What are Different Types of Taxes in India and Benefits of Paying Taxes

“In this world, nothing can be said to be certain, except death and taxes” - Benjamin Franklin

While this may sound ominous, it’s a fact that taxes provide much-needed oxygen and breathes life into the economic activity of the country.  Contribution to tax helps the Government provide basic amenities, pay salaries to its employees, fund various programs and policies and make crucial resources available during a crisis, like the ongoing pandemic.  The Constitution of India confers the right to collect taxes upon the Government in a three-tier structure: central Government, state government, and local municipal bodies.

Types of taxes

Broadly, there are two types of taxes: Direct Tax and Indirect Tax.

1. Direct Taxes

Direct Taxes are levied and collected from an individual or organization directly by the Government. The Central Board of Direct Taxes (CBDT) is responsible for the collection of this tax.  Direct tax includes income tax, wealth tax,  gift tax, capital gains tax, securities transaction tax and corporate tax.

Among these, income tax is the most common tax levied on individuals depending on their annual income. The tax rate is according to the applicable tax slab for individuals. These include Hindu Undivided Family (HUF), company, firm, co-operative societies and trusts.

Additional Read: Know more about Income Tax Basics, tax slabs and e-filing

2. Indirect Taxes

Indirect taxes, as the word suggests, are charges levied indirectly on the people. These are usually collected as an additional levy on the goods and services availed by individuals.  In this case, the seller includes these taxes in the price and deposits into the government account. 

Some important Central indirect taxes include Sales tax, Value Added Tax, Service Tax, Entertainment Tax, Customs Duty, Excise Duty, Toll Tax and Octroi, apart from various State Governments implementing different taxes within their territories. State Governments typically collects tax on agricultural income, professional tax, state excise duty, value-added tax etc.   Local Municipal Bodies collect taxes such as water tax, property tax, etc.

In recent years, the Government of India has made significant moves to simplify this process by implementing a common Goods and Services Tax (GST) through a landmark amendment to the Constitution and subsequent legislation.  GST is being implemented in various stages to rationalize indirect taxation and make it simpler.  Most of the indirect taxes mentioned above have already been abolished. GST is charged on all goods and services transactions in India, barring a few exceptions, like customs duty, local body taxes and excise on certain petroleum products. 

GST is a multi-stage, destination-based tax charged at each stage of the value chain from purchasing raw material up to the sale of the finished product to the end consumer. Typically, wherever there is any value addition and transfer of ownership within the chain, GST will be applicable.  GST is collected by the Government of the destination, where the final purchase takes place.

GST has three components:

• Central Goods and Services Tax (CGST) that the Central Government collects on the supply of goods and services within the state; 
• State Goods and Services Tax (SGST) where the State Government collects taxes on goods and services transacted within the state;
• The central Government collects integrated Goods and Services Tax (IGST) for goods and services transactions across state borders.

Benefits of paying taxes

• It is well-known that no one likes to pay taxes, as would be evident from Benjamin Franklin’s famous quote.  However, it is a fact that tax revenues support economic development and provide resources to the people in any country. So all of us benefit from paying taxes, albeit indirectly. 

• To reduce the tax burden on people, particularly income tax, the Government provides several measures, including standard deductions, tax exemptions on various payments, including deductions on tax-saving investments. In the long term, these are tax-free and build individual savings.

• There are other indirect benefits of duly paying taxes and filing timely Income Tax Returns (ITR).  It enables faster approval and disbursal of credit such as loans, improves credit history and often enables quicker visa processing.

• ITR documents serve as income proof for the self-employed and enable faster and easier refunds.

Conclusion

Taxes are here to stay.  There is no point in avoiding tax, but better tax planning will help you reduce your tax burden. Be a proud citizen, pay tax on time, and participate actively in the country's economic growth.