Understanding What is Tax? – Features, Types and it’s Advantages

Last Updated : March 10, 2023, 4:17 p.m.

Regardless of which part of the world you live in, there is one thing that everyone has to do, i.e., you will be paying taxes to the Government. There are various types of taxes which you will read about later in the guide. Through the guide, you will know everything about taxes, what is tax, the different kinds of taxes, and the tax system in India. The comparison between the different forms of taxes depends on the various ways you adopt to pay taxes to the Government. The vital motive of imposing taxes, especially goods and services tax, is to generate revenue and use the revenue generated to maintain public property such as roads, utilities, etc. Before knowing the numerous kinds of taxes, it will be helpful if you know what is tax .

What is Tax?

Before understanding the various types of taxes in India, it is important to know what is tax. The word tax is derived from the Latin word taxo. It is a mandatory financial fee that a Government levies on people and organisations to generate revenue for public works and the largest income source for the Government. If you fail to pay taxes on time and refuse to contribute, you might face punishment under a few laws.

Paying taxes is essential for various purposes like developing the country, welfare tasks for the country, improving infrastructure, uplifting the society, creating income for undertaking development projects to improve the country’s income, and boosting the citizens’ living standards. Parliament or State Legislature passed laws that must support all the levied taxes in India.

Privileges of Paying Taxes

A few privileges of paying taxes are as follows:

• Tax payment assures that the services provided by the government to every Indian citizen keep on running without any problems.
• You can utilise the documents related to income tax returns to make applications for loans and credit cards.
• To boost the citizens’ living standards, the government can use the taxes to provide better civic amenities and utilities.
• The government also uses taxes to develop infrastructure, assure citizens’ safety, provide military funding, administrative services, etc.

Kinds of Taxes

There are two types of taxes in India. The difference in the kinds of taxes is mainly how they are implemented and paid. There are certain taxes that can be paid directly, while some can be paid indirectly. The kinds of taxes prevalent in India are as follows:

Direct Tax

A direct tax is a type of tax you pay directly to the government. In India, direct taxes are levied on your income. Direct taxes are not transferable to others. The most significant type of direct tax for individual taxpayers is income tax. According to the Income Tax Act of 1961, it is compulsory to pay income tax if the yearly earnings are more than the minimum exemption limit. You can get tax privileges under several sections of the Income Tax Act of 1961. The Central Board of Direct Taxes handles matters pertaining to direct taxes.

Direct Taxes are further classified into:

• Income Tax- Income tax is levied on your yearly income or the profits that the government directly gains. Everyone who earns any type of income can contribute to income tax.
• Capital Gain Tax- Capital Gain Tax comes from profits that are earned through selling capital assets. It could be short-term or long term from an investment.
• Corporate Tax- The tax that a company or a business pays is called corporate tax. It depends on the contrasting slabs that the revenue comes under.

Indirect Tax

Indirect taxes are taxes that are levied on various goods and services. Sellers collect indirect taxes on the services or products’ they sell to the buyers. The indirect tax is added to the cost of the product or service. Hence, it raises the cost of the product or service. Indirect taxes and direct taxes are different because you do not pay the tax directly to the government and are applicable on products and services.

The most common type of indirect taxes are as follows:

• Goods and Services Tax- The Goods and Services Tax (GST) are taxes depending on consumption. It is levied on value-added products and services at every stage of consumption in the supply chain.
• Service Tax- A service tax is levied on a company’s services. The service tax is included in the cost of a product, and the tax collection will be based on the kind of service. Numerous paid services, like healthcare, finance, advertising, etc., are covered under the service tax.
• Sales Tax- Sales tax is the tax charged for the sale of a product. The products’ seller charges the sales tax.
• Excise Duty- The excise duty tax is a kind of indirect tax that is levied on products which are produced in India. The manufacturing firm that produces the goods charges the excise duty tax.
• Customs Duty- The customs duty tax is a kind of indirect tax charged on imported goods. The tax amount will be based on the imported product.

Other Kinds of Taxes

A few other kinds of taxes in India are as follows:

• Entertainment Tax- Entertainment taxes are levied on films, television shows, etc. Entertainment taxes are also known as amusement taxes.
• Road and Toll Tax- Road and Toll tax are utilised for maintaining roads and toll infrastructure.
• Entry Tax- Entry taxes are those taxes that are levied on the products that enter a state via e-commerce entities.
• Education Cess- Education Cess is the tax that is levied on educational courses that the Indian government launched and maintained.

Conclusion

Everyone has to pay taxes to some extent. A few taxes come with a minimum exemption limit, like income tax, where you do not have to pay any tax if your annual earnings are below a specific amount. However, the same does not apply to other taxes like goods and services tax which apply to a particular product or service at the same rates. Hence, everyone has to pay some tax in a way.

Understanding what is tax is important. The Indian Government has the authority to take a final decision on the fixing of tax rates. Nonetheless, numerous departments and institutions recommend and implement tax rates and taxes for the Government of India. A few such departments are The Goods and Services Tax Council, The Central Board of Direct Taxes, etc.