Taxes are an obligatory expense enforced on the individual by the state and central government. They are one of the government’s most significant income sources, helping them build our country’s economy and infrastructure.
Therefore, as a responsible citizen, you must pay taxes. However, it is also crucial to know the different types of taxes in India implemented in the taxation system.
Here’s all about the types of taxes.
Types Of Taxes In India
The tax structure in India is a three-tier structure: local municipal bodies, state, and central government. Taxation in India is broadly classified into direct and indirect tax. Let us look at these two types of taxes and catch the difference between direct and indirect taxes.
Direct Taxes
Direct tax is levied on people's income or profits. For example, a taxpayer pays the government for different purposes, including income tax, personal property tax, FBT, etc. The burden has to be borne by the person on whom the tax is levied and cannot be passed on to someone else. Central Board of Direct Taxes (CBDT) governs and administers the Direct Tax.
Indirect Taxes
Conversely, indirect tax is levied by the government on goods and services. Therefore, it can be shifted from one tax-paying individual to another. E.g; the wholesaler can pass it on to retailers, who then pass it on to customers. Therefore, customers bear the brunt of indirect taxes. The Central Board of Indirect Taxes and Customs (CBIC) governs and administers indirect taxes.
Taxes | ||
Direct Taxes | Indirect Taxes | Other Taxes |
Income Tax | Sales Tax | Property Tax |
Corporate Tax | Service Tax | Registration Fees |
Securities Transaction Tax | Octroi Duty | Toll Tax |
Capital Gains Tax | Custom Duty | Education Cess |
Gift Tax | Value Added Tax (VAT) | Entertainment Tax |
Wealth Tax | Goods & Services Tax (GST) | Professional Tax |
Types Of Indirect Taxes And Direct Taxes In India
Here is a list of major types of Indirect taxes:
- Goods and Service Tax- (GST) is an indirect tax levied on various goods and services. One significant benefit of GST is that it eliminates the tax-on-tax or cascading effect of the previous tax regime.
- Excise duty- Is a tax imposed on licensing, sale or production of certain goods produced within the country.
- Sales Tax—Sales tax is a type of indirect tax that the seller charges a buyer when selling or exchanging a taxable good. The seller then repays the tax to the government on behalf of that buyer.
However, the sales tax generally depends upon the authority in power and the policies implemented by the authority. Some significant sales tax types are manufacturer’s sales tax, wholesale sales tax, use tax, value-added tax, and retail sales tax.
However, with the introduction of GST, excise duty, service value-added tax, and tax (VAT), state/central sales tax on most goods /services has been replaced by GST.
Here is the list of types of Direct taxes:
- Income tax- It is a type of tax imposed on the profits and income earned during the year. Income tax is the most common example of direct tax. As the term “income tax” suggests, it is a tax levied by the Central government on income generated by individuals and businesses in a particular financial year. However, the amount payable for your income tax depends on how much money you earn under different heads of income. Additionally, for a financial year, income tax applies to those with an annual income exceeding the basic exemption limit applicable to them.
In addition, other examples of direct and indirect tax include corporate tax, value-added tax, customs duty, and many more.
Now that you know about some common types of direct and indirect taxes, it is essential to understand the pros and cons of direct and Indirect taxes.
Advantages And Disadvantages Of Direct Tax
Direct Taxes | |
Advantages | Disadvantages |
Individuals with lower incomes pay lower taxes than people with higher incomes, i.e, progressive in nature. | Fraudulent practices through which taxpayers often pay lower taxes or avoid taxes.
|
Curbs inflation and reduces inequalities. | The documentation process can be complex and time-consuming |
Sense of certainty as both the government and taxpayer are aware of what and when to be paid. | The burden cannot be transferred to any other in the chain. |
Advantages And Disadvantages Of Indirect Tax
Indirect Taxes | |
Advantages | Disadvantages |
Every Individual contributes to nation-building | Increase in overall price of goods and services |
Easily collectable from the end consumer | Consumers often lack knowledge of the taxes paid |
Fair Distribution of tax, i.e, essential goods are charged lesser compared to goods that are luxurious. | It is regressive in nature. |
The burden of paying can be transferred to the end consumer. | The amount received in tax is often unpredictable as the tax paid depends on the goods and services purchased |
Difference Between Direct And Indirect Tax
Direct Tax | Indirect tax |
Tax on income or wealth | Tax on goods or services |
Progressive in nature | Regressive in nature |
The tax burden cannot be shifted, i.e., the person who pays the tax to the Government cannot recover it from somebody else. | The tax burden can be shifted, i.e. the person paying the tax passes on the incidence to another person. |
Now that you are aware of the different types of taxes in India, you will have a better idea of the types of taxes you are paying.
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