Tax is to impose a financial charge or other levy upon a tax payer (individual or other legal entity) by government. Taxes are collected by government to run the country.
Power to collect taxes: -
In India taxes are levied by both the central government and state government. Article 265 of the constitution of India has given powers to CG & SG to collect taxes. The areas on which they are eligible to collect taxes have been listed out in 7th schedule of constitution
7th schedule consists of 3 lists namely
1. Union list. (CG can levy taxes on the items listed here)
2. State list. (SG can levy taxes on the item listed here)
3. Concurrent list. (both CG & SG can levy taxes)
Basic types: -
Basically, In India taxes are broadly divided into 2 categories
1. Direct taxes.
2. Indirect taxes.
The following boards were established to administer the above taxes respectively.
1. Central Board of Direct Taxes. (CBDT) – to administer the direct Taxes.
2. Central Board of Excise and customs (CBEC) – to administer the indirect taxes.
Direct taxes: -
Direct taxes are taxes which are levied on persons for the income earned or activities conducted. The incidence of tax is borne by the person himself on whom it is levied. The burden of tax cannot be transferred or shifted.
Income tax is the tax known by everyone. Taxable event in income tax is earning of income. Generally, income earned in a Financial Year (Previous Year) are assessed in the next year known as Assessment Year. Even though, the incomes are assessed AY, in most cases taxes are paid in advance by way of TDS or advance tax.
2. Capital gain tax: -
Capital gain tax is a tax on profits earned on sale of properties, securities, gold, shares etc. capital gain tax can be classified into 2 types based on their holding period namely, Short-term capital Gain and Long-term capital gain. Profit is calculated by reducing the purchasing price form sale price. Indexation benefit is also available for adjusting inflation.
3. Securities Transaction Tax(STT): -
STT is levied on sale & purchase of securities at stock exchange. This tax amount is mostly added in the value of the transaction itself, but due to its smaller amount we rarely notice it. This tax is introduced because most of the people are not disclosing the profits earned by them through stock exchange.
4. Perquisite tax: -
After abolishing Fringe Benefit Tax in 2009, the perquisites given by the employer are taxed under Perquisite tax. In this the employer pays the tax on the non-monetary benefits provided to the employee at different rates.
5. Corporate tax: -
Corporate taxes are the taxes paid by the corporate companies on their annual income. They are charged at flat rates. They are also subject to a surcharge if their income exceeds a certain limit.
Indirect Taxes: -
It is a tax on goods & services. The incidence of tax is borne by the consumers who ultimately consume the goods and services.
Types of Indirect taxes: -
1. Sales tax: -
Sales tax is a tax levied on sale of goods. This tax is levied by both state government and central government. Sales tax is also known as VAT. In case of intra sales, sales tax is levied by State government whereas central government levies tax on inter-state sales. Sales tax rates differ from state to state.
2. Service tax: -
Service tax is levied on supply of services. Service tax is levied by Central Government. Service tax is to be paid by service provider to government, which he ultimately collects from service receiver. The current service tax rate is 14.5%. Service tax is to be paid on all service except on those services which are provided in the negative list.
3. Excise duty: -
Excise duty is the duty levied by CG. Excise duty has to be paid by the manufacturer or producer of goods/products. The taxable event in the case excise duty is manufacturing or producing goods or products.
4. Customs duty: -
Custom duty is the duty paid on the goods imported to India from other countries. The tax rate varies from product to product. It is generally payable at the port of entry.
5. Anti-dumping duty: -
When goods in large quantities are exported, or imported from one country to another country at price lower than the normal sale price, then anti-dumping duty is levied. This is duty is levied by Central government to safeguard the industry from unfair trade practices. The duty shall not exceed the amount of difference between the normal price and the price at which they are dumped.
Whatever may the name the tax, every rupee in India earned or expended is taxed. There are many other taxes in India such as entertainment tax, entry tax, dividend tax, Krishi Kalyan Cess, SwachBharath Cess, etc.