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What Are Taxes? Why Should We Pay Them?
Taxes are the price you pay for the services of the government, such as roads, highways, police, education, health care and defence. You pay taxes to ensure that the government is able to provide the services you want and expect. Taxes are collected from everyone, regardless of where they live. Taxes are a mandatory part of our economy.
India has a complex tax system with a large number of taxes. The system is designed to tax revenue and consumption, and to collect money for the citizens to spend and invest in the country. The taxation system in India is a relatively new system, having been introduced only after independence in 1947. The system was designed to meet India’s need for public revenue.
The central government, state governments, and local municipal organizations are what make up the tax framework. In India, there are two sorts of taxes: direct taxes and indirect taxes. Income tax, capital gains tax, corporate tax, and so on are examples of direct taxes, whereas indirect taxes include value-added tax, Good and Service tax, customs duty, and so on.
While customs duty, central excise duty, income tax, and service tax are all levied by the Central Government of India; State governments levy income taxes on agricultural income, as well as state excise duties, professional taxes, land revenue, and stamp duties. Local municipal bodies are permitted to collect octroi, property tax, and other fees on a variety of services such as water and drainage delivery.
Taxes in India
Now Let Us Look At The Classifications Of Tax In Detail
In India, taxation is primarily separated into Central and State Government taxes, with two categories of taxes:
- Direct Tax
- Indirect Tax
While direct taxes are charged on your earnings, indirect taxes are applied on your expenses. The earning party, whether an individual, a HUF, or a company, is responsible for depositing the direct tax liability. Direct tax is majorly income tax & capital gains tax.
Indirect taxes are mostly collected by corporations and businesses that provide services and products. As a result, it is these entities' responsibility to deposit indirect taxes. Some examples of indirect tax are GST, VAT, stamp duty, etc.
However, in addition to these two traditional taxes, the Central Government has imposed other charges to further a certain goal. Other taxes include direct and indirect taxes such as the recently implemented Swachh Bharat Cess tax, Krishi Kalyan Cess tax, and infrastructure Cess tax, among others.
Direct Taxes
As previously indicated, direct taxes are those that you pay directly. These taxes are imposed directly on a company or an individual and cannot be transmitted to another person or entity. The Central Board of Direct Taxes (CBDT), which is part of the Department of Revenue, is one of the bodies in charge of these direct taxes. It has the backing of many acts that govern various parts of direct taxation to aid it with its obligations. Among the direct taxes levied are the following:
Income Tax
The Income Tax Act of 1961 governs income tax collection throughout the country and establishes the laws that govern income tax collection. The income taxed by this legislation might originate from any source, such as a business, owning a home or property, earnings from investments and salary, and so on. The statute specifies the amount of the tax advantage on a fixed deposit or a life insurance premium. It is also the statute that determines how much of your income can be saved through investments and what the income tax slab will be. Individuals pay the tax directly or through TDS (Tax Deducted at Source) by the companies for whom they work depending on these laws and regulations.
You can read more about Income Tax on our CreditMantri website!
Income Tax Slabs for F.Y 2021 - 22
Individuals (resident or non-resident) under the age of 60 at any time during the previous year:
| Existing Tax Regime | New Tax Regime u/s 115 BAC | Income Tax Slab | Income Tax Rate | Income Tax Slab | Income Tax Rate |
|---|---|---|---|
| Up to Rs. 2,50,000 | Nil | Up to Rs. 2,50,000 | Nil |
| Rs. 2,50,001 - Rs. 5,00,000 | 5% above Rs. 2,50,000 | Rs. 2,50,001 - Rs. 5,00,000 | 5% above Rs. 2,50,000 |
| Rs. 5,00,001 - Rs. 10,00,000 | Rs. 12,500 + 20% above Rs. 5,00,000 | Rs. 5,00,001 - Rs. 7,50,000 | Rs. 12,500 + 10% above Rs. 5,00,000 |
| Above Rs. 10,00,000 | Rs. 1,12,500 + 30% above Rs. 10,00,000 | Rs. 7,50,001 - Rs. 10,00,000 | Rs. 37,500 + 15% above Rs. 7,50,000 |
| Nil | Nil | Rs. 10,00,001 - Rs. 12,50,000 | Rs. 75,000 + 20% above Rs. 10,00,000 |
| Nil | Nil | Rs. 12,50,001 - Rs. 15,00,000 | Rs. 1,25,000 + 25% above Rs. 12,50,000 |
| Nil | Nil | Above Rs. 15,00,000 | Rs. 1,87,500 + 30% above Rs. 15,00,000 |
Individuals (resident or non-resident) 60 years of age or older but under 80 years of age at any time during the previous year
| Existing Tax Regime | New Tax Regime u/s 115 BAC | Income Tax Slab | Income Tax Rate | Income Tax Slab | Income Tax Rate |
|---|---|---|---|
| Up to Rs. 3,00,000 | Nil | Up to Rs. 2,50,000 | Nil |
| Rs. 3,00,001 - Rs. 5,00,000 | 5% above Rs. 3,00,000 | Rs. 2,50,001 - Rs. 5,00,000 | 5% above Rs. 2,50,000 |
| Rs. 5,00,001 - Rs. 10,00,000 | Rs. 10,000 + 20% above Rs. 5,00,000 | Rs. 5,00,001 - Rs. 7,50,000 | Rs. 12,500 + 10% above Rs. 5,00,000 |
| Above Rs. 10,00,000 | Rs. 1,10,000 + 30% above Rs. 10,00,000 | Rs. 7,50,001 - Rs. 10,00,000 | Rs. 37,500 + 15% above Rs. 7,50,000 |
| Nil | Nil | Rs. 10,00,001 - Rs. 12,50,000 | Rs. 75,000 + 20% above Rs. 10,00,000 |
| Nil | Nil | Rs. 12,50,001 - Rs. 15,00,000 | Rs. 1,25,000 + 25% above Rs. 12,50,000 |
| Nil | Nil | Above Rs. 15,00,000 | Rs. 1,87,500 + 30% above Rs. 15,00,000 |
Individuals (resident or non-resident) who were 80 years old or older at any time during the preceding year:
| Existing Tax Regime | New Tax Regime u/s 115 BAC | Income Tax Slab | Income Tax Rate | Income Tax Slab | Income Tax Rate |
|---|---|---|---|
| Up to Rs. 5,00,000 | Nil | Up to Rs. 2,50,000 | Nil |
| Rs. 5,00,001 - Rs. 10,00,000 | 20% above Rs. 5,00,000 | Rs. 2,50,001 - Rs. 5,00,000 | 5% above Rs. 2,50,000 |
| Above Rs. 10,00,000 | Rs. 1,00,000 + 30% above Rs. 10,00,000 | Rs. 5,00,001 - Rs. 7,50,000 | Rs. 12,500 + 10% above Rs. 5,00,000 |
| Nil | Nil | Rs. 7,50,001 - Rs. 10,00,000 | Rs. 37,500 + 15% above Rs. 7,50, |
| Nil | Nil | Rs. 10,00,001 - Rs. 12,50,000 | Rs. 75,000 + 20% above Rs. 10,00,000 |
| Nil | Nil | Rs. 12,50,001 - Rs. 15,00,000 | Rs. 1,25,000 + 25% above Rs. 12,50,000 |
| Nil | Nil | Above Rs. 15,00,000 | Rs. 1,87,500 + 30% above Rs. 15,00,000 |
The government also offers a number of rebates and deductions to the taxpayers to encourage them to save money or invest in various development programmes. For example, HRA is a tax deduction available for rent payers. Your contribution towards PPF, NSC, NPS, life insurance, medical insurance, and similar investments are exempted from tax up to a certain limit every year. Tax payers take advantage of these investment options and save money that will help them in future.
Learn More About The Investment Option For Saving Tax
Capital Gains Tax
This is a tax that must be paid anytime you receive a large sum of money. It could be the result of an investment or the sale of a property. It is typically divided into two categories: short-term capital gains from assets held for less than 36 months and long-term capital gains from investments kept for more than 36 months. The tax applicable to each is also considerably different, as the tax on short-term profits is computed based on your income band, whilst the tax on long-term gains is 20%. The interesting thing about this tax is that the gain does not always have to be monetary. It could also be a transaction in which case the value of the exchange will be taxed.
Read more on Tax Implications For Property Sellers And Buyers
Securities Transaction Tax
Most Indians trade in the stock market and in securities, with the potential to make a lot of money. This, too, is a source of income, but it is subject to its own tax, known as the Securities Transaction Tax. This tax is imposed by adding the tax to the share price. This means that you must pay this tax every time you acquire or sell stock. This tax is levied on all securities traded on the Indian stock exchange.
Perquisite Tax
Perquisites are all of the benefits or privileges that employers may provide to their employees. These benefits may include a residence provided by the firm or an automobile provided by the corporation for your usage. These incentives aren't only restricted to large sums of money like vehicles and houses; they can also include things like fuel or phone bill reimbursement. This tax is levied by determining how the perk was obtained by the corporation or used by the employee. In the case of autos, a car given by the firm and used for both personal and official purposes may be tax-deductible, whereas a car used solely for official purposes is not.
Read more about EPF and the tax concessions you can get with it
Corporate Tax
Corporate tax is an income tax levied on businesses based on their revenue. This tax likewise has its own slab that determines how much tax the corporation must pay. For example, a domestic firm with less than Rs. 1 crore in annual income will not be required to pay this tax, whereas one with more than Rs. 1 crore in annual revenue will be required to pay this tax. It is also known as a surcharge and varies according on the revenue bracket. It is also different for multinational corporations, where the corporate tax may be 41.2% if the company has less than Rs. 10 million in income, and so on.Additional Read: 7 Common Mistakes People Make When Filing Income Tax Returns
Indirect Taxes
Taxes levied on goods or services are referred to as indirect taxes. They differ from direct taxes in that they are imposed on products rather than individuals who pay them directly to the government. They are charged on items and collected by an intermediary, the person selling the commodity. The most prevalent types of indirect tax are as follows: VAT (Value Added Tax), taxes on imported goods, and GST. These taxes are imposed by adding them to the price of the service or product, which raises the price of the product.
GST - Goods and Service Tax
The Goods and Services Tax (GST) is the most significant change to India's indirect tax structure since the market began to open up nearly 25 years ago. The GST is a consumption-based tax since it is levied where consumption occurs. The GST is charged on value-added goods and services at every stage of the supply chain. The GST payable on the purchase of goods and services can be offset against the GST payable on the supply of goods and services; the merchant will pay the applicable GST rate but can reclaim it through the tax credit system.
Value Added Tax or VAT
The value added tax is a tax levied at the discretion of the state government, and it was not implemented in all states when it was first introduced. The tax is levied on numerous items sold in the state, and the amount is set by the state.
Custom Duty & Octroi
When you buy something that needs to be imported from another country, a tax called customs duty is levied on it. It applies to all products that arrive by land, sea, or air. Customs duty exists to ensure that all items entering the country are taxed and paid for. Octroi is intended to ensure that products crossing state boundaries inside India are properly taxed. It is levied by the state government and acts similarly to customs duty.
Excise Duty
This is a levy imposed on all commodities manufactured or produced in India. It differs from customs duty in that it only applies to goods manufactured in India. It is also known as the Central Value Added Tax, or CENVAT. The government collects this tax from the manufacturer of the items. It can also be collected from businesses who receive manufactured goods and hire employees to transport them from the maker to them.
Other Taxes
Apart from these direct and indirect taxes, Indians pay a slew of other taxes like education cess, Swachh Bharat cess, Krishi Kalyan cess, gift tax, wealth tax, and more, which we will see in a separate section on our website.
FAQs:
1. Should every Indian pay tax?
Every Indian pays tax directly or indirectly. If your income is not high enough to levy an income tax, you would still be paying tax in the form of GST. Tax is how the government earns money to run the country.
2. Why should I pay tax when it is my hard earned money?
Taxes are the main source of income for the government. The collected tax money is used for various development projects like constructing roads, hospitals, schools and other facilities. They also need this to supply essentials like electricity & water to every household. As a dutiful citizen, we should all pay the requisite taxes without fail.
3. What is the minimum income for me to pay income tax?
You don’t pay any tax for income up to Rs.2.5 lakhs. Income over and above this amount shall be taxed based on the tax slabs prescribed by the income tax department.
4. What is TDS?
TDS is tax deducted at source. This is generally done for salaried employees where the employer calculates the cumulative tax owed by the employee for a particular financial year and deducts it from his salary before paying him. The employer then remits this tax directly to the income tax department under the employee’s name.
5. I'm heading home to India and have some valuables with me. Will I have to pay customs?
Customs duty is levied on products and services imported into India from outside or exported from India to any other country for the purpose of resale. Since the items are for personal use, they will be exempt from customs duty.