Different types of taxes
Types Of Taxes In India
The tax structure in India is a three-tier structure: local municipal bodies,
state, and central government. Taxation in India is broadly classified into
direct and indirect tax.
Direct Taxes
Direct tax is levied on people's income or profits. For example, a taxpayer
pays the government for different purposes, including income tax, personal
property tax, FBT, etc. The burden has to be borne by the person on whom
the tax is levied and cannot be passed on to someone else. Central Board of
Direct Taxes (CBDT) governs and administers the Direct Tax.
Indirect Taxes
Conversely, indirect tax is levied by the government on goods and services.
Therefore, it can be shifted from one tax-paying individual to another. E.g;
the wholesaler can pass it on to retailers, who then pass it on to customers.
Therefore, customers bear the brunt of indirect taxes. The Central Board of
Indirect Taxes and Customs (CBIC) governs and administers indirect taxes.
What is Direct Tax?
Direct tax is a type of tax levied on individuals or entities (corporate and
non-corporate) directly by the government. These taxes are imposed on
the basis of the taxpayer's ability to pay, meaning that those with higher
incomes or more valuable assets typically pay more in direct taxes.
Direct Tax cannot get transferred to any other person or entity. There is
only one such federation that winks at the direct taxes, i.e. the Central
Board of Direct Taxes (CBDT) governed by the Department of Revenue.
Example of Direct Taxes
As mentioned above, one good example of direct taxes is a person’s income
tax. Usually, income tax is filed annually, although deductions from one’s
salary can be done on a monthly basis. If, for example, an individual incurs
tax amounting to $30,000 a year for his annual salary of $120,000, the
$30,000 is his direct tax.
Types of Direct Taxes
1. Income tax
It is based on one’s income. A certain percentage is taken from a worker’s
salary, depending on how much he or she earns. The good thing is that the
government is also keen on listing credits and deductions that help lower
one’s tax liabilities.
2. Transfer taxes
The most common form of transfer taxes is the estate tax. Such a tax is
levied on the taxable portion of the property of a deceased individual,
including trusts and financial accounts. A gift tax is also another form
wherein a certain amount is collected from people who are transferring
properties to another individual.
3. Entitlement tax
This type of direct tax is the reason why people enjoy social programs like
Medicare, Medicaid, and Social Security. The entitlement tax is collected
through payroll deductions and is collectively grouped as the Federal
Insurance Contributions Act.
4. Property tax
Property tax is charged on properties such as land and buildings and is used
for maintaining public services such as the police and fire departments,
schools and libraries, as well as roads.
5. Capital gains tax
This tax is charged when an individual sells assets such as stocks, real
estate, or a business. The tax is computed by determining the difference
between the acquisition amount and the selling amount.
What is Indirect Tax?
On the other hand, indirect tax is charged by the government on goods and
services. Thus, it is transferable from one taxpaying person to another. E.g;
wholesaler can shift it to retailers, who can shift it to customers. Hence,
customers ultimately suffer from indirect taxes. Central Board of Indirect
Taxes and Customs (CBIC) administers and governs indirect taxes.
Previously, an indirect tax implied the payment of more than the true cost of
a product purchased or a service obtained. And there were a variety of
indirect taxes levied on taxpayers.
Goods and Service Tax (GST) is one of the existing indirect tax levied in
India. It has subsumed many indirect tax laws.
GST as Indirect Tax
With the introduction of GST, we have already seen a series of positive
developments in the financial sector of India. The different taxes that were
compulsory before are now redundant, courtesy of this new reformed
indirect tax. Not only that, GST is ensuring the slogan “One Nation, One Tax,
One Market” becomes the reality of our nation and not merely a dream.
That notwithstanding, with the advent of the Goods & Services Tax (GST),
the greatest relief thus far is most obviously the abolition of the ‘cascading
effect of tax’ or the ‘tax on tax’ dilemma.
Cascading effect of tax is a condition where the final consumer of any
product or service will have to bear the cost of the tax to be paid on the
previously determined tax and consequently would incur a higher or inflated
cost.
Under the GST regime, nevertheless, the customer is relieved of the tax
which otherwise would be paid by virtue of the cascading effect.
Types of Indirect Taxes
1. *Goods and Services Tax (GST)*: GST is a tax on the supply of goods
and services. It is a consumption-based tax, and the tax rate may vary based
on the type of goods or services.
2. *Value-Added Tax (VAT)*: VAT is a tax on the value added to goods and
services at each stage of production and distribution.
3. *Sales Tax*: Sales tax is a tax on the sale of goods. It is typically levied
on the final sale of goods to consumers.
4. *Customs Duty*: Customs duty is a tax on imported goods. It is levied on
the value of goods imported into a country.
5. *Excise Tax*: Excise tax is a tax on specific goods, such as tobacco,
liquor, or fuel. It is typically levied on the manufacturer or importer of the
goods.
6. *Service Tax*: Service tax is a tax on services provided by businesses,
such as consulting or telecommunications.
