Introduction
Tax may be described as a levy made by a nation’s government upon its citizens in order to fund the government’s operations or to provide services to the citizens of that country. It is neither a taxpayer’s voluntary payment nor a charitable contribution. It is, rather, a compelled contribution to the government. Non-payment will result in legal consequences for the taxpayer. The objective of taxes is to promote the general welfare of society by providing essential public services, property protection, defense costs, economic infrastructure, and other benefits.
There are four primary objectives for which taxes are collected.[1]
1) Revenue – Taxes provide revenue for direct government expenditures such as building roads, schools, and hospitals, as well as for indirect government responsibilities such as enforcing the laws or administering justice. This is the function that is the most well-known to the general public.
2) Redistribution – In most democracies, this involves shifting money from the wealthiest to the poorest portions of society, but the amount to which this should occur is often debated.
3) Reprising – For example, cigarettes are taxed to reduce smoking, and many people favor measures like the implementation of a carbon tax to combat global warming.
4) Representation – Taxes such as income taxes have been demonstrated to have the largest impact on accountability and governance, whereas indirect taxes have had a lower impact. This is a key benefit of taxes that is frequently overlooked.
Taxation in India has a long and illustrious history that extends back to prehistoric times. Ancient literature such as “Manu Smriti” and “Arthasastra” reveals that in the older beginnings of India, taxes were mostly imposed on the buying and selling of products. In India, numerous kinds of taxes were levied during the Mughal rule. The British also had a big hand in developing India’s tax structure since it was favorable to them. In 1922, India built its first full-fledged tax administration system.[2]
Types of Taxes in India
Taxes may be divided into two broad categories: direct tax and indirect tax.
Direct Tax
Businesses and individuals in India are subject to direct taxation, which is collected by the Central and State Governments under the supervision and control of the Central Board of Revenue, which was established under the Central Board of Revenue Act, 1924, to aid in the development of the nation’s economy. Direct tax may be a useful tool for preventing inflation and maintaining price levels if it is administered correctly. Direct tax, by virtue of its progressive nature, more successfully meets the societal idea of equality than indirect tax. It represents a significant portion of the overall tax income in advanced nations.
Direct taxation is restricted in less developed nations due to low per capita income and wide disparities in wealth and income. It is in the best interest of the government to enhance the percentage of direct taxes that are collected. As a result, the nature of direct taxation must be income elastic.[3]
India has a number of direct taxes, which include
Income Tax
According to the Income Tax Act 1961, any individual who is entitled to pay taxes to the government on any sort of income received and whose total income exceeds the maximum exclusion level is subject to income tax at the rate or rates specified in the Finance Act. During the next tax year, this income tax must be paid on the total amount of money earned in the last year.
Corporate Tax
It is a tax that is levied on a company’s net profit after expenses. The Companies Act 1956 mandates that companies, both private and public, registered in India under the Companies Act 1956 be liable to payment of corporate tax. Domestic companies are subject to a 25.17% tax rate for the fiscal year 2014-15.
Dividend tax
The Finance Act, 2020, revised the Income Tax Act, 1961, by amending the laws pertaining to the taxation of dividend income. Prior to the change, dividends were taxed at the corporation that issued them. Dividend Distribution Tax (DDT) was payable by the dividend-paying corporation according to section 115-O of the Act. Additionally, such dividend was tax-free in the hands of stockholders according to Section 10(34) of the Act.
“The Finance Act 2020 removed the DDT concept and deemed dividends taxable in the hands of stockholders under the traditional dividend tax system. This change took effect on April 1, 2020. Dividends issued on or after April 1, 2020, are not subject to Dividend Distribution Tax (DDT) and are taxable in the hands of shareholders at their respective slab rates.[4]
Professional tax
The word ‘Professional tax’ may be one of those expressions that do not entirely reflect the term’s true meaning. Contrary to what the name implies, it is not a tax that is solely charged to professionals. In other words, it’s a tax placed on the earnings of people in all sorts of jobs, trades, and professions. It is charged to employees, people who work for themselves, and anyone else who runs a business if their income is above a certain amount.
According to Article 246 of the Indian Constitution, only Parliament has the sole authority to create legislation relating to the Union List, which includes income taxes. The state may enact legislation exclusively in relation to the Concurrent and State lists.
In spite of being a kind of state-imposed tax, professional taxes are not imposed in every state. The State Government is also entitled to enact legislation relating to professional tax, despite the fact that it is a tax on income, according to Article 276 of the Indian Constitution, which deals with taxes on professions, trades, callings, and employment.
According to the Income Tax Act 1961, the professional tax is deductible and may be subtracted from taxable income.
Indirect Tax
It is a tax collected by the government on products and services rather than on an individual’s income, profit, or revenue, and it has the ability to be transferred from one taxpaying entity to another.
The term “indirect tax” is used to signify paying more for a product or service than the real cost. Additionally, taxpayers were subjected to a variety of indirect taxes.
As an indirect tax in India, the Goods and Services Tax (GST) is now in place. Many indirect tax regulations have been absorbed by it.[5]
Here are some examples of indirect taxes that were formerly levied in the country of India:
Basic Customs duty
If you’re shipping items over international boundaries, you’ll have to pay customs duty. In order to protect the economy, employment, the environment, and other aspects of a country’s population and citizens, customs duties are imposed on the import and export of commodities.
Due to several criteria, such as the country of origin or the country of manufacture, the duty rate for every commodity is predetermined. You must also disclose any items you bring into India for the first time according to customs regulations. The products you buy outside of India, as well as any gifts you get, must be declared.
Property tax
House properties may be anything from your house to an office building or even land next to a structure, such as a parking lot or driveway. Commercial and residential properties are treated the same under the Income Tax Act. Under the heading “income from home property,” taxpayers are required to report all sorts of property income on their tax returns. Income tax law defines an owner as a person who may exercise the rights of the owner in his own name and not on behalf of another person.
The ‘income from business and profession’ section of the tax code is employed when a property is used for commercial or professional purposes or for carrying out the freelance activity. Repair and maintenance costs are deductible as company expenses.
Stamp duty
When a property is sold, the state imposes a charge known as “stamp duty.” It is charged in accordance with Section 3 of the 1899 Indian Stamp Act.
At the time of registration, the stamp duty period will be determined by the property’s worth. As a result, it differs depending on where the property is situated, as well as whether it is a new or old home.
Any time you acquire real estate, you’ll be hit with the extra expense of paying stamp duty, so it’s critical to fully grasp the implications of this tax before making a purchasing decision.
Distinguish Between Direct Tax and Indirect Tax
1) Direct taxes are levied directly on the individual. Indirect taxes are levied on dealers and producers but are then passed on to consumers when they purchase products or services.
2) Direct taxes make it difficult to shift the cost; therefore, the tax burden falls on the taxpayer. The indirect tax might be transferred to another person.
3) Direct tax evasion is possible by manipulation of records and omission of income. Indirect taxes provide less room for tax evasion since the tax is included in the price of the product or service.
4) Direct taxation has the potential to decrease inflation, but indirect taxation has the potential to increase inflation.
5) Individuals’ capacity to save and invest is negatively impacted by direct taxes. By reducing consumption of non-essential goods and services, indirect taxes may enhance savings and investment.
6) Direct taxes are progressive in nature and work to decrease inequality, while indirect taxes are regressive in nature and work to increase inequality.
7) In the case of indirect taxes, the government may redirect people’s buying power toward helpful products by excessively taxing hazardous items such as cigarettes and liquors.
8) It is common for direct taxes to be complicated and need help from expert accountants and auditors, but indirect taxes are easier to collect, resulting in lower administration expenses.
9) Direct taxes, on the other hand, only apply to those in their specific tax bands, whereas indirect taxes are levied on everyone who buys goods and services.
10) The government can count on consistent and predictable revenue through indirect taxes, and this allows it to tax almost everyone in society, something the government has been unable to achieve with direct taxes.
Direct and indirect taxes are crucial for the nation since they are inextricably tied to the general economy. As a result, the collection of these taxes is critical to the government’s financial health as well as the overall well-being of the nation.[6]
Conclusion
Administrative inefficiency is a major problem in the Indian tax system. A well-organized, planned, and coordinated tax system cannot develop since there is no coordination between the taxes. Direct taxation is quite prevalent in India, yet it contributes just a small portion of the country’s overall tax income. In order to combat tax evasion and avoidance, concrete measures must be put in place. Even though the exemption limit has been lifted on a number of occasions, neither the level of national nor per capita earnings has increased in a corresponding manner. The introduction of India’s new Goods and Services Tax is a big step forward in the country’s long-held aim of economic liberalization.
Income tax and other taxes must be paid by all citizens of India, as mandated by law. Some may ask, “Why should I pay taxes?” They say that they must pay for their food, housing, travel, and medical care, as well as the expense of having a vehicle, which includes not just the vehicle’s purchase price but also vehicle taxes and other associated costs. Even on many highways, tolls must be paid! Compared to nations like the United States and the United Kingdom, the citizens in this country get social security and free medical care. However, similar services are not available in India. Compared to other industrialized nations, India does not give social security or free health care. However, we must consider the matter on a broader scale.
We must acknowledge that the government is required to fulfill a variety of tasks, including providing health care via public hospitals (which generally offer services at no cost) and providing education (In Municipal and Government schools, the fee is negligible). Cooking gas is often offered at the government’s reduced or subsidized cost. Of course, the bulk of the government’s budget is spent on national defense, infrastructure development, and other essential services. For example, the government uses taxes to fund numerous social programs, including job training. The government must bear the administrative costs of tens of thousands of staff spread across several ministries. In spite of the fact that the court system is prone to lengthy delays, the government must nonetheless pay the salaries of judges, magistrates, and other judicial employees. In light of these varied responsibilities of the government, it is essential to remember that we must pay taxes as mandated by law. We all have a responsibility to be good citizens.
According to Justice Holmes of the United States Supreme Court, “taxes are the price of civilization.” Time has come when taxation is no longer seen as a burden but rather as a necessary cost of civilization.[7]
[1] 2009. [ebook] Sullivan & Cromwell LPP. Available at: https://www.sullcrom.com/siteFiles/Publications/Korb%20Rogovin%20Article.pdf
[2] Goods And Service Tax In India – Dr. Paritosh Awasthi – Google Book
[3] Das, P.K., 2020. Indian Direct Tax Structure–An Analytical Study. Journal of Accounting, 4(1), pp.042-051.
[4] https://www.financialexpress.com/money/income-tax/getting-dividend-as-regular-income-beware-you-have-to-pay-tax-and-reveal-it-in-itr-this-year/2375475/
[5] Ghuge, N.R. and Katdare, V.V., 2015. Indian Tax Structure-An Analytical Perspective. International Journal in Management & Social Science, 3(9), pp.242-252.
[6] A Jha, “Tax Structure in India and effect on corporates”, International Journal of Management and Social Sciences Research, 2013, 2(10), 80-82
[7] https://www.hks.harvard.edu/centers/mrcbg/programs/growthpolicy/taxes-price-civilization-or-tribute-leviathan
