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What is tax?

Tax is a type of mandatory payment that individuals need to pay to the government of India. The tax collected thereof is used for public welfare purposes and to conduct government activities. No matter where you reside, you are bound to pay taxes if you are a salaried or self-employed earning individual, and thus paying taxes in a financial year is compulsory for all. It is as per the constitution that the government of India is authorized to levy charges on earning individuals. However, the tax slab varies and depends mainly on the income of individuals.

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Types of Tax

The taxes levied by the government of India are broadly divided into two types, direct tax, and indirect tax. So, let us discuss these types of taxes in detail:

Direct Tax

Direct taxes are those that are directly paid by any individual or entity to the Indian government. The Central Board of Direct Taxes or CBDT is the governing body and looks after direct taxes. Direct taxes are further classified into different acts:

  • Income Tax Act: Income Tax Act or the IT Act of 1961, dictates certain rules for the income tax in India. There are different sections available under this act such as Section 80C, Section 80D, Section 80E, section 80G, and more. Under the Income Tax Act, you can also find a list of tax-saving investment options such as ELSS, NPS, life insurance plans, and more. This act details everything about tax deductions and exemptions available.
  • Gift Tax Act: The Gift Tax Act was introduced in the year 1958 to specify that any individual receiving money or valuables as gifts are taxable. So, if any individual is gifting shares, jewelleries, or any such related items, then, it will be taxable. However, if such gifts are given within a family, such as from husband to wife, then that will not be taxable. Other individuals, receiving gifts of more than Rs. 50,000 are liable to pay taxes to the Indian government.
  • Wealth Tax Act: The Wealth Tax Act on the other hand takes into account any individual’s net wealth for taxation. The income taken into account is those generated by businesses, employed individuals, businesses, etc. This act was introduced in the year 1951.
  • Expenditure Tax Act: The Expenditure Tax Act is the expenses incurred by an individual or family on goods and services.
  • Interest Tax Act: The Interest Tax Act was introduced in 1974 to specify the taxes applicable to interests earned.

The different types of direct taxes are as follows:

  • Income Tax: These are the taxes that are levied as per the individual income. It needs to be paid regularly by individuals in every financial year and is levied as per the existing tax slabs.
  • Corporate Tax: Corporate taxes are those that are paid by companies as income tax. The corporate tax is further classified into Minimum Alternative Tax, Fringe Benefits Tax, Dividend Distribution Tax, and Baking Cash Transaction Tax.
  • Capital Gains: Any tax charged on the money received out of investments or by selling property is classified as Capital Gains. The capital gains can be either short-term or long-term.
  • Securities Transaction: This is applicable to those who trade in stocks and thus as per the shares, a certain amount of direct tax is calculated.

Indirect Tax

Unlike direct taxes, indirect taxes are those that are levied upon goods and services. As these are not collected by the government and instead by those who are selling the source, these are termed indirect taxes. Below are the different types of indirect taxes:

  • GST: This is a type of consumption-based tax that is charged on different services and goods. This type of tax was implemented in 2017 and this helped in doing away with VAT.
  • Sales Tax: This type of tax is imposed upon the sale of different products. The sales tax is of further different types such as Retail Sales Tax, Manufacturer's Sales Tax, Wholesale Sales Tax, and Use Tax. It is levied upon the seller of the product.
  • Custom Duty: Custom duty is charged if any product is imported from foreign countries. So, for importing items, you are liable to pay a certain amount of custom duty.
  • Excise Duty: This is a type of indirect tax that is charged on any goods that are manufactured in India.

Benefits of paying tax

On paying income tax on time, there are certain benefits that you can get such as the following:

  • Loan approvals are easier if taxes are paid on time
  • For applying for a visa, you are also required to submit an income tax receipt. Thus, for visa applications, paying tax can be an added advantage
  • In claiming tax refunds

Apart from the advantages of paying taxes, there are certain penalties that are charged by the government if the taxes are not paid on time. So, make sure to pay all your taxes on time.

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FAQs

  • What are the two different types of tax?

    The two different types of tax are direct tax and indirect tax.

     

  • Is corporate tax a type of direct tax?

    Yes, corporate tax is a type of direct tax.

     

  • Who is liable to pay GST?

    GST is charged on goods and services and thus any individual buying a source is liable to pay GST.

     

  • What are the different types of Indirect Tax?

    The different types of indirect taxes are GST, Excise Duty, Custom Tax, and a few more.

     

  • How can I calculate my tax liability?

    You can use an income tax calculator to calculate your tax liability.

     

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