Whatever banking or insurance examination you are preparing for, questions from different kinds of taxes are likely to be asked in the written examination or probably in the interview. After all, taxation is the fuel state and central government use to fund public expenditure. Governments derive the authority of collecting taxes/cesses from the constitution of India. Failure to pay taxes is punishable by law. Each of the tax is backed by either the Parliament or the state legislatures.
Taxes can be broadly divided into three categories: Direct, Indirect and Other Taxes
Those taxes which are paid directly to the government come in this category. These taxes have to be paid by the taxpayer and the responsibility of paying tax can’t be transferred. Let’s have a look at different direct taxes:
This tax is levied on a taxpayer’s earning in a financial year. How much income tax an individual needs to pay depends on a number of factors like tax slabs, deductions, rebates, and cesses. The tax starts from zero and goes up to 30 % of the income depending on the assessee’s income.
Capital Gains Tax
When you receive a sizable amount of money, it is taxed under capital gains. It can be of two types depending on the tenure of the investment held: Short-term capital gain and long-term capital gain. Short-term capital gains are for investments which are held for less than 36 months and for investments which are held for a period of more than 36 months, they come under long-term capital gains. While how much do you need to pay under short-term capital gains depends on a number of factors like the relevant tax slab, the tax on long-term capital gains is a flat 20%.
Securities Transaction Tax
Making money by trading on the stock market attracts tax in the name of Securities Transaction Tax. Every time you buy or sell a share, this tax automatically gets included in the transactions.
This tax is levied on the perks which an employee receives from his employer. Some examples can be car, house etc.
Tax paid by companies on their income is called corporate tax. Like income tax, there are many factors at play while calculating corporate tax such as tax slabs, surcharges, and cesses. There are 4 types of corporate taxes:
Minimum Alternative Tax
Income tax department mandates those companies who make huge profits, to pay a minimum of tax under minimum alternative tax.
Fringe Benefit Tax
This tax applies to the fringe benefits an employer provides to their employees. This may include an employer’s expenses in travel, employee welfare, accommodation etc.
Dividend Distribution Tax
This tax is levied on companies who pay dividends to their investors.
Banking Cash Transaction Tax
This tax is no longer effective. It was applicable to all banking transactions which were more than Rs. 50,000.
In contrast to direct taxes, indirect taxes are not levied on a person directly. It is rather levied on goods and services and is collected by the intermediaries. Taxes of this kind are collected by one entity in a supply chain and is paid to the government and is passed on to the consumer as the part of the purchase price of goods or services. The consumer already pays the tax by paying more for the product. Examples of indirect taxes are below:
Goods and Services Tax
This tax has been in news prior to its implementation as well as post-implementation. It is so because when introduced, it was the biggest reform in the structure of Indian indirect taxation. It intended to replace all other indirect taxes like Central Excise Duty, VAT etc. However, products like alcohol, petroleum products etc. don’t come under the purview of GST and indirect taxes continue to be levied on these products. Because it is charged when the consumption is taking place, it is called consumption-based tax. It is imposed at every stage of a goods/services (where it is being consumed) in its supply chain journey. The GST chargeable on the supply of goods/services can be redeemed against the GST chargeable on goods/services supply.
Sales tax is levied on the seller of a product who transfers it to the seller of a product in the course of sale of that product. This tax is added to the price of the product and can be levied only once in the lifetime of sales of that product. Sales tax comes under the purview of a state government.
It’s very similar to sales tax except the fact that the service tax is added to a service rather than a product. It’s applicable to companies providing services and is collected on a monthly or quarterly basis.
Value Added Tax
As the name indicates, VAT is a tax on the value addition at each stage of a commodity. All these stages should add some value to the commodity. For example, under VAT a wholesale dealer who buys from manufacturers and sells to retailers, will collect tax on his sales and will retain the tax which he paid on his raw materials purchase and will pay the balance to the government. Coming under the purview of state government, all the states have their own legislation, rates, taxable base and list of taxable goods related to VAT.
Customs Duty & Octroi
Customs duty is imposed on all those products which are imported irrespective of the fact that they come via air, sea or land. Likewise, octroi is imposed on all the goods which travel from one state to other. Customs duty comes under the purview of central government while that of octroi comes under state government.
Excise duty is imposed on all the goods which have been manufactured/produced in India. Also called CENVAT (Central Value Added Tax), government collects this tax from the manufacturer of goods which are mentioned in the first schedule and the second schedule to the Central Excise Tariff Act, 1985. Every individual who manufacture/produce/stockpile goods will make payment of the duty chargeable on these goods.
Apart from direct and indirect taxes, there are certain taxes and cesses. These taxes/cesses don’t generate much revenue as compared to the others. These taxes/cesses are levied by the government and the revenue collected through these means are used for specific purposes as per the finance minister’s discretions.
Professional tax is a form of tax levied by state governments on those individuals who are earning income or practicing a profession such as doctor, lawyer, chartered accountant etc. There are two facts to be kept in mind: firstly not all states levy professional tax and secondly the rate differs in different states.
This tax is levied by the local municipality bodies of every city to all the residential/commercial properties. The purpose of these taxes is to maintain the basic civic services of a city.
This tax is levied on those business entities who deal with feature films, television series, exhibitions, amusement/recreational parlors.
Stamp Duty, Registration Fees, Transfer Tax
These charges are levied on purchasing/transferring a property.
To aid government-sponsored educational programs, education cess is levied to all taxpayers.
Any individual receiving gift worth more than Rs. 50,000 in a year would be taxed under this tax.
This tax is levied on the net worth of an individual’s property. Net worth is equal to all the assets an individual holds less the cost (loan, if any) of acquiring them. This tax has been discontinued since 2015.
Toll Tax & Road Tax
Users of infrastructure developed by government are levied these taxes.
Swachh Bharat Cess
Swachh Bharat cess is applicable on all taxable services and is collected by the consolidated fund of India. It is used to fund/promote campaigns related to Swachh Bharat initiatives.
Krishi Kalyan Cess
This cess has been introduced in order to improve agricultural facilities in the country and for the welfare of farmers.
This cess is applicable on all the four-wheeler owners. The money collected is used to fund infrastructure projects around the country.
This tax is levied on those items which enter a state via e-commerce orders.
We hope this article has provided you a bigger picture of the taxation system in India. Let us know in the comment below if you feel any other aspect should be included.