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Tax System in India | What are Different Types of Taxes in India | YES BANK

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Tax is a compulsory contribution to government revenue and an essential part of promoting the economic growth of the nation. The tax-money is used to provide the basic services and amenities to the people of the country. The Indian Constitution confers the right to collect taxes upon the Government of India. The tax structure in India is a three-tier structure, including central, state and local municipal bodies.

What are the different types of taxes in India?

Typically, the tax structure includes Direct tax and Indirect taxes.

  1. Direct taxes: These are taxes that are levied on an individual and are directly payable to the government. The Central Board of Direct Taxes (CBDT) is responsible for the governance of this tax.
    Some important Direct taxes include:

  • Income tax

  • Wealth tax

  • Gift tax

  • Capital Gains tax

  • Securities Transaction tax

  • Corporate tax

Among these taxes, income tax is the most common tax levied on individuals. This tax is imposed on the income earned within a financial year. The tax rate is determined according to the applicable tax slab. Individuals include Hindu Undivided Family (HUF), company, firm, co-operative societies and trusts.

  1. Indirect taxes: Indirect taxes are charges levied indirectly on the publicThese are mostly charged through goods and services. The seller takes these taxes in the prices, which are then collected by the concerned government bodies.
    Some important Indirect taxes include:

  • Sales tax

  • Goods and Services tax

  • Value Added Tax (VAT)

  • Customs duty

  • Toll tax

  • Octroi duty

Who collects the taxes?

The Indian Constitution confers the right to collect taxes in India upon three statutory bodies including:

  • The Central Government collects income tax, customs duties, central excise duty, etc.

  • The State Government gathers tax on agricultural income, professional tax, state excise duty, value-added tax, etc.

  • Local Municipal Bodies take taxes, including water tax, property tax, etc.

That said, in India, the central government introduced the Good and Services Tax (GST) in 2017, to incorporate a few taxes in one blanket. Some of the taxes replaced by GST are:

  • Sales tax

  • Service tax

  • Octroi

  • Central Excise duty

  • Entertainment tax

  • Purchase tax

GST is a multi-stage location-based tax, which is charged on each stage of the supply chain from the purchase of raw material, till the sale of finished product and then to the end consumer. Typically, wherever there are value addition and transfer of ownership in the supply, GST will be applicable.

GST is collected by the government of the destination, where the final purchase takes place. GST has three components:

  • Central Goods and Services Tax (CGST), where the central government collects the charge on the supply of good and services within the state

  • State Goods and Services Tax (SGST), or UTGST for Union Territories, where the state government/Union Territory collects taxes on the supply of goods and services within the state

  • Integrated Goods and Services Tax (IGST), where the central government collects taxes for the sale of goods and services beyond state borders

What are the benefits of taxes?

Even though no one like to pay taxes, it is important to give an adequate charge to the collection body. The money collected from taxes is used to support the development and provide resources to the people in the country. However, to reduce the burden of taxes on people, particularly income tax, the government provides specific standard deductions, tax exemptions, as well as tax deductions for the tax-saving investments made under the purview of the Income Tax law.

Paying taxes and duly filing for Income Tax Returns (ITR) also enables you to get faster loan approval, improve credit standing and quick VISA processing. Moreover, ITR documents serve as income proof for the self-employed and also allow you to get easier refunds.

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