Types Of Taxes In India – What Is Tax, Definition and Benefits

You may have heard the famous quote by Benjamin Franklin: “In this world, nothing can be certain except death and taxes.” Taxes are inevitable in our lives, whether we like it or not. But what exactly are taxes, and why do we have to pay them?

Taxes are mandatory fees or financial charges levied by the government on individuals or organisations to collect revenue for public works and services. The government uses the tax money to fund various activities, such as defence, education, health, infrastructure, social welfare, etc. Taxes are essential for the nation’s development and the citizens’ welfare.

There are two main types of taxes in India: direct and indirect taxes. Let’s learn about them in detail.

Understanding Direct Taxes in India

Direct taxes are those that you pay directly to the government based on your income or wealth. You cannot pass on these taxes to someone else. For example, when you earn money from your job or business, you must pay income tax to the government. Direct taxes are essential for the country’s social and economic development. They help the government to fund public services, reduce income inequality, and control inflation.

Types of Direct Taxes in India

There are three major types of direct taxes in India. Here is the explanation for each of them.

1. Income Tax

You pay this tax on your income from various sources, such as salary, business, profession, house property, capital gains, and other sources. The amount of income tax you must pay depends on your income level and tax slab. The tax slab in India for the financial year 2023-24 is as follows:

Income	Tax Rate
Up to ₹ 2.5 lakh	Nil
₹ 2.5 lakh to ₹ 5 lakh	5%
₹ 5 lakh to ₹ 10 lakh	20%
Above ₹ 10 lakh	30%

You can also opt for a new tax regime that offers lower tax rates but fewer deductions and exemptions. The tax slab in India under the new regime are:

Income	Tax Rate
Up to ₹ 3 lakh	Nil
₹ 3 lakh to ₹ 6 lakh	5% (rebate under section 87A)
₹ 6 lakh to ₹ 9 lakh	10% (rebate under section 87A up to ₹ 7 lakhs)
₹ 9 lakh to ₹ 12 lakh	15%
₹ 12 lakh to ₹ 15 lakh	20%
Above ₹ 15 lakh	30%

The benefit of income tax in India is that it is progressive, meaning that the higher your earnings, the higher your tax rate. This ensures that the rich pay more taxes than the poor and contribute more to the public welfare.

2. Corporate Tax

This is the tax in India that companies pay on their profits from their business operations in India. The corporate tax rate in India for the financial year 2023-24 is 30% for domestic companies and 40% for foreign companies. However, there are some exceptions and concessions for certain types of companies, such as:

• New domestic manufacturing companies that start their production before March 31, 2023, can opt for a lower tax rate in India of 15%, subject to certain conditions.
• Existing domestic companies that do not claim any deductions or incentives can opt for a lower tax rate of 22%, subject to certain conditions.
• Small domestic companies with a turnover of up to Rs. 400 crore in the previous year can avail of a lower tax rate of 25%, subject to certain conditions.

The benefit of corporate tax in India is that it helps the government collect revenue from the business sector and promote economic growth and investment.

3. Capital Gains Tax

This is the tax in India you pay on the profit you make when you sell an asset, such as property, shares, bonds, mutual funds, etc. The rate of capital gains tax depends on the type and duration of the asset. There are two types of capital gains: short and long-term. 

Short-term gains arise from selling an asset you have held for less than 36 months (12 months for shares and securities). Long-term capital gains arise from selling an asset you have held for more than 36 months (12 months for shares and securities). The tax rates for the financial year 2023-24 are as follows:

• As per your tax slab, short-term capital gains from property sales are taxable at your normal income tax rate.
• Short-term gains from selling shares and securities are taxable at 15% if the transaction is subject to securities transaction tax (STT). Otherwise, they are taxable at your normal income tax rate per your tax slab.
• Long-term capital gains from property sales are taxable at 20%. This comes with the indexation benefit. Indexation is a way of adjusting the cost of the asset for inflation, which reduces your taxable capital gain.
• Long-term capital gains from the sale of shares and securities are taxable at 10% if the gain surpasses ₹ 1 lakh in a year, and the transaction is subject to STT. Otherwise, they are exempt from tax.

The benefit of capital gains tax is that it encourages long-term investment and discourages speculation in the asset market.

Understanding Indirect Taxes in India

Indirect taxes are taxes that the government levies on goods and services rather than on the income or wealth of individuals or businesses. The consumers pay indirect taxes when they buy or use goods and services, and the sellers or service providers collect and pass on the tax to the government. Indirect taxes are transferable from one taxpayer to another, unlike direct taxes, which one cannot transfer.

Types of Direct Taxes in India

The central and state governments and local bodies levy various types of indirect taxes in India. Some major types include:

1. Goods and Services Tax (GST)

GST is a comprehensive and uniform indirect tax that subsumed many previous indirect taxes, such as excise duty, service tax, value-added tax (VAT), etc. 

GST applies to the supply of goods and services at every stage of the production and distribution chain. The central and state governments collect this tax. GST has four tax rates: 5%, 12%, 18%, and 28%, revolving around the type of goods and services. Some goods and services, such as fresh food, education, healthcare, etc., are exempt from GST. GST has ousted the cascading effect of taxes, simplified the tax system, and increased the tax base.

2. Customs Duty

Customs duty is an indirect tax applicable on importing and exporting goods. The central government collects it based on the goods’ value, weight, or volume. 

Customs duty has two components: basic customs duty (BCD) and additional customs duty (ACD). 

BCD is the standard rate of duty that varies from 0% to 100%, depending on the type of goods. ACD compensates for the excise duty or GST that would apply to the domestic production of the same goods. It equals the applicable rate of excise duty or GST on the goods.

Some goods, such as life-saving drugs and fertilisers, are exempt from customs duty. Customs duty helps protect the domestic industry, regulates foreign trade, and generates revenue for the government.

3. Stamp Duty

State governments levy stamp duty on property transfers like land, buildings, and shares, collecting it based on the property’s value. Stamp duty rates differ from one state to another and depend on the type of property and the transfer mode. Stamp duty helps prevent tax evasion, ensures legal validity, and records property ownership.

4. Property Tax

Property tax is an indirect tax in India levied on property ownership, such as land, buildings, etc. Local bodies, such as municipal corporations, panchayats, etc., collect property taxes. 

This tax is based on the property’s value, location, size, and use. Property tax rates in India vary from one place to another. It depends on the type of property and the category of the owner. Property tax helps fund the local public services, such as water supply, sanitation, roads, etc.

5. Entertainment Tax

This tax applies to entertainment activities like cinema, theatre, amusement parks, sports events, etc. The state government collects this tax based on the ticket price or the entry fee for the entertainment activity. Entertainment tax rates vary from state to state and depend on the type of entertainment activity and the category of the audience. This tax helps regulate the entertainment industry, promote the local culture, and generate revenue for the government.

Indirect taxes significantly impact the economy, society, and the government. They can influence consumption patterns, production decisions, income distribution, and resource allocation in the country. Indirect taxes in India can also affect the prices of goods and services, as well as their demand, supply, and profitability. 

Conclusion

Taxes are a certainty in life, funding crucial public services like defence, education, and healthcare. In India, two main tax types, direct and indirect, play vital roles. Direct taxes, including income and corporate taxes, contribute to social and economic development. Meanwhile, indirect taxes like GST, customs duty, stamp duty, and property tax impact daily life, regulating trade, protecting industries, and funding local services. 

If you are a business owner, understanding taxation becomes much more important. Among the many tax benefits available to businesses, one is the business loan interest rate.

Business loans are available in a customised form at FlexiLoans. You can opt for a machinery loan to buy new equipment, a working capital loan to meet inventory requirements, a line of credit to use funds as per your convenience, and an MSME loan if you run a small firm.

FAQs

Q1. What is tax?

Ans: Tax is a mandatory fee or charge the government levies on an individual or an organisation to collect revenue for public works providing the best facilities and infrastructure.

Q2. What are the types of taxes in India?

Ans: There are two types of taxes in India: direct and indirect taxes. The taxpayer pays direct taxes to the government, such as income and wealth taxes. Indirect taxes, such as GST, are paid indirectly by the end-user of goods or services through the seller.

Q3. What is income tax?

Ans: The central government levies income tax directly on the income earned by an individual or entity in a financial year. The income tax rates and slabs vary based on the taxpayer’s income level, age, and residential status.

Q4. What is GST?

Ans: GST means Goods and Services Tax, an indirect tax in India levied by the central and state governments on the goods and services supply within the country. GST replaced the previous indirect taxes, such as excise duty, service tax, VAT, etc., and created a uniform tax system across the country.

Q5. What is VAT?

Ans: State governments levy Value Added Tax (VAT), an indirect tax, on the value addition of goods at each stage of production and distribution. VAT implementation was in 2005 and was later subsumed under GST in 2017.

Q6. What are the benefits of taxes?

Ans: Taxes are the government’s primary revenue source, which helps fund various public expenditure programs such as infrastructure development, social welfare, defence, education, health, etc. Taxes also help regulate the economy, reduce inequality, and promote social justice.

Q7. What is cess and surcharge?

Ans: Cess and surcharge are additional charges levied by the government over and above the normal tax rates in India for specific purposes. The central and state governments share cess, which is imposed for a specific purpose, while the central government retains a surcharge applicable for general purposes.

Q8. How to save tax in India?

Ans: Tax saving is the process of reducing a taxpayer’s tax liability by availing various deductions and exemptions provided by the government under multiple sections of the Income Tax Act 1961. Common tax-saving options include investing in provident funds, life insurance, mutual funds, etc., claiming deductions for home loan interest, education loan interest, medical expenses, etc., and opting for lower tax rates under the new tax regime.