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 in 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.

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.

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.

Need help?