Understanding income tax may feel daunting; however, knowing its various types would help understand the various ways in which your income can be taxed in India.
Types of taxes in India
India has a unitary form of government with a federal system under which the power to levy taxes is given to urban-local bodies, states and the central government.
Taxes levied by the central government in India
- Income
- Customs duty
- Central excise
- Service tax
Taxes levied by state government in India
- Agricultural income
- Stamp duty
- Value added tax
- State excise
- Land revenue tax
Taxes levied by local bodies in India
- Property tax
- Octroi tax
- Sewage tax
- Water tax
- Drainage tax
Hence, the country follows a three-tier taxation system using two types of taxes:
What is a direct tax?
Direct tax is the tax where the incidence and impact fall on the same person. In direct tax, the tax is recovered directly from the person liable to pay it by the entity authorised to collect it.
What are the types of direct taxes?
Governed and administered by the Central Board of Direct Taxes (CBDT), direct taxes are imposed in the form of:
Income tax: Levied on and paid by the same person
Corporate tax: Paid by companies and corporations on their profits
Wealth tax: Levied on the value of property that a person holds
Estate duty: Paid by an individual in case of inheritance
Gift tax: An individual receiving the taxable gift pays tax to the government
See also: Direct tax vs indirect tax
What is indirect tax?
Under this tax, the incidence and impact fall on two different persons. In other words, indirect tax is a tax levied by the tax-imposing authority on the production or consumption of goods and services or on transactions whose burden can be shifted wholly or partly to another individual.
What are the types of indirect taxes?
Excise duty: Payable by a manufacturer who shifts the tax burden to the retailers and wholesalers.
Sales tax: Paid by a shopkeeper or retailer who shifts the tax burden to the customers via sales tax on goods and services.
Custom duty: Import duties levied on goods from outside the country, paid for by consumers and retailers.
Entertainment tax: Liability is on the cinema owners who transfer the burden to the cinemagoers.
Service tax like GST: Charged on services rendered to consumers, such as food bills in a restaurant.
Difference between direct and indirect tax
| Context of differentiation | Direct Tax | Indirect Tax |
| Imposition | Imposed on income or profits | Imposed on goods and service |
| Taxpayer | Individuals, firms and companies | Consumer of goods and services |
| Applicability | Applicable to the taxpayer alone | Applicable to every stage of the production-distribution chain |
| Course of payment | Taxpayers pay it directly to the government | Taxpayers pay it to the government through an intermediary |
| Tax burden | The burden falls directly on the individual | The burden is shifted to the consumer |
| Transferability | Cannot be transferred to anyone else | Can be transferred from one taxpayer to the other |
| Coverage | Confined to an entity or individual taxpayer | Wide coverage because all the members of the society are taxed |
| Administrative cost | Higher administrative costs and several exemptions | Lesser administrative costs because of stable, convenient collections |
| Tax evasion | Possible | Not possible |
| Allocative effects | Good allocative effects since they put less burden on the collection | Allocative effects are not as good as those of direct taxes |
| Inflation | Helps in reducing inflation | May increase inflation |
| Orientation | Discourage investments, lessen savings | Growth-oriented, encourage savings |
| Nature of tax | Progressive tax; reduces inequalities | Regressive tax; increases inequalities |
| Common example | Income tax, wealth tax, corporate tax | Goods and services tax, excise duty |
FAQs
What are the assessment year and financial year?
Both the assessment year (AY) and financial year (FY) are a period of 12 months, starting on the first day of April every year. However, AY comes after FY. For example, for the year beginning on April 1, 2021, and ending on March 31, 2022, the FY is 2021-22 and the AY is 2022-23.
Who is an assessee?
An assessee is a person who is liable to pay a tax or a sum of money (i.e., penalty or interest) under the Income Tax Act.
Who is a ‘person’ under the Income Tax Act?
The term person includes:
(1) An individual
(2) A Hindu Undivided Family (HUF)
(3) A company
(4) A firm
(5) An Association of Persons (AOP) or a Body of Individuals (BOI), whether incorporated or not
(6) A local authority
(7) Every artificial juridical person not falling within any of the preceding categories
What is an HUF?
A Hindu Undivided Family, on which the Hindu law applies, consists of all the persons lineally descended from a common ancestor and includes their wives and unmarried daughters. Once a family is assessed as a Hindu Undivided Family, it will continue to be assessed as such till its partition.
What is a direct tax?
The tax that is levied directly on the income or wealth of a person is called direct tax.
Which laws govern income tax matters in India?
The income tax in India is governed by the Income Tax Act, 1961, and the Income Tax Rules, 1962.
| Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com |
