Learn About What Is Tax & How It Works In India

What is tax? Taxes are government-mandated contributions levied on individuals and corporations. They are collected by the government to pay for government functions. Income, property, capital gains, sales, and inheritance taxes are all mandatory levies that are subject to taxation. Taxation is completely involuntary for all citizens of India, thus the payee does not have to consent.

What is tax divided into? There are two types of taxes: direct taxes and indirect taxes, in a broad sense. Both taxes are implemented differently. Some of them are paid directly, such as the income tax, corporate tax, wealth tax, and so on, while others are paid indirectly, such as sales tax, service tax, and value-added tax.

What Is Direct Tax and How Does It Work?

What is tax in the case of direct taxes? You are responsible for paying these direct taxes directly and regulating your own tax savings. Such taxes are imposed directly by the government on an individual or an entity, and they cannot be transferred to another person or entity. The Central Board of Direct Taxes (CBDT), which is overseen by the Department of Revenue, is the only federation that oversees direct taxes. The CBDT has the support of many legislation that oversee various parts of direct taxes to help it fulfill its responsibilities.

Direct taxes are divided into subcategories, which are as follows:

Income Tax

This tax is levied on an individual’s earnings from a variety of sources, including salaries, investments, real estate, and company returns. 

A tax benefit or tax saving obtained through insurance premiums or fixed deposits is described in the Income Tax Act. They can also assist in determining how much money to save through investments and what tax bracket to fall into.

Capital Gains Tax

The sale of a property or the money obtained from an investment is both subject to capital gains tax. It could come from short-term or long-term capital gains on an investment. This includes all in-kind exchanges that are weighed against the value of the item.

Securities Transactions Tax 

Stock market and securities dealing are subject to Securities Transactions Tax. What is tax for ISE? The tax is applied to both share prices and securities traded on the ISE (Indian Stock Exchange).

Prerequisite Tax

These are taxes imposed on the various benefits and perks that a company provides to its employees. It is necessary to specify the objective of the advantages and perks, whether official or personal.

Corporate Tax

The corporate tax is the amount of income tax paid by a firm. It is determined by the many slabs in which the revenue is classified. The following are the sub-categories of corporate taxes:

1. Dividend Distribution Tax ( DDT)
2. Fringe Benefits Tax (FBT)
3. Minimum Alternative Tax (MAT)

What Is Indirect Tax and How Does It Work?

What is tax in terms of indirect tax? Indirect taxes are taxes that are levied on products and services. They differ from direct taxes in that they are not imposed on individuals who pay them directly to the Indian government; instead, they are imposed on items and collected through an intermediary, the individual selling the product.

Indirect taxes are of different types, which are as follows:

GST

In India, a consumption tax is imposed on the supply of services and goods. GST is imposed on every step of the manufacturing process for any goods or value-added services. It is meant to be reimbursed to all parties engaged in the manufacturing process (and not the final consumer).

In India, there are three basic types of GST:

1. Central Goods and Services Tax (CGST)
2. State Goods and Services Tax (SGST)
3. Integrated Goods and Services Tax (IGST)

The CGST and SGST apply to transactions within a state, but the IGST is applied to those between states.

Sales Tax

Sales tax is a tax applied on the purchase of goods. This tax is charged to the supplier of a product, who subsequently passes the price on to the buyer, with the tax included in the price.

Service Tax 

This tax is included in the price of each good sold in the country, just like sales tax. It is based on the services that a business provides. They are collected in different ways depending on how these services are provided.

Excise tax

Excise duty is a tax imposed in India on manufactured goods or items. It is obtained directly from the product’s maker. They’re also gathered from companies that receive the items and work for the people who send them.

Value Added Tax

VAT is collected at many points during the distribution of a product. The tax is imposed on the movement of the product in the supply chain from the manufacturer to the end-user.

Custom Duty

Any commodity that has been imported from another country is subject to customs duty. Its purpose is to ensure that items entering the country are taxed and paid for.

Takeaway

Now that you know what is tax, it’s time to know how to make tax savings. To lower your tax bill, you may want to invest in certain financial instruments or plans. An investment strategy that lowers your taxable income is known as a “tax saving investment.” Even the Indian government provides a few tax saving options, such as the Public Provident Fund, the National Pension Scheme, and others. Life insurance premiums/term insurance premiums, Equity Linked Savings Schemes (ELSS), Tax Saving Fixed Deposits, Employee Provident Fund (EPF), and other tax saving investments are also other popular options.