What is Tax in India? Types & Tax Concept

The concept of tax is fairly simple enough. However, the tax system prevailing in most countries can be quite complex to understand. In India, the tax system has been elaborately and comprehensively constructed to ensure fair yet efficient tax collection. You may already be aware of the meaning of tax and its types, like income tax, GST, excise duty and more.

However, to fully grasp how the concept of tax works in India, we need to delve into the basis. Let’s take a closer look at what tax is, the types of taxes in India and more. 

What is Tax in India?

Tax is a fee or financial charge that the government of India levies on different categories of persons like individuals, Hindu Undivided Families (HUFs), sole proprietary concerns, partnership firms, companies and other entities. The fee levied is paid to the government and acts as a source of revenue for the governing body. Together, tax collection revenue helps the government carry out its responsibilities more effectively. 

This sums up the concept of tax in India. If a tax has been levied and you do not fulfil the obligation, you will be required to pay an additional interest and/or penalty as per the governing laws and regulations. 

Now that you’ve seen what tax is in India, let’s take a deep dive into the different kinds of taxes that the Indian government levies on its taxpayers. 

Types of Taxes

The two primary types of taxes in India are direct tax and indirect tax. They differ in many ways, from the nature and point of levy to the structure and the rates of taxes. Here’s a closer look at the meaning of taxes that are levied directly or indirectly.

• Direct Tax

As the name indicates, direct tax is directly levied on the person responsible for paying this kind of tax to the government. For example, income tax, which is levied directly on the person earning the taxable income, is a kind of direct tax. This person is responsible for paying income tax to the government of India. 

Another example of direct tax is securities transactions tax (STT), which is levied on the purchase and sale of securities trading on the stock exchanges in India. The tax is levied on the trader and paid by them, making it a direct tax. 

• Indirect Tax 

An indirect tax is levied on one person but paid by another. In other words, the person responsible for remitting indirect taxes to the government does not pay the tax themselves. Instead, this liability is passed onto another third party. 

One of the most common examples of indirect tax is goods and services tax (GST), which is levied on the purchase of goods or services. The responsibility to remit this tax to the government lies with the seller of the goods or services. However, the tax burden is shifted onto the buyer, who pays GST to the seller. 

Recent Reforms in Taxes in India

In 2017, the Indian government implemented the Goods and Services Tax (GST), marking a significant milestone in tax reform. Previously, the tax system was characterised by a myriad of state and central taxes, leading to complexity and enabling tax evasion through loopholes. 

The introduction of GST streamlined the taxation process, consolidating multiple taxes into a single framework, which enhanced compliance. This reform effectively expanded the taxpayer base, bringing a larger percentage of assessees under the tax umbrella. As a result, evading taxes became increasingly difficult, thereby strengthening revenue collection and promoting greater accountability within the taxation system.

What is Income Tax?

Income tax is one of the most common taxes in India. It is a type of direct tax that is paid by any person who earns more than the exempted level of income. Whether you are a salaried employee or a self-employed businessperson, it’s crucial to understand the meaning of tax levied on your income, how it is levied and more. The Income Tax Act 1961 governs the levy and collection of income tax in India.  

• The Meaning and Structure of Income Tax

Income tax is simply the tax levied by the Indian government on the income earned by a taxpayer or an assessee. This direct tax is levied on five types or heads of income, as outlined below: 

• Income from Salaries

This head of income includes any payment received by an employee from their employer in the course of their employment. It also includes the pension income received by retired employees. This income head is exclusive to individuals and not any other type of person. 

• Income from House Property

Income from house property typically includes rental income earned by the owner of a house property. If an assessee owns more than one house property that is left vacant, they may be liable to pay direct tax on the deemed income from one or more such properties. 

• Profits and Gains from Business or Profession

Any income earned from a business or profession that the assessee carries out is categorised under this head. This includes income earned by sole proprietorships, partnership firms, companies and any other business organisation. 

• Capital Gains

The sale of any movable or immovable capital asset results in capital gains or losses. Such capital gains are also liable to this direct tax. Capital losses, on the other hand, can sometimes be used to set off capital gains as per the provisions of the Income Tax Act. 

• Income from Other Sources

 Any other income that is not included in the above four heads is considered to be income from other sources. Some examples of such incomes include interest from savings accounts and deposits, dividends and the like. 

• Income Tax Deductions and Exemptions

• Taxable Income: Citizens with taxable income exceeding ₹2.5 lakh are subject to income tax based on applicable slabs.
• Tax Saving Options: Individuals can reduce their taxable income using various options, including: Equity Linked Savings Scheme (ELSS), Mutual Funds, Public Provident Fund (PPF), Employee Provident Fund (EPF), and Tax Saver Fixed Deposits
• Sections 80C and 80D: Many of these tax-saving schemes fall under these sections of the Income Tax Act, 1961, allowing for significant deductions.
• Tax Deducted at Source (TDS): TDS, or Tax Deducted at Source, is a common method employed by the government to collect taxes from salaried individuals.
• Common Cases: TDS is often applied to salaries and interest earned on fixed deposits.
• Refunds: Taxpayers can claim refunds on TDS by filing their Income Tax Return (ITR) if excess tax has been deducted.

• Taxation as per Income Tax Slabs

The total taxable income computed after accounting for deductions and exemptions is subject to tax based on the prevailing income tax slab rates. The rates applicable as well as the deductions and exemptions available, depend on the tax regime you choose. The old tax regime carries higher rates of interest but offers more deductions and exemptions than the new tax regime. 

Also Read More About Old Tax Regime vs New Tax Regime

Conclusion

This sums up the fundamentals of the meaning of tax and its types. The two main types of taxes in India — direct and indirect taxes — act as major sources of revenue for the government. The government of India utilises the funds collected via different types of taxes to meet different kinds of public expenditure. As an individual, you will have to pay both direct and indirect taxes based on your income and spending habits. Ensure that you manage these liabilities promptly to avoid any penalties for delayed payment of taxes. 

FAQs