What are taxes? Are you finding it hard to get your head around these concepts? It could be hard when there is just so much you have to grasp so quickly. Here we are, ready to spill the tea. Learn this in simple ways. Are you ready for this thrilling ride? Let’s start from scratch.
What are Taxes?
Taxes are contributions imposed on people or companies by a government agency, whether local, regional, or national. Tax revenues fund government operations like roads, schools, and programs like Social Security and Medicare.
In economics, taxes are imposed on whoever bears the cost of the tax, whether it is the entity being taxed, such as a business, or the end users of the firm’s products. Accounting considers a variety of taxes, including federal and state income taxes, payroll taxes, and sales taxes.
Let’s head to the basic concepts of income tax now.
India has a complex tax system that addresses several facets of taxes. In our country, by that we mean ‘India’,, there are two varied types of taxes: direct taxes and indirect taxes. Here are some fundamental principles about tax regimes in India:
Direct Taxes | Indirect Taxes |
Income Tax: This is a direct tax levied on individuals, Hindu Undivided Families (HUFs), corporations, businesses, and other entities. The Income Tax Act of 1961 controls income taxes. It is progressive in nature, which means that higher-income people pay a greater proportion of their income in taxes.Capital Gains Tax: This tax is charged on the profit that is realized from the sale of capital assets like real estate, stocks, and bonds.Corporate Tax: Companies in India pay corporation tax on their earnings. The pricing may differ between domestic and overseas firms. Corporate tax rates are specified in the Finance Act.Wealth Tax: In 2015, the wealth tax, which was charged on the net wealth of individuals and HUFs, was eliminated. | GST: GST full form Goods and Services Tax is a comprehensive indirect tax that replaces a variety of taxes, including central excise duty, service tax, value-added tax (VAT), and more. It is imposed on the provision of products and services and collected at various stages of the supply chain.Excise Duty: It is a tax imposed on the production or manufacturing of commodities. However, with the implementation of GST, most excise charges have been absorbed into the new tax framework.Customs Duty: Customs tax is levied on the import and export of commodities. It is overseen by the Central Board of Indirect Taxes and Customs (CBIC). |
Who Needs to Pay Direct Taxes?
Find out if you belong in one of these categories:
- Individuals: Individuals pay income taxes on their earnings, which include salary, company profits, capital gains, rental income, and other forms of income. Income tax slab rates are progressive, which means that higher-income people pay greater taxes.
- HUFs: HUFs, a type of joint family recognized by Hindu law, are classified as independent businesses for tax reasons. HUFs are required to pay income tax on their earnings, and the tax rates for HUFs are the same as those for individuals.
- Companies: Corporate income tax applies to all enterprises operating in India, both domestic and international. Corporate tax rates might vary depending on the company’s turnover and whether it is domestic or international.
- NRIs: Non-resident Indians (NRIs) are required to pay income tax in India on income earned or received within the country. The tax burden of NRIs is determined by their residence status.
- Other Entities: Aside from people, HUFs, and firms, other entities like trusts, associations of persons (AOP), and bodies of individuals (BOI) are also required to pay income tax.
Who Pays Indirect Taxes?
These are the taxes that are overlooked, even while we are still paying them:
- Consumers: The final burden of indirect taxes lies on the consumers. When consumers purchase products or services, taxes are incorporated into the price they pay. Businesses collect indirect taxes during the manufacturing and distribution processes, which are then passed on to customers as part of the product or service cost.
- Manufacturers: Manufacturers and service providers are responsible for collecting and remitting indirect taxes, such as products and Services Tax (GST), on products and services sold. They must keep accurate records and file frequent tax returns to guarantee compliance with indirect tax requirements.
- Businesses: Businesses play a critical role in collecting and remitting indirect taxes. They collect taxes on behalf of the government and are responsible for remitting them to the appropriate tax authorities. Businesses may incorporate indirect taxes in their prices for products and services, which are subsequently passed on to customers.
- Traders: Traders and retailers serve as middlemen in the supply chain. They collect and remit indirect taxes on the sale of products to consumers. They may also claim input tax credits for taxes paid while purchasing goods or services, which reduces their overall tax burden.
- Importers and Exporters: Importers are liable to customs duties when they bring items into the nation. Customs duties are indirect taxes paid on imported products. Exporters may also face indirect taxes relating to the export process, such as export tariffs or taxes on certain services.
Is There Anything Tax-Free in India?
Certain elements in India are tax-exempt, either partially or completely. These exemptions are frequently granted by the government to encourage certain activities or to offer assistance to certain segments of society. Let’s find out if you belong to these lucky few.
Some typical items that are tax-free or benefit from tax breaks in India include:
- Agricultural Income: Agricultural revenue is normally excluded from income tax in India. Agriculture-related income, such as that from dairy farming and poultry farming, is taxed.
- Specific Savings and Investments: Certain savings and investment instruments are tax deductible under certain provisions of the Income Tax Act. Examples include – PPF, EPF, NPS, and more.
- Gratuity: Employee gratuities are tax-free if received in accordance with the criteria and restrictions set out.
- Tax-Free Bonds: Interest income from some government-issued bonds may be tax-exempt.
- Life Insurance Proceeds: Life insurance policy earnings, including death payments and maturity proceeds, are normally excluded from income taxes.
- Income of Charitable Institutions: Income earned by registered charity institutions engaged in particular activities is not subject to income tax.
- Long-Term Capital Gains on Equities: Long-term capital gains from the sale of listed equities and equity-oriented mutual funds may be tax-free under certain conditions, according to my most recent knowledge update in January 2022.
- Housing Rent Allowance: Individuals who get HRA as part of their compensation are partially free from income taxes under specific situations.
Conclusion
This is just one slice of a big fat three-storey cake (an analogy). There is so much to this concept, and it is a never-ending learning process because taxes are constantly updated every financial year. So, apart from this, you will need to know rates, deductions, exemptions, and so much more. By this, we mean to say you will always have to keep an eye on the ever changing tax rules of India.