Tax is an economy building fee paid by the citizens to the government of a country. It is mainly of two types: Direct tax and Indirect tax. This article will discuss the working of these categories in India.
The topics covered in this article are:
- Direct Tax in India
- Indirect Tax in India
- GST as an Indirect Tax
1. Direct Tax in India
The direct tax is a tax charged on income, profit, and revenue of an entity, and is paid directly to the government. Here, the liability to pay tax resides completely on the same taxpayer and cannot be passed on or transferred to another entity.
There are various direct taxes imposed in India, most importantly:
- Income tax: Income tax is charged by the government on individuals based on their income groups. Income tax return has to be filed annually every year, and after that the taxpayer will have to pay the tax or become eligible to get a tax refund.
- Wealth Tax: Wealth tax is charged on the value of property owned by an individual.
- Estate/Inheritance Tax: Estate or Inheritance tax is charged on estate or total value of property and money left behind after the death of an individual.
Estate tax and Wealth tax are not imposed in India anymore.
The main disadvantage of direct tax is that the process of filing involves extremely time-consuming procedures. The advantages of direct taxes, however, are towards propelling the socio-economic growth of a country. Direct taxes are also a means of:
- Reducing Inflation: At the time of monetary inflation, the tax rates are increased by the government so as to bring down the demand of goods and services which then reduces inflation.
- Maintaining Socio-economic Balance: Income inequalities are balanced out by the government with the help of well-defined exemptions and slab-rates, which are based on the overall economic situations and different income groups existing in the society.
2. Indirect Tax in India
Indirect Tax is a tax which is levied on goods and services, and paid to the government indirectly. The liability to pay indirect tax can be transferred or passed on from one entity to another.
In the pre-GST era, there were numerous indirect taxes charged on goods and services, which sometimes meant that taxpayers had to pay more than the actual price. Some of these indirect taxes imposed on taxpayers were:
- Value Added Tax (VAT): VAT was collected by suppliers from customers for every value of goods and services added to every stage of production and distribution.
- Service Tax: Service tax was imposed on the aggregate/gross amount which the service provider charged on the service recipient.
- Central Excise Duty: Central excise duty was to be paid by manufacturers, who then transferred the tax liability to the wholesalers and retailers.
- Customs duty: Customs duty was levied on imported goods as import duty which was paid by retailers and customers, ultimately.
- Sales Tax: The retailer paid this tax and then transferred the tax liability to the customers by charging goods and services with sales tax.
3. GST as an Indirect Tax
Goods and Services Tax (GST) was implemented in India as an indirect tax in 2017. It came with the aim to bring uniformity in taxation across the country. Several irrelevant taxes were dissolved and one uniform tax was introduced in the form of GST. This reduced the confusion among customers because of different tax rates being imposed in different states for different goods, previously. Therefore, consumer awareness has increased dramatically as compared to the pre-GST era.
GST has also replaced most of the state and central taxes in India. It has been introduced as consumption based tax as opposed to the production based tax in the pre-GST era. The system became more transparent and simplified after all processes were made electronic. Everything is now required to be completed through the GST Portal which has made it much easier to track and detect any corrupt activities.
Other benefits may include:
- Eliminated Cascading Effect of Tax: Cascading effect of tax is tax paid on previously calculated tax which was borne by the end-consumer. This resulted in the customer paying a price much more than the actual price of the product or service. GST has eliminated this effect by exempting the customers form paying any other tax than the one they are liable to pay.
- Input Tax Credit (ITC): ITC is the credit which can be availed on the tax paid on inputs of a product. The final tax to be paid on a product can thus be reduced by claiming Input Tax Credit (ITC) and just paying the balance amount.
- Composition Scheme: Composition scheme under GST has been introduced for small businesses with an annual turnover below Rs. 75 lakhs. Such businesses are not required to complete the time-consuming procedures for filing GST, but instead just pay tax at a fixed rate according to their turnover.
Thus, both direct tax and indirect tax are being structured and improved in such a way so as to reduce the tax burden for taxpayers and also reduce corruption in the country.