Tax meaning and different types of Taxes in India

Government levies taxes on citizens for creating an influx of income that are utilized for supplementing projects for country's development, welfare, and boosting the economy so as to raise the standard of living. By the Constitution of India, the government can levy tax and allocate the same to central and state governments. The Parliament and State Legislature has to agree on the taxes levied so as to pass into the mainstream of application.

For FY 2020-21, there are two different types of income tax structure that you can choose. If you go by the new tax regime, then there has been a reduction in tax rate from 20% to 10% and 30% to 20% as per the relevant income tax slabs. The old income tax regime of FY 2019-20 is still applicable for those who wish to not choose the new income tax structure.

• The new income tax exemption limit depends on the tax payee’s residential status and age.
• If the new IT structure is chosen, then you have to forego up to 70 deductions and exemptions that you can otherwise avail under the old income tax regime.
• The exemptions that you need to forego include LIC premium, Mediclaim, House Rent Allowance, Education Loan, Home Loan, and others.

1. Income Tax Slab for Individuals and HUF below 60 Years of Age

Here are the details:

• For a person earning Rs. 7.5 lakhs yearly, the total benefit in tax liability under the new tax slab is up to Rs. 25,000.
• The reduction in tax liability for an individual with Rs. 15 lakhs and above yearly income is up to Rs. 75,000. However, if exemptions are foregone, then the actual savings can be lower.
• On the other hand, a rebate of Rs. 12,500 is available under the old income tax regime.
• Rebate of the same amount is also available in new income tax structure for individuals whose yearly taxable income does not exceed Rs. 5 lakhs.
• For new and old income tax regime, cess at 4% is applicable. Surcharge at 15% and 10% is applicable for yearly income over Rs. 1 crore and Rs. 50 lakhs, respectively.

2. Income Tax Slab for Senior Citizens (After 60 Years but Less Than 80 years)

Here are the details:

• For all income slabs, a rebate of Rs. 12,500 is available for both types of income tax regimes.
• But the rebate amount in the new tax structure is only available for people with yearly income of up to Rs. 5 lakhs.
• For new and old income tax regime, cess at 4% is applicable. Surcharge at 15% and 10% is applicable for yearly income over Rs. 1 crore and Rs. 50 lakhs, respectively.

3. Senior Citizens Tax Slab (Age More Than 80 Years)

Here are the details:

• For new and old income tax regime, cess at 4% is applicable. Surcharge at 15% and 10% is applicable for yearly income over Rs. 1 crore and Rs. 50 lakhs, respectively.

4. New Income Tax Slab for Domestic Companies and Firms

Here are the details:

Here is a deeper understanding about income tax regime for FY20-21 with calculations and illustrations.

What are the Benefits of Taxes?

• The government can work on important infrastructures and developmental plans for the nation from the income generated through taxes.
• These also encourage citizens to create sufficient investments and savings and use several financial investments to reduce the taxable income and thus lessening the tax amount to be paid.
• Paying taxes includes that you must file for tax returns. On doing so it gets easier to apply for home loan or credits and easing your financial journey.

What are the Penalties for Not Paying Taxes?

Different types of taxes carry unique penalties if not paid out. These penalties can be monetary fines to imprisonment according to the crime's severity. In few cases, you may have to pay the owed tax with a lump sum as fine that is determined by the government officials. Thus, it is recommended that everyone must pay the taxes in time and be aware of the taxes you are liable to pay.

There are Some Important Types of Taxes:

Direct and indirect taxes are different in a way these are implemented. You may have to directly pay some taxes such as corporate tax, income tax etc., while some are indirectly paid such as service tax, sales tax, value added tax etc. There are few other taxes that the Central Government has brought into effect and levied on both indirect and direct taxes such as Krishi Kalyan Cess tax, Swachh Bharat Cess tax, infrastructure cess tax etc.

1. Direct Tax

The Central Board of Direct Taxes is one of the bodies that takes care of direct taxes and helps on with its support, duties, governing etc. Some of these are mentioned below:

Income Tax Act

Following the IT Act of 1961, the government rules the income tax in India. It comes from the sources such as owning of property or house, business, salaries, gains from investment etc.

Expenditure Tax Act

The expenditure tax was introduced in 1987 and concerns the expenses you incur when availing services at a restaurant or hotel. It does not apply on Jammu and Kashmir but rest of the India.

Securities Transaction Tax

When you trade in stock market or securities, you gain some substantial amount of money which becomes a source of income, and is levied with securities transaction tax. The same is added to the share price, so when you sell or buy shares, you pay this tax every time.

Capital Gains Tax

The capitals gains tax is implied on sizeable earning from sale of property or investments. There are two types: short term capital gains and long term capital gains. The interest earned on investment is taxed.

Interest Tax Act

This tax came into effect in 1974. It states the amount payable on interest earned from specific situations. There was an amendment, which eliminated requirement of interest tax on interests earned later to March 2000.

Perquisite Tax

The privileges that employers bestow on employees are taxed as well. These come under the perquisite tax. The perks can extend to compensations such as housing, cars, phone and fuel bills etc. If these facilities are used for official purpose, then the costs incurred may be exempted from such taxes.

Corporate Tax

This tax is paid by firms for the revenue these earn. There are specific tax slabs in this section and the payment of tax is according to these slabs. Types are: minimum alternative tax, fringe benefit tax, and dividend distribution tax.

Wealth Tax Act

As per the budget 2015, the Wealth Tax stands abolished, but it was enacted in 1951. It was meant to pose taxation as per the net wealth of the company, individual or a Hindu Unified Family.

Gift Tax Act

Since 1958, the Gift Tax came into being, which taxed people on receiving gifts worth a value and shelling an amount up to 30% of the gift's expense. However, this tax was done away with in 1998. Now if someone other than the exempted entities gives gift to you, exceeding INR 50,000 then this gift amount will be taxed.

2. Indirect Tax

Some of the taxes are levied on the facilities and services you enjoy and these come to be taxed by the government. Here are few of the important indirect taxes.

Value Added Tax

VAT is a commercial tax but not levied on commodities with zero rates such as essential drugs and food items or those that come under exports. However, value added tax comes in play for supply chain where it is paid by dealers, distributors and manufacturers.

Sales Tax

This tax was levied on sale of product and came under both central and state legislation. The limitation of the sale tax is that it can be taken once for particular product. Thus if the product is resold, this tax won't apply.

Service Tax

The service tax as the name implies is a tax added on services provided in India. The last ratio percentage for it was 14 and it is not applied on goods but firms that offer services. Such amount is reflected in the bill to customers

Goods and Services Tax (GST)

The most talked about tax is the Good and Services Tax, which has superimposed several of the indirect taxes, which now stands defunct. GST is consumption based tax and applies on value added services, goods at several stages of consumption in supply chain. Merchants can pay the GST rate applicable and claim it through the tax credit system.

Excise Duty

This tax is imposed on things manufactured in India and called as Central Value Added Tax or CENVAT. It is collected from the manufacturer of goods by the government. No excisable goods that bear any payable duty are allowed to move without the payment of duty to the destination where these are manufactured or produced.

Custom Duty and Octroi

On making a purchase that has to be imported in India from another country, you may have to pay custom duty and Octroi tax. The Octroi is for ensuring that goods from across the borders and coming into the country are taxed properly.

3. Other Taxes

The other taxes are referred to as cess and are levied by the government with intention of generating funds for specific purposes as decided by the Finance Minister.

Swachh Bharat Cess

Starting from November 2015, the Swachh Bharat Cess is applicable on taxable services of India and is accounted at 0.5% over and above service tax of 14%. This cess is not implemented on services which are completely exempt from service tax or services covered under negative services list. This is collected by the Consolidate Fund of India and utilize in promoting and funding government campaigns related to Swachh Bharat efforts.

Krishi Kalyan Cess

Applicable since June 2016, the Krishi Kalyan Cess is levied on all services of India in order to extend welfare to farmers and improve the agricultural facilities of the nation. The rate for this tax is 0.5% and charged over and above the Swachh Bharat Cess and service tax.

Professional Tax

Employment or professional tax is a tax levied by the state governments. As per the norms, individuals practising a profession such as lawyer, doctor, company secretary, chartered accounted or earning etc must pay this tax. Not every state levy professional tax, whose rate also differs as per the state government's discretion.

Property Tax

Real estate tax or property tax is levied by the local municipal bodies of all cities. These are levied to make funds for maintaining basic civic services. The owners of commercial and residential properties are subject to the Municipal tax.

Entertainment Tax

The entertainment tax is levied by the government on television series, amusement, feature films and recreational parlours. Such tax is taken into account as the business entity's total collection of earnings from film festival earnings, commercial shows and audience participation.

Stamp Duty, Registration Fee, Transfer Tax

The mentioned taxes supplement property tax and are incurred at specific such as charges of stamp duty, property registration or transfer of ownership to another person or entity.

Infrastructure Cess

The infrastructure cess came into effect on 1st June 2016. A cess of 1% is eligible on motor vehicles driven on LPG/CNG/Petrol. The vehicles accounted for such cess must be 4 meters or less in length and 1200cc or lower engine capacity. 2.5% tax has to be paid for diesel motor vehicles that do not exceed the mentioned length and contain engines with capacities lower than 1500cc. 4% cess is applicable on vehicle's overall cost for big SUVs and sedans.

Education Cess/Surcharge

The Education Cess helps to cover the cost by government for sponsoring educational programs. The tax is collected independently and applicable on all Indian corporations, citizens and other people residing in the country. Currently, the cess amount is 2% of individual's income.

Entry Tax

Under entry tax, select states in India such as Madhya Pradesh, Assam, Gujarat, Uttarakhand, and Delhi account for tax payable on items that enter this state via e-commerce establishments.

Road Tax and Toll Tax

This form of tax is paid for the infrastructure developed by the government for roads and bridges. The amount of such tax is rather negligible and utilized for maintenance of particular roadway projects.