Different kinds of taxes

Tax is the amount that we pay to the government to finance government activities. Tax is levied from various sources like wages, interest, dividends, goods, rental or intellectual properties, etc. It is a mandatory fee collection by the government to finance public services like roads, colleges, and schools. If one fails or denies to pay taxes, he/she will face the consequences defined under the law. The government uses this amount to enhance the economy of the country and to lift the standard of living.

There are different kinds of taxes. Based on how the taxes are being paid to the government, taxes are divided into two categories; direct and indirect taxes which further subdivides into many.

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Direct Tax

A direct tax as the name suggests is a tax that an individual or organization directly pays to the government. It includes property taxes, income taxes, taxes on assets, etc. It is based on the ability-to-pay principle. The more money a person earns the more taxes he pays.

Direct taxes cannot be passed on to others, it is levied on an individual or organization and it’s their responsibility to pay it.

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Types of direct taxes:

• Income Tax - This tax is based on one’s income. A certain amount is taken from an individual’s salary depending on his or her earnings. In India, income tax is governed by the rules set by the IT Act, 1961.

• Gift Tax - It is a type of transfer tax where the tax is on the property or money or items of value that individual gifts to another. If the money exceeds 50,000, the entire gift becomes taxable. The money received from relatives is not taxable.

• Wealth Tax - This tax is levied on an individual's net wealth or market value of his assets. This includes financial securities, bank deposits, personal assets. It is also known as capital assets or equity assets. The net wealth of an individual should be above 30,000 and the tax payable is calculated at 1% of the exceeded amount.

• Expenditure Tax - This tax is levied on the expenditure made by an individual. Under the Expenditure Tax Act, in restaurants and hotels, if the room rent is above 3,000, expenditure charges are payable to the hotels.

• Interest Tax - If 90% of the income tax is not paid by the end of March or filing an income tax return after the due date or hasn't paid the tax at all, interest will be accrued. This is called the interest tax.

Indirect Tax

Indirect tax is the exact opposite of direct tax. It is collected from intermediaries, usually a producer, manufacturer, or retailer by the government. This tax is levied by the government on the person for the goods and services rendered. Unlike direct taxes, they can be passed on from one individual to another.

(Source: exportersindia.com)

Types of indirect taxes;

• Sales Tax - It is a consumption tax on the sale of goods and services imposed by the government. We used to pay this tax when we visit the shopping malls or departmental stores but now, there’s only one tax which is GST. Clothing, cosmetics, household items are some of the goods bound to such type of tax.

• Excise Tax - This tax is levied on certain types of goods and services like alcohol, tobacco, and fuel. Excise taxes are mainly for business purposes and mostly this tax is passed on by the sellers to the consumers by charging a higher price.

• Custom Duty - This tax is levied on the goods imported to India and sometimes applicable to some exports made by the customs authority. It is also known as import duty or tariff.

• Value Added Tax - VAT is a consumption tax levied on the goods and services from production to sale. The consumer pays the VAT based on the cost of the product, less any previously taxed cost of materials used in the product. It is the most commonly found tax.

• Service Tax - It is an indirect tax that came into being under the Finance Act 1994 and is levied by the central government on certain services and is to be paid by the service providers.

Direct vs Indirect Taxes

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What is GST?

Goods and Services Tax is an indirect tax that has replaced other taxes like excise duty, VAT, etc. It came into effect on July 1st, 2017. Under this tax regime, Central GST and State GST are charged for intra-state sales, the tax is charged at every point of sales.

Before GST, every state had a different set of rules and regulations and they mainly collected tax in the form of VAT.

GST provides simpler online facilities and removes the cascading effect and it helps in regulating the unorganized sectors. It also helped in price reduction.

There are three taxes under this system;

• Central Goods and Services Tax (CGST)

• State Goods and Services Tax (SGST)

• Integrated Goods and Services Tax (IGST)

Taxes provide the government with funds for various purposes like public insurance, law enforcement, public health, public education, pension schemes, and many more.

Let’s take a look into the GST collection by GoI in the last 2 years;

Due to lockdown induced by Covid 19, the government has only collected GST of 10.12 lakh crore during April 2020 - February 2021 against the GST collected in 2019-2020 which is 12.22 lakh crore.

In India as a result of COVID-19, the GST collected for the financial year is less than half the revised full-year target. The revised full-year target of GST collection is 6.90 lakh crore and the central government could only collect 49 per cent of it. Out of the total GST tax collections, 84 per cent is from the central GST and 16 per cent is from the compensation cess.

(Source: pib.gov.in)

As you can see, the pandemic has affected the total GST revenue.

The government has set a target of 6.3 lakh crore GST collection for FY22. We are sure that GoI will achieve the target as Covid-19 cases are reducing and we are running the largest vaccine drive.

"We have what it takes to take what you have."

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Author - Fiza Fathima

Content Writer at Escribo.