Taxation in India

Taxes have always been a part of the Indian society. No matter how far back you look into the history, taxation has existed and formed a crucial part of the Indian society. In the past, taxes were collected not just in cash but also in kind; in the form of food grains, etc. Though the earlier system of taxation cannot be argued to be just and fair, the tax structure has seen various changes over the years to give way to the present day modern structure which is based on the theory of maximum social welfare for all. It can be said to be rooted from the period of ‘Manu Smriti’- an ancient legal text among the many Dharmasastras of Hinduism and the ‘Arthasastra’- the wise Chanakya’s book on statecraft, economic policy, and the military system. The present-day tax system is remarkably similar to the taxation structure which existed around 2300 years ago.

Today, a majority of the crucial taxes are collected by the Central as well as the State governments. It is the Constitution of India which gives the two a power to collect taxes from the Indian citizens. The same constitution mandates it for every individual to pay these taxes levied by the government as a responsible citizen and as their contribution the development of the society.

It is essential to realize the importance of taxes in order to willingly and responsibly pay them from time to time. Taxes are the most basic source of revenue for not just the Indian government, but all the governments that exist in the world. This is where the government derives all its money from, to develop and maintain decent living standards in the society and provide its citizens with the most basic civic services. These funds are also used to finance the minor governments like panchayats and municipal corporations. So all in all, it can be said that taxes form the backbone of the development of a country and hence, require a responsible payment from every individual.

Types of taxes of India

In the Indian taxation structure, there are broadly two types of taxes- the direct tax and the indirect tax. This division is done on the basis of who bears the major burden of the tax and who collects it from the taxpayer. These two major classifications cover almost all the essential types of taxes levied by the Indian government and paid by the Indian citizens at different levels, either knowingly or unknowingly.

1. Direct Taxes

Direct taxes are the taxes which are paid in their entirety by the taxpayer to the government. It can also be defined as the tax whose liability as well as the burden to pay falls flatly on one single individual or taxpayer. This type of tax cannot be shifted or transferred from one taxpayer to another and has to be paid by one person. Generally, direct taxes are the taxes levied on an individual’s income, profits or revenue. When talking about the Indian system, a lack of efficiency in the administrative system makes it possible for minor direct taxes to be evaded at certain levels. On the other hand, the advantages of direct taxes include the reduction of inflation in the economy as well as the maintenance of social and economic balances. Despite the fact that the filing of tax returns is a time consuming and an exhausting process, direct taxes, perhaps, form a crucial part of the defining structure of the Indian economy. Direct taxes levied in India are the Income Tax, Corporate Tax, Wealth Tax and Capital Gains Tax.

2. Indirect Taxes

Indirect taxes are the taxes whose burden falls on not just one but multiple taxpayers. It includes those taxes where the liability to pay the tax lies with one person who then shifts it to another individual, thereby sharing or completely transferring the burden of the tax on the end-consumer of goods and services. Generally, the indirect tax is applied to the manufacture and sale of goods and services. The taxes are initially paid to the government by an intermediary who then adds the amount of the tax paid to the value of goods and services, thereby passing on the burden to the end user. This usually leads to the payment of an amount higher than the actual price of the goods bought or service used. An evasion of indirect taxes is pretty much impossible in the current tax regime. However, indirect taxes do contribute to an enhancement of inflation in the economy. Usually, these taxes are considered to be regressive for the economy, unlike the direct taxes, as they, indirectly, enhance inequalities in the society. Again, they have a broader reach than the direct taxes for the Indian residents. Indirect taxes can, in a way, have a substantial effect on the well-being of the society, both in a good and a bad way. The most important indirect tax levied in India, in today’s context is the Goods and Service Tax, or more commonly, GST. Apart from that, excise duty is also another important indirect tax.

Income Tax
In India, the government levies a tax on all the incomes of its citizens apart from that earned from agricultural processes. The Income Tax department, a part of the Department of Revenue under the Ministry of Finance, Government of India is administered by the Central Board of Direct Taxes (CBDT). Income tax acts as the key source of revenue for the government of India, who uses it to fund its activities and serve the interests of the public. The Income Tax department, in a way, is the most prominent revenue mobilizer for the Indian Government.
Any Indian citizen below 60 years of age and with an income of 2.5 lakhs or above, has to pay the income tax. Additionally, all the income generating Hindu Undivided Families (HUF), body of individuals (BOI), an association of persons(AOP), corporate firms, companies, local authorities, or any other artificial juridical person has to pay a tax on their taxable income.
The primary source of income for any individual is generally his or her salary. Apart from that, any income that you are earning from other sources, except the agricultural income is taxable and is added to your total taxable income. The Income Tax Department broadly classifies income into the following categories:
  • Income from Salary: Income from salary, allowances, leave encashment, or in short, everything you earn as a result of being employed comes under this category.
  • Income from House Property: Any income that you earn from your rented property comes under this category.
  • Income from Capital Gains: Income from sales of capital assets such as mutual funds, shares, land, house property, etc.
  • Income from Business or Profession: This category covers those who are self-employed, work as a contractor or a freelancer or run a business. It includes all the income you earn or the losses you face as a result of carrying on your business.
  • Income from Other Sources: This includes all your other incomes, say from savings bank accounts, family pensions, fixed deposits, lottery winnings, income from dividends, etc.
Income from Other Sources: This includes all your other incomes, say from savings bank accounts, family pensions, fixed deposits, lottery winnings, income from dividends, etc.
  • For a taxable income less than Rs. 2,50,000: No tax has to be paid
  • For a taxable income between Rs. 2.5 lakhs to Rs. 5 lakhs: The tax has to be paid at the rate of 5 %, i.e., 5% of your taxable income goes as income tax.
  • For a taxable income between Rs. Five lakhs to Rs. 10 lakhs: The tax rate charged is 20% which means that you have to pay Rs. 12,500 plus 20% of the income above Rs. 5 lakhs.
  • For a taxable income above Rs. 10 lakhs: The tax rate charged is 30% which means that you have to pay Rs. 1,12,500 plus 30% of your income above Rs. 10 lakhs.
  • Income from Other Sources: This includes all your other incomes, say from savings bank accounts, family pensions, fixed deposits, lottery winnings, income from dividends, etc.
People often get confused while calculating their payable tax and hence, here is an example for the same. If your income is 15 lakhs, you will have to pay Rs. 1,12,500+ 30% of 5 lakhs, which is Rs. 75,000. Therefore, you will have to pay a total of Rs. 1,12,500+ 75,000= Rs. 1,87,500 as income tax to the government.
Again, it needs to be noted that the tax rates and slabs mentioned above are for the citizens below 60 years of age. There are two other slabs for taxpayers who are older than 60 and older than 80.
Broadly, there are three ways in which the income tax is collected by the government of India. They are as follows:
  • Taxes Deducted at Source (TDS): Anyone receiving an income will have a certain portion withheld by their employer or source of income, as prescribed by the government. In the employer-employee cases, your employer will deduct a certain portion of your payable tax based on the tax slab that your predicted income is falling under. Therefore, while filing for your income tax, you can reduce the tax to be paid by the TDS already deducted from your income. In simpler words: Tax Payable on Total Taxable Income - TDS already Deducted = Final Tax Payable
  • Taxes Collected at Source (TCS): It is basically the amount collected by the seller or company as tax from the buyer on the sale of certain specific items. The seller then goes on to transfer this amount collected from the buyer to the government post issuing a TCS certificate. Items which demand a TCS include alcoholic drinks or liquor, parking lot, bullion, jewellery (over five lakhs), etc. The rate of TCS, however, is different for different items.
  • Voluntary payment by taxpayers into designated banks- advance tax and self-assessment tax: Self-employed people are required to do their tax calculation themselves and pay the necessary tax to the government periodically. This is called the advance tax. In other cases, if, while filing a tax return, you realize that you need to pay additional tax, then that will be considered a self-assessment tax.
Every individual, who has a source of income, needs to file their income tax returns, as per the government laws. Even if your income is so low that it does not require any tax payment, you need to inform the government of your sources of income and your total income throughout the year. This filing is done through various Income Tax Return or ITR Forms. There are different forms for different classes of payers, and hence, care should be taken while choosing the form for filing the annual returns. The process can also be done online without much hassle. All you need to do is have your payslip in your hand, and be aware of all the incomes you have to consider, the deductions (or reduction in your total income to lower your taxable income) that you can claim and follow the step-by-step process on the government portal.