Types of taxes in India

Taxes are an essential part of any modern society. They are the government’s primary source of revenue, and they are used to fund essential services such as education, healthcare, and infrastructure. In India, there are a variety of different types of taxes in India, including direct taxes and indirect taxes. Direct taxes are those that are paid directly to the government, such as income tax and corporate tax. Indirect taxes are those that are paid on goods and services, such as the goods and services tax (GST).

As a responsible citizen, it is important to understand the different types of taxes that are levied in India and how they affect you. This knowledge can help you to plan your finances more effectively and to ensure that you are paying your fair share of taxes.

In this blog post, we will take a comprehensive look at the different types of taxes in India. We will explain how each tax is calculated and paid, and we will discuss the impact of taxes on businesses and individuals.

How many types of taxes in India?

In India, the taxation system operates within a well-defined three-tier structure, comprising local municipal bodies, state governments, and the central government. This multi-level structure ensures that various aspects of taxation are effectively managed and regulated across the country.

Taxation in India is primarily categorized into two broad types: direct taxes and indirect taxes. The fundamental difference between these two lies in their incidence and who bears the tax burden. Direct taxes are levied directly on individuals or entities and are based on their income, wealth, or profits. Key examples include Income Tax and Wealth Tax (abolished in 2015). These taxes are borne by the taxpayers themselves.

Indirect taxes, on the other hand, are imposed on the sale or consumption of goods and services, and the burden is transferred to the end consumer. The Goods and Services Tax (GST), Customs Duty, and Value Added Tax (VAT) are prime examples of indirect taxes.

Difference between Direct and Indirect tax

CharacteristicDirect taxIndirect tax
Tax baseTax On Income or wealthConsumption of goods and services
TaxpayerPerson or entity with income or wealthPerson or entity that consumes goods and services
Incidence of taxTaxpayers cannot pass on the cost of the
Tax to another person
Taxpayers can pass on the cost
of the tax to the consumer in the form of higher prices
ExamplesIncome tax, corporate tax,
wealth tax, capital gains tax
Value-added tax (VAT), sales tax, excise duty, customs duty
Difference between Direct and Indirect tax

Direct Taxes In India

quote board on top of cash bills
Photo by Karolina Grabowska on Pexels.com

These types of taxes are directly paid to the government of India by individual/entity

Income Tax:-

Income tax is a tax that is levied on the income of individuals and businesses in India. It is one of the main sources of revenue for the government and is used to fund public services such as education, healthcare, and infrastructure. The income tax rates in India vary depending on the taxpayer’s income slab. For the financial year 2023-24, the income tax rates are as follows:

key types of taxes in india

A rebate of ₹2,500 is available for total income up to ₹3.5 lakh. This means that if your total income is ₹3.5 lakh or less, you do not have to pay any income tax. Income tax is a complex subject, and there are many rules and regulations that apply. If you have any questions about your income tax liability, you should consult with a tax professional.

Corporate Tax

Corporate tax is a tax that is levied on the income of companies. Corporate tax is calculated based on the company’s taxable income. Taxable income is calculated by deducting certain exemptions and deductions from the company’s total income. The tax rate is then applied to the taxable income to determine the amount of tax payable. The corporate tax rate in India is currently 25%. However, there are certain companies that are eligible for a lower tax rate, such as small and medium enterprises (SMEs) and startups.

Note:- Tax Slabs for Domestic Company for AY 2023-24

key types of taxes in india

Corporate tax is a complex subject, and there are many rules and regulations that apply. If you have any questions about your corporate tax liability, you should consult with a tax professional.

Capital Gains Tax

The profit from the sale of a capital asset is subject to capital gains tax (CGT), which is a type of tax. Property, stocks, bonds, and other valuable items can all be considered capital assets. The difference between the capital asset’s sale price and its original cost (or indexed cost) is used to determine capital gains tax (CGT). The purchase cost is increased by inflation to create the indexed cost.

CGT can be long-term or short-term, depending on the holding period of the capital asset. For immovable property, the holding period is 24 months. For other capital assets, the holding period is 36 months. The tax rates for long-term and short-term CGT differ depending on the nature of the capital asset. For the financial year 2023-24, the capital gains tax rates are as follows:

key types of taxes in india

Securities Transaction Tax

The buying and sale of securities listed on Indian stock exchanges are subject to the Securities Transaction Tax (STT). It was first mentioned in the Union Budget for 2004 and went into effect on October 1st. The primary goal of implementing STT was to reduce tax evasion on earnings from capital gains obtained via the trading of securities. STT is a straightforward tax that is simple to administer and has proven successful in lowering tax evasion.

Depending on the type of security transferred and whether the transaction is a purchase or a sale, the STT rate varies. The STT rates for the fiscal year 2023–2024 are as follows:

key types of taxes in india

Wealth tax

A wealth tax is a charge assessed against an individual’s net worth. It is based on the value of the taxpayer’s assets, including their real estate, stock portfolio, bonds, and other valuable possessions. In India, wealth taxes were first implemented in 1957 with the intention of fostering social justice and eliminating inequality. It was, however, eliminated in 2015 because it was thought to be an administrative burden on the rich and burdensome. Wealth tax rate in 2023-24 Since there is no wealth tax in India, the wealth tax rate for 2023-24 is 0%.

Gift Tax

A charge paid to the receiver of a gift is known as gift tax. Direct tax must be paid to the government. Under current tax laws, not all gifts received in India are subject to tax. However, the Income Tax Act, of 1962 includes key provisions which allow you to receive various tax-exempt gifts. For instance, if you receive gifts or cash of up to Rs. 50,000 in a financial year, you do not have to pay any gift tax on it.

key types of taxes in india
Photo:- ET Money

Professional Tax

A direct tax known as professional tax is imposed on people whose income comes from a profession, trade, or calling. It is a tax imposed by the state government rather than the federal government. States have different professional tax rates.

The following are some of the categories of individuals who are liable to pay professional tax:

  • Salaried employees
  • Self-employed professionals, such as doctors, lawyers, engineers, and architects
  • Business owners and partners
  • Commission agents
  • Contractors

Professional tax is often taken out of salaried staff salaries by their employer. Self-employed people and company owners are in charge of paying their professional taxes to the state directly. While being a very minor tax, the professional tax may add up over time. For instance, in the state of Maharashtra, professional tax is 2.5% of salaried workers’ gross pay, up to a cap of 2,500 per year.

Indirect Taxes In India

Sales Tax

Sales tax is a type of indirect tax that a seller charges a buyer when selling or exchanging taxable goods. The seller then repays the tax to the government on the buyer’s behalf. The sales tax, on the other hand, is generally dependent on the authority in power and the policies implemented by the authority. Some major sales tax types are manufacturer’s sales tax, wholesale sales tax, use tax, value-added tax, and retail sales tax.

The rate of sales tax varies from state to state in India. Most states have a two-tier sales tax system, with a lower rate for essential goods and a higher rate for non-essential goods. The rates of sales tax also vary depending on the type of good or service being sold.

For example, the sales tax rate on food items is typically lower than the sales tax rate on electronic items. The sales tax rate on services is also typically lower than the sales tax rate on goods. The following is a table of the sales tax rates in some of the major states in India:

key types of taxes in india

Service Tax

This tax is an indirect tax that taxpayers have to pay service tax on paid services. Paid services are the telephone, tour operator, architect, interior decorator, advertising, health centre, banking and financial service, event management, maintenance service, and consultancy service. The Interest on the service tax is 15%.

Value Added Tax (VAT)

VAT is a consumption tax charged on the value added to products and services at each stage of the manufacturing and distribution process. It is a multi-stage tax, meaning it is collected at each stage of the supply chain, from the raw material supplier through the final customer. VAT is often computed as a percentage of the product or service’s selling price. The tax rate is computed by removing the cost of inputs from the selling price at each stage.

VAT is a popular form of consumption tax around the world, and it is used in over 160 countries. It is a relatively simple and efficient tax to administer, and it is difficult to evade.

General VAT rates are charged with high VAT rates of 12.5% or 14-15%. There are a lot of state governments that follow a general rate of VAT for goods which cannot be categorized to the above list of classifications. Goods like that are taxed at 12%, 13% or even 15% in various states.

Custom Duty

Custom duty is a charge that is charged to goods imported and exported. It is an indirect tax, meaning that it is paid by the consumer. The government collects customs duty at the ports of entry and exit. Customs tax rates differ depending on the type of goods imported or exported. Some commodities are duty-free, while others may be subject to a high amount of duty. Customs duty has three purposes it protects the home economy from foreign competition, it generates income for the government, and it regulates the trade of specific items.

Here are some examples of custom duty rates in India:

  • Agricultural products: 5% to 10%
  • Consumer goods: 10% to 20%
  • Machinery and equipment: 5% to 10%
  • Electronic goods: 10% to 15%
  • Vehicles: 30% to 40%

Octroi Tax

The octroi tax is a charge paid on goods entering a city or municipality. It is an indirect tax, meaning that it is paid by the consumer. The local authority collects the Octroi tax. The octroi tax rate varies according to the type of goods carried into the city or town. Some items are exempt from octroi tax, while others may face a high amount of levy. The octroi tax is intended to generate revenue for the local government body in order to pay for public services such as sanitation, roads, and drainage.

Goods And Service Tax (GST)

The Goods and Services Tax (GST) is a multi-stage, destination-based tax applied on all value additions. It is a single domestic indirect tax law that applies throughout the country. On July 1, 2017, India implemented GST to replace the current indirect tax framework, which was complex and fragmented.

The provision of goods and services, including imports, is subject to GST. It is a destination tax, which means it is taxed in the state where the goods or services are consumed. GST will be charged at each stage of the supply chain, from manufacturer to retailer to customer.

In India, the GST rate is divided into four categories: 5%, 12%, 18%, and 28%. Some goods and services are GST-free, while others are taxed at a lower rate.

The GST rate on a particular good or service can be found by searching for the good or service in the GST Rate Finder. The GST Rate Finder is an online tool that is provided by the Central Board of Indirect Taxes and Customs (CBIC).

Other Taxes In India

Property Tax

Property tax is a yearly fee that landowners must pay to their community’s municipal corporation or local government. His home, office building, and any actual real estate that he has rented to others are all included in the property.

There are three main methods used to calculate property tax in India:

  • Capital Value System (CVS): Under this system, the tax is calculated as a percentage of the market value of the property.
  • Unit Area Value System (UAS): Under this system, the tax is calculated based on the per-square-foot value of the property.
  • Annual Rental Value System (RVS): Under this system, the tax is calculated based on the annual rental income that the property could generate.

The specific property tax rate varies from state to state and city to city. However, in general, property tax rates in India range from 5% to 20% of the taxable value of the property.

Here are some examples of property tax rates in major Indian cities:

  • Mumbai: 5% to 10%
  • Delhi: 6% to 12%
  • Kolkata: 5% to 15%
  • Chennai: 5% to 10%
  • Bangalore: 5% to 15%

Registration Fees

Registration charges are a kind of tax paid on the sale of real estate. They are normally sent to the government department in charge of recording the real estate transaction. State-by-state and country-by-country differences in registration fees can be found.

In India, registration fees are typically 1% to 2% of the market value of the property. However, the exact rate can vary depending on the type of property, its location, and the relationship between the buyer and seller. Registration fees are typically paid by the buyer of the property. However, in some cases, both the buyer and seller may be required to share the cost.

key types of taxes in india
Photo:- Elearmarkets

Toll Tax

The fee that vehicles must pay to cross interstate expressways, highways, tunnels, bridges, etc. is known as a toll tax. The National Highway Authority of India (NHAI) is responsible for managing the toll roads that are subject to the toll levy.

Toll tax rates vary depending on the type of vehicle, the distance traveled, and the time of day. For example, commercial vehicles typically pay higher toll rates than passenger vehicles. Toll rates may also be higher during peak travel times.

key types of taxes in india

Education Cess

In India, there is an additional tax called the education cess that is added to the income tax that both individuals and businesses must pay. It supports national primary, secondary, and higher education. The current rate of education cess is 3%, which is made up of a 2% primary education cess and a 1% secondary and higher education cess.

Along with income tax, the government also collects an education cess. Before applying any deductions, it is based on the entire amount of income tax that must be paid. For instance, if a person pays 10,000 in income taxes, they must also pay a 300 education cess.

Education cess is used to fund a variety of educational initiatives, including:

  • Midday meal programs
  • Construction of new schools and colleges
  • Provision of scholarships and educational loans
  • Training of teachers

Entertainment Tax

Consumption of entertainment-related products and services is subject to entertainment tax. Usually, the buyer of the product or service pays the tax to the seller, who then transfers the expense to the buyer in the form of increased prices.

Entertainment tax can be levied on a variety of goods and services, including:

  • Movie tickets
  • Theatre tickets
  • Concert tickets
  • Sporting event tickets
  • Amusement park tickets
  • Video game rentals
  • Streaming subscription services
  • Pay-per-view events

The rate of entertainment tax varies from state to state and country to country. In some cases, entertainment tax may be levied in addition to other taxes, such as value-added tax (VAT) or sales tax.

The purpose of entertainment tax is to generate revenue for the government. It can also be used to discourage the consumption of certain types of entertainment, such as gambling or smoking.

What are the different types of taxes in India?

There are two main types of taxes in India: direct taxes and indirect taxes. Direct taxes are levied on the income or wealth of a taxpayer, while indirect taxes are levied on the consumption of goods and services.

What are the most common direct taxes in India?

The most common direct taxes in India are income tax, corporate tax, wealth tax, and gift tax.

What are the most common indirect taxes in India?

The most common indirect taxes in India are value-added tax (VAT), sales tax, excise duty, and customs duty.

Who pays direct taxes?

Direct taxes are paid by individuals, companies, and other taxpayers who have an income or wealth.

Who pays indirect taxes?

Indirect taxes are paid by consumers when they purchase goods and services. |

What are the benefits of direct taxes?

Direct taxes charge persons with higher incomes and wealth at a higher rate than indirect taxes because they are more progressive. As a result, the income gap is decreased. Indirect taxes are easier to avoid than direct taxes.

What are the benefits of indirect taxes?

Indirect taxes are easier to administer than direct taxes. Indirect taxes can also be used to generate revenue from people who do not pay direct taxes, such as the poor and the unemployed. Indirect taxes can also be used to discourage the consumption of certain goods and services, such as alcohol and tobacco.

What are some of the challenges of tax collection in India?

Some of the challenges of tax collection in India include a large informal sector, a complex tax system, and a lack of awareness of tax laws among taxpayers.

What are some of the ways to improve tax collection in India?

Some of the ways to improve tax collection in India include simplifying the tax system, increasing awareness of tax laws among taxpayers, and using technology to improve tax administration.

What are the major tax reforms that have been implemented in India in recent years?

The major tax reforms that have been implemented in India in recent years include the introduction of the Goods and Services Tax (GST) and the Direct Taxes Code (DTC).

What are the implications of the GST and DTC for taxpayers?

The GST is expected to make it easier and cheaper to do business in India by removing multiple taxes and simplifying the tax system. The DTC is expected to make the income tax system more transparent and fair.

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