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Tax Structure & Taxation System in India Explained | YES BANK

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The taxation system in India has prevailed for centuries. The government uses the revenue collected through taxes in the development of the nation. Earlier, traders and farmers used to pay taxes in the form of gold, silver and agricultural produce. At the time of independence, the government formalized the taxation system. They presented a well-structured taxation system was presented to Indian citizens, to push economic reform and remove wealth disparity.

Over the years, the government has reformed many policies to simplify and automate the taxation process. Read ahead to understand the tax structure and tax system in India.

Tax structure in India

The tax structure in India is three-tiered, comprising of the following government bodies:

  1. The Central Government

Some of the taxes that the central government levies include:

  • Income Tax

  • Corporate Tax

  • Excise Duty

  • Estate Duty

  • Customs Tax

  1. The State Government

The state government collects taxes on agricultural income, VAT (Value Added Tax), land revenue, toll tax, etc.

  1. The local municipal bodies

Local governing bodies and municipal corporations levy property tax and professional tax.

Tax system in India

The tax system in India is broadly classified into two types of taxes, direct and indirect tax. In addition to these, in the year 2017, the government added the Goods and Services Tax (GST) to the tax system.

  • Direct taxes

 

The taxes that are directly levied on individuals or corporate institutions are known as direct taxes. The income tax is the most common form of direct tax. The Union Budget of 2020 introduced a new income tax regime.

Under the new regime, individuals who are willing to forego tax-exemptions (including common tax breaks like 80C and 80D) and deductions, can avail reduced tax rates. The new regime is entirely optional and will coexist with the old regime. For individuals opting to stick with the old regime, they will continue to pay tax in FY 2020-21 as they did in FY 2019-20.

Individuals with an annual income of ₹5 Lakhs, will be given a rebate of up to ₹12,5000 under Section 87A, under both the regimes.

Income Slab

Tax-rates (Old regime)

Tax-rates (New regime)

Up to ₹2,50,000

Nil

Nil

₹2,50,000 - ₹5,00,000

5%

5%

₹5, 00, 000 - ₹7, 50, 000

20%

10%

₹7,50,000 - ₹10,00,000

20%

15%

₹10,00,000 - ₹12,50,000

30%

20%

₹12,50,000 - ₹15,00,000

30%

25%

Over ₹15,00,000

30%

30%

 

  • Indirect taxes

The taxes imposed on products or services, when they are bought or sold, are called indirect taxes. The government collects the taxes from the seller and not from an individuals’ income. Some examples of taxes that fall under indirect taxes are customs duty and security transaction tax.

  • Goods and Services Tax (GST)

Goods and Services Tax (GST) came into effect on 1st July 2017. It has replaced almost all indirect taxes as a comprehensive single, pan-India indirect tax. With its implementation, the cascading effect of taxes impacting the cost of goods has been removed. Thus, GST has helped reduce the cost of goods. It has made the taxation system more efficient by regulating logistics and compliances.

GST is formed of three components- CGST, SGST and IGST. The central government collects CGST. The various state governments charge SGST (also known as UGST for union territories). IGST is the tax levied by the central government for inter-state sales.

Conclusion

The income tax structure and taxation system in India have undergone some milestone reforms in the last decade. Simpler taxation laws and the ease of filing taxes online have been revolutionary. Such changes have regulated the unorganized sectors, reduced tax evasions, and improved compliance.

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