Types of Taxes
Taxes have been levied on the earnings of the citizens of each country for a very long time. These taxes collected by the government act as a fund to be invested in various welfare programs and improve the country’s development and economic status. For an individual, it is necessary to pay taxes, both for using the services provided by the government and to contribute towards the growth of his nation.
The constitution of India has allowed both the state and the central government to be responsible for the collection of taxes in the county, and they are categorized into two major heads to ease the process, Indirect tax, and Direct tax.
What are taxes?
A tax is an obligatory fee charged on the earnings of all the citizens of India and is collected by the government to operate various public-oriented tasks around the country. Paying a tax to the collecting authority is mandatory for all, regardless of the source of income. If an individual fails to do so, he will have to face legal obligations under predefined laws.
What are the types of taxes?
To ease the process of tax collection the taxes are divided into two subcategories on the basis of how they are paid to the authorities. These are the two types of taxes:
- Direct taxes
- Direct tax is named so because of two reasons, one that it is calculated directly on the income of the citizen and the other that it is paid directly to the concerned authority.
- Direct taxes in India are managed by the Central Board of Direct taxes and cannot be transferred from one individual under any circumstances.
- Some of the examples of direct taxes are Income tax, wealth tax, gift tax, estate duty, expenditure tax, and fringe benefits tax.
- Indirect taxes
- This tax is a consumption-based tax that is imposed when goods or services are sold and bought in India.
- Indirect tax is named so because of its method of collection, these taxes are first collected by the seller of the goods and then paid to the government in returns.
- Some of the examples of indirect taxes are goods and services tax, sales tax, Value added tax (VAT), property tax, entertainment tax, etc.
What are the differences between direct and indirect taxes?
Let us take a look at the differences between the two types of taxes in India:
|Key features||Direct Tax||Indirect Tax|
|Imposition||The direct taxes are imposed on the income of an individual||The indirect taxes are collected on the sale and purchase of any goods or services across the country|
|Concerned authority||Central Board of Direct Taxes (CBDT)||The central and the state governments of India|
|Method of payment||The taxpayer directly pays the tax to the government||The consumer pays tax to the seller of the goods who in turn pays it to the government, thus it reaches the authorities in an indirect way|
|Time of payment||Direct taxes are only paid after the taxpayer receives his income||The consumer pays the taxes even before availing the goods|
|Examples||Income tax, wealth tax, gift tax, etc||Goods and services tax (GST), Value-added tax (VAT), entertainment tax, etc.|
|Tax shifting||The direct taxes cannot be shifted to any other legal entity under any circumstances||A load of indirect taxes can be shifted from one individual to another, like the seller to the buyer.|
Benefits of paying taxes
Paying your taxes on time will not only make you a good citizen but will also provide several benefits as rewards, here are some of them:
1. Quick and easy loan approvals: Timely payment of your income tax returns can help your personal loans to be approved in a faster and hassle-free manner. Many of the banks ask for a copy of your income-tax returns file for the previous years so as to check your honesty and ability to pay the amount according to your income.
Looking at the receipts of your income tax returns from the previous years, the banks might even give you a higher amount of loan.
2. Fastens the process of Visa: The authorities of the UK, USA, Canada, and Europe demand copies of your income tax returns filed before assigning their visas. This is done to ensure that you are not leaving the country in order to avoid paying the taxes imposed on you. It is advised by the Indian tax system that you should always carry your ITR files when visiting foreign countries as these documents can be of major help if you need to consult the embassy or other authorities.
3. Acts as an income proof: The Income-tax returns file receipts act as a statement of income proof for the self-employed people of the country who are either business holders or partners, freelancers, or consultants. The ITR file receipts come into use during all kinds of financial transactions and are a mode to depict the annual earnings of a business.
4. To claim refunds: If there are any due payments to be made to you from the income tax department, the only way to avail of that is to file your income tax returns on a timely basis.
5. Helps in taking bigger insurance coverage: Many insurance companies these days demand ITR file receipts if you are interested in buying a term insurance policy worth INR 50 lakh or more. These companies check for your annual income and calculate other factors by analyzing your ITR file receipts before giving you the life cover.
As directed by the laws placed under the Indian Constitution, it is mandatory for all Indian citizens to pay both types of taxes in a timely manner which if they fail to do so can be penalized by the Income Tax department of India. The government of India is liable to impose taxes on its citizens so as to run the nation efficiently and make it better in all fields and as a good and responsible citizen, you should file your ITR in the right manner to contribute to your country’s development.
In addition, there are a lot of tax-saving instruments that are offered by the Indian Tax System, by investing in which the taxpayers can obtain dual benefits for self and family. Some of them include health insurance plans, life insurance plans, fixed deposits, public provident funds, etc.
Investing in any of these plans and filing your income tax returns on time will depict the fulfillment of your responsibilities both towards your family and nation.