India has a well-structured tax regime. Taxes are compulsory fees/ financial charges levied on individuals and/or companies. They help in raising revenues. Taxes are the biggest source of income for a government. The money acquired from taxation is used for purposes such as the development of a nation.
Taxes are not only levied in India but in all countries around the world. In India, the Central and the State Governments levy taxes. There are other local authorities such as the local governments or the municipality who levy minor taxes.
Types of Taxes in India
In India, there are two major classifications of taxes – Direct Tax and Indirect Tax. The division is based on the process in which the taxes are paid to the government. Let us look at how these two taxes differ.
1. Direct Tax
The Direct Tax can be very simply defined by what its name implies i.e. the tax is paid by the taxpayers directly to the government. Direct Taxes are levied on corporate or individual entities. The taxpayer cannot transfer the tax to anybody else and has to fulfill its payment by themselves only.
Direct Taxes vary from one individual/organization to another. A person who has more income has to pay a higher tax as compared to someone with a lower income. Every entity whose income is more than the maximum exempt limit has to pay Direct Tax, as stated by the Income Tax (IT) Act, 1961. Income Tax, Wealth Tax are some basic examples of Direct Taxes.
2. Indirect Tax
The collection of Indirect Taxes is different from Direct Taxes. Indirect Taxes are consumption-based taxes. They are levied on goods and/or services at the time of buying and selling. The sellers of the goods and services pay the tax to the government, which is then passed on to the consumer at the end of the supply chain.
Indirect Tax is “indirect” because the buyer (end-user in the supply chain) does not pay the tax to the government directly. Some examples of Indirect Taxes are:
Value Added Tax (VAT)- The state government levies the vat on items sold within a state.
Customs Duty- Customs Duty is levied by the central government on imported goods.
Excise Duty- Excise Duty is levied on all goods manufactured domestically.
Service Tax- All domestic service providers are liable to pay Service Tax.
Octroi Tax- Goods that are transported from one state to another state have to pay Octroi Tax.
Indian GST Explained
Goods and Services Tax (GST) was introduced in India in the year 2017. It is a dual tax structure and the largest tax reform in India since Independence. The primary purpose of the implementation of GST was to eliminate the cascading effect of taxes. The cascading effect led to inflationary prices of goods but GST has helped in eliminating that.
GST is a unified Indirect Tax and it has replaced seventeen Indirect Taxes in India. It is a Federal Sales Tax that is levied on almost all goods and services. Some countries refer to GST as Value Added Tax (VAT). The GST is added to the price of the product. A customer who buys the same product pays the tax along with the cost of the product. Therefore, the final customers pay the GST and it is the biggest source of revenue for the government.
Types of GST in India
GST can be categorized into three types. They are:
CGST stands for Central Goods and Services Tax. CGST subsumes various central
taxes such as central sales tax, central excise duty, additional excise duty,
service tax. This tax is levied on the supply of goods and/or services within
the boundaries of a state. CGST is levied by the Central Government.
2. SGST- SGST stands for States Goods and Services Tax. This tax is levied by the State Government on the supply of both goods and/or services. The CGST Act is applied to the entire country of India except for the state of Jammu and Kashmir.
3. IGST- IGST stands for Integrated Goods and Services Tax. Unlike CGST and SGST, IGST is levied on the supply of inter-state goods and/or services. It is also applied to imported goods and services. According to IGST, any good when imported into the territory of India is considered to be supplied. Therefore, imported goods and liable to taxation.
Features of GST
1.GST had replaced several Indirect Taxes and made the entire tax framework better and easier for taxpayers.
2. GST has four tax rates- 5%, 12%, 18% and 28%.
3. There is no “tax-on-ta” effect anymore which, as a result, had reduced the overall prices of goods and services.
4. GST had facilitated India into becoming more competitive in terms of trade. India is now a global and national market.
5. As there are only three GST rates, most of the products come under the lower tax band.
6. There is increased efficiency in tax handling and reduce in leakages which has immensely benefited the overall tax system as well as the customers in India.
7. It is no longer possible to avoid payment of taxes as there is a robust IT cell under GST to keep track of everything.
8. GST has boosted revenue for transactions across sectors and has also reduced the overall cost of tax collection.
9. Substituting all the seventeen Indirect Taxes that existed in the previous tax structure, GST is now much easier to examine.
10. GST makes sure that all tax rates are uniform and a product is priced the same amount all across the nation.
GST has been a game-changing step towards the tax system of India. It has generated a national market and reduced the effect of multiple taxes on the supply of goods and services at every stage. The previous Indirect Tax system was much more complicated to inspect and manage. The Goods and Services Tax (GST) being a single unified tax, is much easier to oversee.