What is Tax Concept in India: Types of Taxes

As important as taxes are to our daily lives, many of us find it challenging to understand the various tax concept and systems in India. Taxes are levies imposed by the government on individuals and businesses to fund public services and projects. The revenue collected through taxes is used to finance education, healthcare, social security, infrastructure, defence, and other government initiatives. In this article, we will take a deep dive into the concept of taxes, different types of tax planning, basic direct and indirect tax concept, recent tax reforms, and other related aspects.

What is the tax concept and its types?

India’s taxation framework forms a vital component of its economic infrastructure, enabling the government to finance public services such as education, healthcare, infrastructure, defense, and social welfare. The system is rooted in the Indian Constitution and the Income Tax Act of 1961, comprising a blend of direct and indirect taxes, structured within a federal setup where both central and state governments possess taxing authority.

Taxation principles in India

Taxation in India involves compulsory levies imposed by the government on individuals, corporations, and other entities to fund public expenditures. These taxes are categorised into two main types:

• Direct taxes: Imposed directly on income, wealth, or assets of individuals and entities.
• Indirect taxes: Levied on goods and services, often passed on to consumers.

The Constitution divides taxing powers among three lists: the Union List (e.g., income tax, customs duties), the State List (e.g., GST on goods, property taxes), and the Concurrent List (e.g., GST, which both levels can levy).

Objectives of taxation

Taxes serve multiple purposes, including revenue generation for government functions, redistribution of wealth through progressive taxes, regulation of economic activities (such as incentivizing investments in sustainable energy), and funding social welfare initiatives like poverty alleviation and health programs.

Tax administration

India’s tax administration is managed by various authorities:

• CBDT (Central Board of Direct Taxes): Oversees direct taxes like income tax and corporate tax.
• CBIC (Central Board of Indirect Taxes and Customs): Handles indirect taxes including GST and customs duties.
• State Governments: Administer state-level taxes such as SGST, stamp duty, and land revenue.

Different types of tax concepts

Tax planning involves organising an individual's finances in such a manner that it attracts fewer taxes. Tax planning involves legal minimising of tax liabilities. With the help of tax planning, an individual can make strategic investment or business decisions that save taxes.

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Basic concepts of direct tax

Direct taxes are levied on individuals or entities based on their income, wealth, and other assets. The Income Tax Act, 1961, governs direct taxation in India and imposes various tax rates based on income ranges. The Income Tax Act provides that the taxable income of individuals must be calculated for every year, and tax-exempted income must be considered before calculating the tax. Individuals can also make use of tax deductions and tax credits provided by the Income Tax Act to minimise their tax liability.

Types of direct tax

• Income tax: A tax applied to the earnings of individuals, Hindu Undivided Families (HUFs), firms, and other entities. For individuals, it follows a dynamic tax bracket system. Businesses, whether they are based in India or elsewhere, are subject to corporate tax when they conduct business in India. The Income Tax Act of 1961, along with the Central Board of Direct Taxes (CBDT), provide the guidelines and management for this tax.
• Corporate tax: Levied on the earnings of both domestic and international corporations. Rates fluctuate depending on the company's revenue and category, such as private, public, domestic, or foreign. To promote economic expansion, there are tailored rules for startups and small businesses.
• Capital gains tax: Applied to profits from selling capital assets like property, stocks, and bonds. It is divided into Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG), each having distinct tax rates.
• Securities Transaction Tax (STT): A tax on transactions of securities traded on stock markets. It applies to the buying and selling of stocks, derivatives, and mutual funds.
• Wealth tax (abolished in 2015): Previously, this was a tax charged to people and HUFs whose total wealth was above a set amount. It has been replaced by a surcharge on very wealthy people and those with high incomes.

Basic concepts of indirect tax

Indirect taxes are levied on goods and services at the point of consumption. These taxes are not directly paid by individuals or businesses, but the burden is passed on to consumers through the pricing of goods and services. Some common examples of indirect taxes include goods and services tax (GST), value added tax (VAT), customs duty, excise duty, and others.

Types of indirect tax

• Goods and Services Tax (GST): Implemented in 2017, GST unified numerous indirect taxes such as VAT, Service Tax, and Excise Duty into a single comprehensive tax system
•  Custom duty: Imposed on goods brought into or sent out of India, this duty aims to regulate international trade and shield domestic industries from foreign competition.
• Excise duty (now integrated with GST): Previously charged on domestically produced goods, excise duty has largely been subsumed under GST, with exceptions like alcohol, petroleum, and tobacco remaining outside this framework.
• Stamp duty and registration fees: These charges apply to property transactions and legal document registrations, with rates differing across various states.

Difference between direct tax and indirect tax

Criteria	Direct Tax	Indirect Tax
Definition	Tax directly levied on individuals or companies by the government.	Tax levied on goods and services rather than on income or profits.
Nature	Progressive (based on ability to pay).	Regressive (same rate for everyone).
Basis of Taxation	Income, profits, and capital gains.	Consumption, sales, and services.
Collection	Collected directly from taxpayers.	Collected from consumers by intermediaries (e.g., businesses).
Example	Income Tax, Corporate Tax.	GST, Customs Duty, Excise Duty.
Impact	Directly affects the disposable income of individuals and profits of businesses.	Indirectly affects the prices of goods and services, impacting consumers.
Ease of Collection	Generally more challenging due to the need to assess and verify income sources.	Generally easier due to point-of-sale collection mechanisms.
Equity	More equitable as it's based on ability to pay.	May be less equitable as it affects everyone, regardless of income level.

 

Recent reforms in taxes

The Indian government has made several significant changes in tax laws recently. One of the reforms is the introduction of the direct tax Vivad se Vishwas Act, 2020, which aims to provide tax relief and a quick dispute resolution process for taxpayers. Another significant change is the reduction in corporate tax rates for businesses, which has helped to boost investment and stimulate economic growth. Additionally, the government has implemented several measures to simplify compliance procedures and reduce the tax burden on taxpayers.

How to do tax planning?

1. Understand tax slabs: Familiarize yourself with the income tax slabs and rates applicable for the financial year.
2. Invest in tax-saving instruments: Utilise investments like ELSS, PPF, NSC, and tax-saving FDs to avail deductions under Section 80C.
3. Health insurance: Invest in health insurance to claim deductions under Section 80D.
4. Home loan interest: Benefit from deductions on home loan interest payments under Section 24.
5. Education loan: Avail deductions on education loan interest payments under Section 80E.
6. HRA exemption: If you receive HRA, claim exemption as per HRA rules.
7. Gifts and donations: Deduct contributions made to eligible charities under Section 80G.
8. Professional tax: Deduct professional tax paid from your taxable income.
9. Consult a tax advisor: Seek advice from a tax consultant to maximize savings and compliance.

What is income tax?

Income tax is a type of direct tax levied on individuals based on their income. An individual's taxable income is calculated by subtracting their tax-exempted income, deductions, and exemptions from their total income. The Income Tax Act sets different tax rates for different income ranges. Higher rates of tax are imposed on individuals with higher incomes. It is a crucial tool for revenue collection that funds public services and national development.

Income tax deductions

The Income Tax Act allows individuals to claim deductions to reduce their taxable income, thereby lowering their overall tax liability. Some key deductions include:

• Section 80C: Investments in Public Provident Fund (PPF), Employee Provident Fund (EPF), Life Insurance Premiums, and other approved avenues (up to Rs. 1.5 lakh).
• Section 80D: Health insurance premiums for self, family, or parents (up to Rs. 25,000, with an additional Rs. 25,000 for parents).
• Section 24(b): Interest paid on home loans (up to Rs. 2 lakh for self-occupied property).
• Section 80G: Donations made to charitable organisations and relief funds.

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Tax deducted at source

Tax deducted at source (TDS) is an indirect tax method, where a business employer or an individual must deduct and remit the tax before making payments such as salary, interest, rent, commission, and other income payments. It is applicable to professionals, contractors, and businesses with a significant turnover. TDS ensures that persons receiving income are paying tax regularly.

Tax evasion laws and implications

Tax evasion is a punishable offence under the Income Tax Act, and the violation of this law carries significant implications. If an individual fails to pay their taxes or deliberately underreports their income, they may face legal action, including interest, penalty, and imprisonment terms. Some banks also consider an individual's tax compliance while processing home loan applications. Therefore, tax compliance is crucial while taking loans, tax planning and investment decision making.

Income tax filing and compliance

Filing income tax returns is a mandatory requirement for eligible taxpayers. Compliance with income tax laws not only avoids legal troubles but also helps in claiming refunds on excess taxes paid, such as TDS. Moreover, timely filing of tax returns provides an official record of earnings, which is beneficial when applying for financial products like home loans.

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Understanding income tax reforms

Over the years, the government has introduced several reforms aimed at simplifying tax compliance and reducing tax burdens on individuals. Some reforms include the introduction of the new income tax regime with lower tax rates but fewer deductions, e-filing procedures for convenience, and incentives for digital payments. Staying updated with these reforms helps individuals make informed decisions during tax planning.

Tips for effective tax planning

• Invest in tax-saving instruments: Utilize Section 80C investments like PPF, ELSS (Equity-Linked Saving Scheme), and National Savings Certificates.
• Claim deductions for home loan: Use deductions under Section 24(b) and Section 80EEA for home loan interest.Home loans are one of the most effective tax-saving tools available to individuals. Ready to reduce your tax burden while fulfilling your dream of homeownership? Apply for a Bajaj Housing Finance Home Loan with a flexible tenure of up to 32 years and EMIs as low as Rs. 741/lakh. You may already be eligible, check your loan offer by entering your mobile number and OTP.
• Maintain tax records: Keep a record of investment proofs, receipts, and tax-related documents for smooth filing and verification.
• Consider the new regime vs. old regime: Evaluate whether to opt for the new tax regime, which offers lower rates but no deductions, based on your financial situation.

In conclusion, taxes play a significant role in financing public services and projects and understanding how taxes work is essential for individuals and businesses. Tax planning can help individuals minimise legal tax liabilities and make better investment decisions. There have been several recent reforms in tax laws in India aimed at simplifying compliance procedures and reducing the tax burden on taxpayers. Income tax, tax deductions, TDS, tax evasion laws are essential concepts to be understood by every taxpayer in India.

There have been several recent reforms in tax laws in India aimed at simplifying compliance procedures and reducing the tax burden on taxpayers. Income tax, tax deductions, TDS, tax evasion laws, and tools like the income tax calculator are essential concepts and resources to be understood by every taxpayer in India.

Related income tax sections

Click on any of the links below to explore crucial income tax sections that impact your financial planning, covering deductions, exemptions, and compliance for better tax management.

Section 16(ia)	Section 80C
Section 143(1)	Section 10(13A)
Section 16(ii)	Section 17(1)
Section 179	Section 194IA
Section 54B	Section 80CCD(1B)
Section 80DD	Section 80DDB
Section 80EEA	Section 80GG