TAX SYSTEM OF INDIA

 Tax: Tax is financial charges imposed on individual or company by Central

Government or State Government. The process of collecting taxes is called
Taxation.
 Collected tax amount is used for Building Nation’s Infrastructure And for
other Development, to increase arms and ammunition for defense of the
country and for the other welfare related work.

Significance of Taxation

1. Revenue Generation: Taxes serve as a major source of revenue for governments. This revenue
is used to fund public goods and services such as infrastructure, healthcare, education, and
defense.
2. Redistribution of Wealth: Taxation can help reduce economic inequality by redistributing
wealth from the rich to the poor. Progressive tax systems, where higher-income individuals are
taxed at higher rates, can help in wealth redistribution and narrowing the wealth gap.
3. Stabilizing the Economy: Through fiscal policy, governments can use taxation to manage
economic cycles. During periods of economic growth, taxes can be increased to prevent
overheating, and during economic downturns, tax cuts can stimulate spending and economic
activity.
4. Control and Regulation: Taxes can be used to discourage or encourage certain types of
behavior. For example, governments often impose excise taxes on cigarettes and alcohol to
reduce consumption. Tax incentives can also be provided to promote activities such as research
and development or renewable energy production.
5. Inflation Control: By adjusting taxes, governments can influence consumer spending, which in
turn can impact inflation rates. Higher taxes can reduce disposable income, curbing spending
and thus controlling inflation.
6. Encouraging Investment: Tax policies can be designed to attract foreign investments or
encourage domestic investments in specific sectors. Tax breaks and incentives can promote
economic growth in targeted industries.
7. Public Goods and Services: Taxes are essential for funding public goods and services that are
not typically provided by the private sector, such as law enforcement, public education, and
healthcare. These services are essential for the overall well-being and development of society.
8. Fiscal Policy Tool: Taxation, along with government spending, is a key tool in fiscal policy.
Governments can adjust tax rates and government spending to achieve economic objectives
such as controlling inflation, boosting economic growth, and reducing unemployment.
9. Debt Reduction: Tax revenue can be used to repay government debts, reducing the burden on
future generations and ensuring the long-term economic stability of a country.
Types of Taxes:

TAX

On basis of
On basis of volume on basis of form Income/consuption
Method

On basis of volume: Tax on the basis of volume means that the amount of tax you pay is
determined by the quantity or volume of the item being taxed. In other words, the more you
buy or use, the higher your tax will be.

There are two types:

(a) Single Tax System: there is one tax rate applied to all product regardless
of their type or value.
Eg. If a book is sold at the tax rate of 10% then the tax rate of a car is
also 10%.

(b) Multiple Tax System: Different products are taxed at different rates based
on their type and value.
Eg. If a book is sold at the tax rate of 5% then the tax rate of a car can be
15%.

On basis of income/consumption method:

There are four types:
(a) Proportional Tax: The rate of taxation remains the same for all incomes (or
property) large or small, irrespective of their income or class.
 (b) Progressive Tax: The rate of taxation increases as the income (or property)
increases, then we have progressive or graduated taxation. A higher tax is
collected from the taxpayers who earn more and lower taxes from taxpayers
earning less.

(c) Regressive Tax: The rate of taxation becomes less as the income or property
increases, tax that takes large percentage from low income people than from
high income people.

(d) Degressive Tax: The rate of taxes increases, faster than income or
property but towards a fixed maximum rate, which it can never exceed, it is
known as degressive taxation. Degressive tax is one on which tax is
progressive up to a certain limit, after that it is proportional.

On basis of Form
 There are two types:
(a) Direct Taxes:

Direct taxes are taxes that are levied on individuals and organizations directly by the
government. Direct taxes are applied on income, profits, and wealth. These taxes are
borne by the person or entity on whom they are imposed and cannot be transferred to
others.

There are several types of direct taxes, including:

1. Income Tax: Income tax is a tax imposed on the income earned by individuals and
businesses. The government uses a progressive tax system, where individuals and
businesses with higher incomes are taxed at higher rates.
2. Corporate Tax: Corporate tax is imposed on the profits earned by businesses. The rate
of corporate tax may vary based on the size and nature of the business.
3. Capital Gains Tax: Capital gains tax is imposed on the profits earned from the sale of
capital assets such as property, stocks, and other investments. The tax is applicable to
the difference between the purchase price and the selling price of the asset.
4. Wealth Tax: Wealth tax is imposed on the net wealth of individuals and
businesses. It is calculated based on the value of assets owned, including properties,
jewelry, vehicles, and financial assets.
5. Property Tax: Property tax is levied on the value of properties owned by individuals and
businesses. The tax amount is usually determined by local governments and is used to
fund local public services and infrastructure.

(b) Indirect Tax:

Indirect taxes are taxes that are imposed on goods and services rather than
on individuals or businesses directly. These taxes are not paid directly by the
consumer to the government; instead, they are collected by intermediaries,
such as retailers or service providers, and then passed on to the government.
 Indirect taxes are considered regressive because they tend to impact lower-
income individuals more heavily as a percentage of their income.

There are several Types of Indirect tax

1. Value Added Tax (VAT): VAT is a consumption tax levied at each stage of the supply
chain. It is one of the most common types of indirect taxes used around the world.
Businesses collect VAT on their sales and remit it to the government. The end consumer
bears the final burden of the tax.
2. Excise Duty: Excise duty is a tax levied on specific goods, such as alcohol, tobacco, fuel,
and certain luxury items. It is often included in the price of the product, and
manufacturers or producers pay this tax to the government.
3. Customs Duty: Customs duty is a tax imposed on goods that are imported or exported
across international borders. It is collected by customs authorities and can be specific (a
fixed amount per unit) or ad valorem (a percentage of the product's value).
4. Sales Tax: Sales tax is a tax imposed on the sale of goods and services. It is typically
collected by the retailer from the end consumer during the point of sale. The tax rate
and regulations vary by jurisdiction.
5. Sin Tax: Sin tax is a special type of excise tax applied to products that are considered
harmful to society, such as alcohol, tobacco, and sugary beverages. The purpose of sin
taxes is to discourage the consumption of these products and generate revenue for
government initiatives.
6. Service Tax: Service tax is a tax imposed on specific services provided by service
providers. It was widely used in many countries before being replaced by GST or VAT on
services in some jurisdictions.
7. Environmental Taxes: Some governments impose taxes on activities or products that
have a negative impact on the environment, such as carbon taxes on greenhouse gas
emissions or taxes on plastic bags.
8. Goods and Services Tax (GST): GST is similar to VAT but combines multiple taxes into
a single tax system. It is used in several countries as a way to streamline the taxation
process and eliminate cascading taxes.
CGST (Central Goods and Services Tax): CGST is the tax levied by the central
government on the intra-state supply of goods and services. In the case of intra-state
transactions (i.e., transactions within the same state), both CGST and SGST are
applicable. The revenue collected from CGST goes to the central government.

SGST (State Goods and Services Tax): SGST is the tax levied by the state government
on the intra-state supply of goods and services. Like CGST, SGST is applicable to
transactions within the same state. The revenue collected from SGST goes to the
respective state government.

IGST (Integrated Goods and Services Tax): IGST is the tax levied on the inter-state
supply of goods and services. It is applicable when goods and services are supplied from
one state to another. IGST is collected by the central government, and it ensures that
the tax revenue is divided between the central and state governments appropriately,
based on the destination principle.