What Are Taxes And Types Of Taxes

taxes

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What Is Tax?

Tax is a compulsory payment to be made by every resident of India. It is a charge or burden laid upon persons or the property for the support of a Government. Government decided the rates and the items on which tax will be charged, like income tax, GST etc.

Tax can be defined in very simple words as the government’s revenue or source of income. The money collected under the taxation system is put into use for the country’s development through several projects and schemes.

Taxes are an essential part of any nation to promote its economic growth. The taxes that we pay fill the coffers of the government, which are then utilized by it to deliver various services to the country’s population. The government has been given the authority to collect taxes by the Indian Constitution. All the taxes that we pay are backed by laws passed by either the Parliament or the State Legislature.

Purposes Of Taxation

During the 19th century the prevalent idea was that taxes should serve mainly to finance the government. In earlier times, and again today, governments have utilized taxation for other than merely fiscal purposes. One useful way to view the purpose of taxation, attributable to American economist Richard A. Musgrave, is to distinguish between objectives of resource allocation, income redistribution, and economic stability. (Economic growth or development and international competitiveness are sometimes listed as separate goals, but they can generally be subsumed under the other three.) In the absence of a strong reason for interference, such as the need to reduce pollution, the first objective, resource allocation, is furthered if tax policy does not interfere with market-determined allocations. The second objective, income redistribution, is meant to lessen inequalities in the distribution of income and wealth. The objective of stabilization—implemented through tax policy, government expenditure policy, monetary policy, and debt management—is that of maintaining high employment and price stability.

There are likely to be conflicts among these three objectives. For example, resource allocation might require changes in the level or composition (or both) of taxes, but those changes might bear heavily on low-income families—thus upsetting redistributive goals. As another example, taxes that are highly redistributive may conflict with the efficient allocation of resources required to achieve the goal of economic neutrality.

Classes Of Taxes

In the literature of public finance, taxes have been classified in various ways according to who pays for them, who bears the ultimate burden of them, the extent to which the burden can be shifted, and various other criteria. Taxes are most commonly classified as either –

An example of the former type being the income tax and of the latter the sales tax. There is much disagreement among economists as to the criteria for distinguishing between direct and indirect taxes, and it is unclear into which category certain taxes, such as corporate income tax or property tax, should fall. It is usually said that a direct tax is one that cannot be shifted by the taxpayer to someone else, whereas an indirect tax can be.

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Direct taxes

Direct taxes are primarily taxes on natural persons (e.g., individuals), and they are typically based on the taxpayer’s ability to pay as measured by income, consumption, or net wealth. What follows is a description of the main types of direct taxes.

Individual income taxes are commonly levied on total personal net income of the taxpayer (which may be an individual, a couple, or a family) in excess of some stipulated minimum. They are also commonly adjusted to take into account the circumstances influencing the ability to pay, such as family status, number and age of children, and financial burdens resulting from illness. The taxes are often levied at graduated rates, meaning that the rates rise as income rises. Personal exemptions for the taxpayer and family can create a range of income that is subject to a tax rate of zero.

Taxes on net worth are levied on the total net worth of a person—that is, the value of his assets minus his liabilities. As with the income tax, the personal circumstances of the taxpayer can be taken into consideration.

Personal or direct taxes on consumption (also known as expenditure taxes or spending taxes) are essentially levied on all income that is not channeled into savings. In contrast to indirect taxes on spending, such as the sales tax, a direct consumption tax can be adjusted to an individual’s ability to pay by allowing for marital status, age, number of dependents, and so on. Although long attractive to theorists, this form of tax has been used in only two countries, India and Sri Lanka; both instances were brief and unsuccessful. Near the end of the 20th century, the “flat tax”—which achieves economic effects similar to those of the direct consumption tax by exempting most income from capital—came to be viewed favourably by tax experts. No country has adopted a tax with the base of the flat tax, although many have income taxes with only one rate.

Taxes at death take two forms: the inheritance tax, where the taxable object is the bequest received by the person inheriting, and the estate tax, where the object is the total estate left by the deceased. Inheritance taxes sometimes take into account the personal circumstances of the taxpayer, such as the taxpayer’s relationship to the donor and his net worth before receiving the bequest. Estate taxes, however, are generally graduated according to the size of the estate, and in some countries they provide tax-exempt transfers to the spouse and make an allowance for the number of heirs involved. In order to prevent the death duties from being circumvented through an exchange of property prior to death, tax systems may include a tax on gifts above a certain threshold made between living persons (see gift tax). Taxes on transfers do not ordinarily yield much revenue, if only because large tax payments can be easily avoided through estate planning.

Different types of taxes

India has two types of taxes, namely Direct Tax and Indirect Tax. The core difference between both the taxes lies in their implementation.

Apart from these types of taxation, there are other taxes or cess levied by the government for specific purposes, which are – Krishi Kalyan Cess, Swachh Bharat Cess and Infrastructure Cess Tax.

Direct Tax

Direct Taxes comprise taxes that you pay directly to the government. These taxes are levied directly on an individual and therefore can’t be transferred to another entity or person. The Central Board of Direct Taxes (CBDT) under the Department of Revenue is responsible for the governance of this tax.

There are various types of Direct Taxes, which include:

Income Tax

Income Tax came into force with the Income Tax Act of 1961. All the rules of income tax are set by this act. This tax will apply to any income you generate for profits, owning a property, salary, investments or business.

Besides stipulating from where income tax is to be collected, this act has provisions that allow tax benefits for taxpayers through fixed deposits and life insurance premiums. This act also determines your position on the income tax slab.

Gift Tax

In 1958, the Gift Tax Act was originally introduced. According to the act, if you receive presents of any kind, then you will have to pay a tax of 30%. This was later tweaked to exclude gifts from family such as spouse, parents and blood relatives. If anyone else gives a gift whose value exceeds Rs. 50000, then you will have to pay tax.

Wealth Tax

Amongst the various types of taxes, Wealth Tax is applicable not only on an individual but also on a Hindu Unified Family (HUF) and businesses.

For example: If your net wealth is more than Rs. 1 crore, then you have a surcharge of 12%. Companies whose turnover exceeds 10 crores will also have to pay wealth tax.

Capital Gains Tax

This is a type of Income Tax levied on the gains you make after the sale of an investment or property. There are two types of Gains Tax – Long Term Capital Gains Tax and Short Term Capital Gains Tax. The former is applied when the holding period of the investment exceeds 36 months. The latter is applicable if the duration of the investment is less than 36 months.

Securities Transaction Tax

Share trading on the stock market is subject to this tax. For every share purchase or sale, you pay the Securities Transaction Tax.

Corporate Tax

Another type of Income Tax, the Corporate Tax is levied on the earning of businesses. An Indian firm whose turnover is less than Rs. 1 crore is not subject to this tax. There is a corporate tax slab according to which companies pay tax. Moreover, the tax structure for international firms is different from domestic firms.

Indirect Taxes

Unlike Direct Taxes, these taxes are not levied on individuals but on goods and services. This tax is not levied on profit, income or the revenue of an individual or an entity. Also, this tax can be transferred from one person to another.

Here’s a list of various types of Indirect Taxes:

Sales Tax

Any product being sold is subject to Sales Tax. The product can be either produced domestically or be imported. The government subjects the seller of the product to the sales tax, who can then pass it on the buyer.

Sales Tax is different for different states. Also, the central government levies the sales tax. For some states, sales tax is one of their largest revenue sources.

Service Tax

Service Tax is applicable on services provided by companies. Unlike Sales Tax, it is not charged on every sale. This tax is charged with on a monthly or quarterly basis. Service providers pay this tax once their customers clear their bills.

Goods and Service Tax

The Goods and Services Tax was introduced in 2017. This tax is applied at the consumption stage. GST is applied at every stage of the supply chain wherever consumption takes place.

Value Added Tax (VAT)

VAT is levied on products other than commodities such as food and essential drugs. This tax is placed at stages in the supply chain where value is added. This tax comes under the purview of the state government.

Customs Duty

If you buy a product from a different country and import it to India, then you have pay tax on it. This tax is called Customs Duty.

Toll Tax

Toll Tax is levied either by the state or central governments on roads and bridges. The purpose of the tax is to fund road construction and maintenance activities.

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Both Direct and Indirect Taxes are essential for the economic growth of the country.

Article Written by:

CVBAY is an ITR, GST AND Finance management Platform helping businesses for finance and tax related services. For any query, please email us : ccvbayaccountservicee@yahoo.com Or visit : https://www.cvbay.co.in Or call us: +91 834100081

What is Tax?

Tax can be defined in very simple words as the government’s revenue or source of income. The money collected under the taxation system is put into use for the country’s development through several projects and schemes.

How many types of taxes?

India has two types of taxes, namely Direct Tax and Indirect Tax. The core difference between both the taxes lies in their implementation.
Apart from these types of taxation, there are other taxes or cess levied by the government for specific purposes, which are – Krishi Kalyan Cess, Swachh Bharat Cess and Infrastructure Cess Tax.

What is direct tax?

Direct Taxes comprise taxes that you pay directly to the government. These taxes are levied directly on an individual and therefore can’t be transferred to another entity or person. The Central Board of Direct Taxes (CBDT) under the Department of Revenue is responsible for the governance of this tax.

What is Indirect tax?

Unlike Direct Taxes, these taxes are not levied on individuals but on goods and services. This tax is not levied on profit, income or the revenue of an individual or an entity. Also, this tax can be transferred from one person to another.

What is income tax?

This tax will apply to any income you generate for profits, owning a property, salary, investments or business.

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