradicate income and wealth disparity.

TYPES OF TAXES:

There are four ways to classify different types of taxes in India:

1. Taxes Levied by the Central Government and State Governments

2. On the Basis of Relationship between Tax Base and Tax Rates

3. On the Basis of Method of Assessment

4. On the Basis of Incidence and Impact of Taxes

TYPES OF TAXES:

1. Taxes Levied by the Central Government and State Governments

> By the Central Government: These include Income taxes, GST, Customs duties, Corporation taxes, Excise duties, Estate duty and more

> By the State Government: These include State GST, Excise on Liquor, VAT(value Added Tax) on Petrol & Diesel, Tax on Agricultural Income, land revenues, tolls and more.

> By the Local Civic Bodies: Municipal corporations and other local governing bodies collect taxes like property taxes, Water Taxes, etc.

2.On the Basis of Relationship between Tax Base and Tax Rates:

On this basis the Taxes are classified into Four types, such as;

> Proportional Tax: A proportional tax, also referred to as a flat tax, impacts low-, middle-, and high-income earners relatively equally. They all pay the same tax rate, regardless of income. Taxes which very in direct proportion to the change in Tax Bases. The Tax base could be income, Value of Goods and Value of Wealth or Property.

Example: Wealth Tax and Sales Tax.

> Progressive Taxes: A progressive tax has more of a financial impact on higher-income individuals and businesses than on low-income earners. That means A progressive tax imposes a greater percentage of taxation on higher income levels, operating on the theory that high-income earners can afford to pay more.

Example: Income Tax

TYPES OF TAXES:

On the Basis of Relationship between Tax Base and Tax Rates

> Regressive Taxes: Low-income individuals pay a higher amount of their incomes in taxes compared to high-income earners under a regressive tax system because the government assesses tax as a percentage of the value of the asset that a taxpayer purchases or owns. This type of tax has no correlation with an individual’s earnings or income level.

Example: Taxes on Goods & Services, Such as GST, Excise Duty, etc.

> Digressive Taxes: A tax is called Digressive when the rate of progression in taxation does not increase in the same proportion as the income increases. In this case, the rate of tax increases up to certain limit, after that a uniform rate is charged and become constant.

3. On the Basis of Method of Assessment

On this basis, taxes are classified into two types, Such as;

> Specific Duty: Taxes levied according to some unit of a product is called as Specific Duty. For example, Excise Duty on cigarettes are levied on the basis of length of the cigarettes.

> Ad-Valorem Tax: Taxes levied on the basis of value of the goods is called as Ad-Valorem Duty. It is generally expressed in percentage form.

4. On the Basis of Incidence and Impact of Taxes:

Before discussion on the types of taxes in this basis, you have to understand the meaning of two important terms, i.e. ‘Incidence’ and ‘Impact’ of Tax are as follows;

Incidence of Tax: Incidence of Tax means the first burden of tax. Incidence of tax falls on a person on whom the tax levied for the first time. Incidence of tax can be shifted to another person.

Impact of Tax: Impact of tax means the ultimate/final burden of tax. Impact of tax falls on the person who ultimately bears the burden of tax, i.e. the Consumer.

On the basis of incidence and impact of tax, a tax can be either, ‘Direct Tax’ or ‘Indirect Tax’

On the Basis of Incidence and Impact of Taxes

> Direct Taxes: The individuals directly pay these taxes to the respective governments. In this case the both Incidence and Impact will fall in a single person, i.e. an assesse. The most notable examples include Income tax, Capital gains tax, Corporate tax, Wealth Tax and Securities transaction tax.

> Indirect Taxes: These taxes are not directly paid to the governments but are collected by the intermediaries who sell or arrange products and services. In this case, the Incidence and impact of taxes will fall on two different persons. GST (Goods and Service Tax), Service tax, sales tax, octroi, customs duty, value-added tax, and excise duty, customs duty, are some of the top examples

DIRECT TAX VS. INDIRECT TAX

Particulars Direct Tax Indirect Tax
1. Meaning Direct Taxes are the taxes in which the incidence and impact falls on the same person/assesse Indirect Taxes are such type of taxes where incidence and impact fall on two different persons.
2. Nature of tax Direct Tax is progressive in nature. Indirect Taxes are regressive in nature.
3. Taxable Event Taxable Income / Taxable Wealth of the Assessees. Purchase / Sale / Manufacture of goods and /or rendering of services.
4. Levy & Collection Levied and collected from the Assessee. Levied & collected from the consumer but paid / deposited to the Exchequer by the Assessee / Dealer.
5. Shifting of Burden Tax Burden is directly borne by the Assessee. Hence, the burden cannot be shifted. Tax burden is shifted to the subsequent / ultimate user.
6. Tax Collection Tax is collected after the income for a year is earned or valuation of assets is determined on the valuation date. At the time of sale or purchases or rendering of services.
7. Tax Evasion Comparatively more because of presence of Unorganised sector. Comparatively less because of presence of organised sector.
8. Administered by

 

Direct Tax is administered by Central Board of Direct Taxes (CBDT) Indirect Tax is administered by Central Board of Indirect Tax & Customs (CBIC). It is formerly known as Central Board of Excise & Customs (CBEC).

Author Bio

Qualification: Post Graduate
Company: NIIS INSTITUTE OF BUSINESS ADMINISTRATION
Location: BHUBANESWAR, Odisha, IN
Member Since: 20 Jun 2020 | Total Posts: 3

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2 Comments

  1. Krishnan says:

    TaxGuru is publishing plenty of interesting articles on tax matters. These are very useful at this time when many changes are being made in the IT Act, with a view towards simplifying the tax structure both from the point of view of equity and efficiency. Thank you.🙏

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