What Is Tax? - A Complete Guide on Taxation in India

The taxes you contribute enhance our defence system and implement welfare programmes to benefit all Indian citizens.

So, what is the meaning of the word tax? Taxoriginates from the Latin term 'taxo,' which means 'I estimate.' In ancient Rome, tax collectors would estimate the earnings of individuals and collect taxes accordingly.

The term ‘tax’ has come to encompass any financial charge the government imposes or has imposed throughout history. It has developed throughout the long term and fundamentally impacts the worldwide economy.

What is income tax?

Tax refers to the charge the government imposes on any individual or organisation for carrying out an activity in an area under its jurisdiction, or using a facility developed by it.

The government must collect taxes to fund running of the administration and undertaking public projects. Tax is calculated by considering the income of the taxpayer and the value of property, goods or services made available commercially.

Development of educational and medical infrastructure, putting in place and maintaining law and order, and supporting social programmes are only some instances of the sorts of public tasks that can profit from tax revenue.

The collection of taxes at the federal, state, and local levels of government is known as taxation.

Who pays income tax in India?

The following entities are liable to pay income tax in India -

• Individuals
• Hindu Undivided Families (HUFs)
• Companies
• Partnership Firms
• Associations of Persons (AOPs)/Body of Individuals (BOIs)
• Any other entity or taxpayer as per the Income Tax Act 1961.

Features of the tax system in India

The Indian tax system is a complex framework comprising various direct and indirect taxes levied by the central and state governments. Here are some key features of the taxes explained below -

Progressive taxation:

The Indian tax system follows the principle of progressive taxation, which mandates that people with higher incomes pay higher tax rates. This implies that the tax obligation increases in direct proportion to income.

Dual taxation authority:

India's taxation system follows a federal model in which the central government (Union) and state governments have the authority to pay taxes. This tax is nationwide and is controlled by the central government.

Multiple taxes:

The Indian expense framework incorporates immediate and roundabout charges (like the pay and corporate expense) and circuitous expenses (for example, the labour and products charge, customs obligation, and extract obligation). Citizens are expected to keep a wide range of regulations and rules because of the charge framework.

Tax exemptions and deductions:

Numerous exemptions and deductions in the Indian tax system let people lower the taxable income and tax bill. These clauses include deductions for investments made under Section 80C, exemptions for specific allowances, and deductions for specific expenses like health insurance.

Tax filings and compliance:

Taxpayers in India are obliged to submit tax returns on a regular basis and follow the tax compliance requirements, including keeping proper financial records, registering for taxes, and making tax payments by the due dates. Penalties and interest costs may result from non-compliance.

Taxpayer identification:

The Indian tax system requires that taxpayers use a Permanent Account Number (PAN). For different tax-related transactions, like tax payments, the Income Tax Department issues PANs to people, businesses, and organisations.

Taxation of international transactions:

India's tax system also consists of laws for taxing cross-border transactions, such as transfer pricing rules. By requiring that business dealings between related parties be done at arm's length costs, these regulations hope to stop tax evasion.

Tax incentives:

To support particular industries or activities, the Indian tax system provides a number of incentives and exemptions. These include special economic zones, units focused on exports, and incentives for startups, all of which aim to boost investment and the economy.

Evolving tax reforms:

To adapt to shifting economic and social factors, the Indian tax structure is continually revised and amended. The Goods and Services Tax (GST), which attempts to streamline the indirect tax framework by replacing many indirect taxes with a single unified tax, was one key reform adopted in 2017.

Advantages of paying taxes in India

Here are the advantages of paying taxes in India:

Access to Public Infrastructure:

Taxes fund the development and maintenance of public infrastructure like roads, bridges, schools, hospitals, and transportation systems, ensuring better connectivity and enhancing education and healthcare facilities.

Social Welfare Programs:

Tax contributions enable social welfare programs that uplift disadvantaged sections of society, providing financial aid, healthcare benefits, educational opportunities and fostering inclusivity and equity.

Economic Growth and Stability:

Taxes play a vital role in funding government initiatives that stimulate economic growth, create a stable economy, generate job opportunities, and foster a favourable business environment.

Legal Compliance and Civic Responsibility:

Paying taxes showcases your commitment to legal compliance and fulfilling civic responsibilities, maintaining the integrity of the tax system, promoting transparency, and ensuring fair and efficient resource allocation.

Enjoying Security and Rule of Law:

Your tax contributions strengthen security measures, maintain law and order, and support defence forces, creating a safer environment for you, your family, and the community, fostering peace, stability, and a sense of security.

Different types of taxes in India - Infographics

A nation's economy is largely shaped by taxes. Different kinds of taxes in India help the country develop and function. Let's look at the two primary types of taxes: direct and indirect -

Direct Taxes:

• Income Tax: This tax is imposed on the income earned by individuals and businesses. It is calculated based on the respective income slabs and rates.
• Corporate Tax: Companies are subject to corporate tax on the profits it generates. The business structure and turnover of the company influence the tax rates.
• Capital Gains Tax: Capital gains tax is due on the profit from the sale of capital assets, such as stocks or property, by individuals or businesses.

Indirect Taxes:

• Service Tax: Service providers charge this tax on specific services rendered to customers. It has now been replaced by the Goods and Services Tax (GST).
• Goods and Services Tax (GST): GST is a thorough duty that subsumes different roundabout charges. It is assessed at each stage of production and distribution on the supply of goods and services.
• Stamp Duty: Stamp duty is payable on the execution of certain documents such as property agreements, loan agreements, and share transfers.

What is the purpose of paying taxes in India?

It is crucial for you to comprehend the function of taxes and how it contributes to the operation of the government and the general advancement of the nation as a responsible citizen. Let's examine some of the purposes for taxes in India:

Revenue generation:

The main purpose of taxes is to finance public policies. The government collects money from the citizens and the institutions under its authority from the taxes used to meet the various needs of the people.

Public services and programs:

Taxes finance important public and health programs that positively impact people. These services encompass education, infrastructure development, law enforcement, social welfare initiatives, construction projects, and healthcare.

Reducing income inequality and poverty:

India's tax laws also aim to reduce poverty and income inequality. The public authority needs to make a fairer society where everybody benefits from monetary development and weak gatherings of the populace are upheld through moderate expense strategies.

Economic stabilisation:

Charges are fundamental for keeping the economy stable. The public authority might utilize charge approaches to control utilization, venture, and reserve funds — factors that affect monetary development and keep up with monetary dependability.

Funding public debt:

The public authority might give securities or different protections supported by charges when it needs to fund its spending plan shortage or acquire cash for different activities or drives. Charge income is normally used to pay the interest and head on these bonds, guaranteeing that the public authority can support its obligation.

What are the recent reforms in taxes?

These are the major tax reforms introduced in recent years -

1. The finance minister proposed important tax reforms for the new tax regime to ease the tax burden of the middle class. Here is the current income slab -

Income Slab	Tax Regime (Until 31st March 2023)	New Tax Regime (From 1st April 2023)
₹0 - ₹2,50,000	-	-
₹2,50,000 - ₹3,00,000	5%	-
₹3,00,000 - ₹5,00,000	5%	5%
₹5,00,000 - ₹6,00,000	10%	5%
₹6,00,000 - ₹7,50,000	10%	10%
₹7,50,000 - ₹9,00,000	15%	10%
₹9,00,000 - ₹10,00,000	15%	15%
₹10,00,000 - ₹12,00,000	20%	15%
₹12,00,000 - ₹12,50,000	20%	20%
₹12,50,000 - ₹15,00,000	25%	20%
>₹15,00,000	30%	30%

2. Implementing the Goods and Services Tax (GST) resulted in merging state and indirect taxes and eliminating the input and central sales tax (CST). This change had a positive impact on traders.

3. The National Income (Amendment) Rules of 2019 introduced a preferential tax rate of 22% for all existing domestic companies starting from the fiscal year 2019-20, provided they are not interested in special exemptions or incentives.

4. As per the Finance Act of 2020, the Dividend Distribution Tax (DDT) has been removed, which means companies are no longer required to pay it. This has relieved them of the obligation to pay DDT.

What are tax-saving investments?

As an individual citizen, you should know about charge-saving ventures. Under the Income Tax Act 1961, these financial instruments or schemes allow you to save tax by reducing your taxable income.

Employees Provident Fund (EPF), Public Provident Fund (PPF), National Certificate of Savings (NSC), Tax-Effective Fixed Deposit, Equity Savings Scheme (ELSS) and Life Insurance Premiums are the highest taxable investments in India. By saving duties, these speculations give chances for long-haul abundance creation and monetary preparation.

Exemptions on tax deduction in India

Here are the key exemptions on tax deduction in India and their significance -

Deductions under Section 80C -

Individuals can claim deductions for specific investments and expenses under Section 80C of the Income Tax Act, with a maximum limit of ₹ 1.5 lakh per financial year. These deductions help in reducing taxable income.

This includes options such as EPF, PPF, Life Insurance Premiums, ELSS, NSC, five-year fixed deposits with banks, and tuition fees paid for children's education. These exemptions encourage saving and investing for your future while reducing your tax liability. It's vital to painstakingly consider these choices and pursue informed monetary choices to enhance your duty reserve funds inside the lawful system.

Deductions for health insurance premiums -

Section 80D of the Annual Assessment Act gives derivations on health care coverage expenses paid by people for themselves, the mates, youngsters, and guardians. This exemption encourages individuals to avail health insurance coverage for themselves and the families, promoting better financial planning and protection against medical emergencies. The maximum deduction limit depends on the insured person's age and the policy type.

Deductions for home loan interest -

Under Section 24(b) of the Income Tax Act, you can deduct the interest you pay on your home loan. For landlords, the limit is ₹ 2 lakh funds per year to facilitate home ownership and encourage real estate investment. There is no limit for a let-out or deemed to be let-out property, providing flexibility for tax savings based on your property usage.

Deductions for donations -

As a taxpayer in India, you can claim a deduction for donations made to eligible organisations or foundations under Section 80G of the Income Tax Act. This article encourages financial aid and inspires you to support it by providing tax benefits. The tax deduction amount depends on the type of donation and the recipient organisation, allowing you to support charitable endeavours while reducing your taxable income.

Deductions for education loans -

Under Section 80E of the Income Tax Act, individuals can claim a deduction for student loans. This deduction has no limit and can be claimed for up to eight years or until the interest on the loan is completely paid off, whichever comes first. This tax exemption aims to ease the financial burden of taxpayers who have taken out education loans, and to encourage education and career growth.

Deductions for disabilities -

Section 80U of the Income Tax Act allows deductions for individuals with disabilities. This exemption aims to financially support these individuals and promote the welfare. This waiver is intended to assist financially and support the health of these individuals. The deduction depends on the degree of disability and ranges from ₹ 75,000 to ₹ 1.25 lakh.

Deductions for start-ups -

The Government of India has introduced various incentives and exemptions to encourage entrepreneurship. Start-ups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) can claim deductions under Section 80-IAC of the Income Tax Act. This exemption encourages innovation and entrepreneurship, fostering economic growth and development.

Deductions for rural development -

Section 80CCF of the Income Tax Act provides deductions on investments made in notified long-term infrastructure bonds for financing projects. This exemption is designed to facilitate infrastructure investments, especially in rural areas.

Conclusion

Managing and improving people's general health is a crucial role taxation fulfils by securing goods and public services. The importance of taxation varies among people, but it undeniably serves as a significant method to collect money and redistribute wealth for the country's advantage.

Taxpayers should understand existing exemptions, follow appropriate procedures and information requirements, and seek practical advice to maximise savings and comply with tax laws.

FAQs – Frequently Asked Questions