What is Tax?
Taxes are mandatory payments made by people or businesses that fall within a tax bracket to the Indian Government. Taxes are imposed at every level in India, from municipal to national, and are one of the main ways the government makes money.
The government imposes taxes on citizens to raise funds for economic development initiatives, strengthen the national economy, and increase citizens’ living standards. The Indian Constitution grants the State and Central governments the exclusive right to raise taxes, which gives our government the power to do so. All domestic taxes must be supported by an authorizing law approved by the State Legislature or the Parliament.
Types of Taxes
Taxes fall into two primary categories, each of which is subsequently broken down into smaller categories. Direct tax and indirect tax are two main types of taxes. In addition, there are many different sub-categories of small cess taxes. Various acts control these taxes within the Income Tax Act.
The tax that an individual or business pays directly to the government is known as a direct tax. The Central Board of Direct Taxes overseas direct taxes (CBDT). Direct taxes are non-transferable to any other person or legal entity.
Sub-categories of Direct Taxes
Income Tax: The tax on annual income or profits paid directly to the government is known as income tax. Anyone who receives payment of any type is required to pay income tax. The annual tax exemption threshold for people under 60 is INR 2.5 lakh. The maximum tax-exempt amount for people aged 60 to 80 is INR 3 lakh. The maximum amount of tax exemption for people over 80 is INR 5 lakh.
For different income levels, there are various tax slabs. Legal entities, in addition to persons, are required to pay taxes. All artificial judicial persons fall in this category, along with the Hindu Undivided Family (HUF), the Body of Individuals (BOI), the Association of Persons (AOP), local firms, companies, and local governments.
Capital Gains: When an asset is sold, or money is earned from an investment, capital gains tax is levied on those earnings. It could come from an investment’s long- or short-term capital gains. This encompasses any trades that are measured against their value.
Securities Transaction Tax: Trading in securities and the stock market is subject to the Securities Transaction Tax (STT).
Prerequisite Tax: These taxes are imposed on an organization’s various perks and advantages to its employees. The rewards and bonuses must have a defined purpose, whether it is official or personal.
Corporate Tax: Corporate tax is the income tax paid by a firm. It is based on the various tax brackets to which the revenue belongs. The following are the corporate tax sub-categories:
- Dividend Distribution Tax (DDT): This tax is imposed on the dividend payments made by companies to their investors. It applies to the investor’s gross or net return from the investment.
- Fringe Benefit Tax (FBT): This is the tax on the fringe benefits to an employee from their employer. This covers lodging, transportation, leave travel allowance, employee’s retirement fund contributions, entertainment, employee welfare, Employee Stock Ownership Plan (ESOP), etc.
- Minimum Alternative Tax (MAT): Companies pay the IT Department using MAT, which is governed by Section 115JA of the IT Act. Companies involved in infrastructure and power sectors are exempt from MAT.
Indirect tax refers to taxes imposed on goods and services. The person who sells the service or item is responsible for collecting indirect taxes. The final price you pay for goods and services includes this tax. The prices of goods and services go up as a result. Currently, the government imposes just one indirect tax; the Goods and Services Tax.
GST: In India, GST is a consumption tax that is imposed on the supply of goods and services. The GST is applied at every stage of producing goods or value-added services. The parties involved in the production process are supposed to receive a refund ( not the final consumer).
Other taxes and fees, such as Value Added Tax (VAT), octroi, customs duty, Central Value Added Tax (CENVAT), and excise and customs taxes, were eliminated as a result of the introduction of GST. Electricity, alcoholic beverages, and petroleum products are not subject to the GST. Instead, individual state governments impose taxes on them under the previous tax regime.
Other taxes are small cess taxes and generate only minor revenue. The following are the numerous other tax sub-categories:
Property Tax: Real estate tax and municipal tax are other names for property tax. Property owners, whether residential or commercial, must pay property taxes. Some of the essential civil services are maintained with its help. The municipal bodies in each city impose the property tax.
Stamp Duty, Transfer Tax, Registration Fees: When a property is purchased, registration fees, stamp duty, and transfer tax are collected in addition to or as a supplement to the property tax.
Entertainment Tax: The entertainment tax is levied on movies, television shows, and exhibitions. The tax is applied to gross collections from the earnings. Amusement tax is another name for entertainment tax.
Professional Tax: Individuals with a salaried income or those who practice a profession, such as legal professionals, chartered accountants, and physicians, attract this employment tax. State-by-state variations exist for this tax. Some states do not impose a professional tax.
Education Cess: The government of India imposes an education cess to pay for its ongoing educational initiatives.
Road Tax and Toll Tax: The revenue earned from this tax is used to maintain the roads and toll infrastructure.
Entry Tax: This tax, applicable in Delhi, Assam, Gujarat, Madhya Pradesh, etc., is imposed on goods or products that enter a state, specifically through e-commerce firms.
Benefits of Taxes
The goal of taxes is to give the government access to money for inflation-free spending. The government uses taxes for several things, including the following:
- Funding of public infrastructure
- Defense expenditure
- Development and welfare projects
- Public insurance
- Scientific research
- Operation of the government
- Salaries of state and government employees
- Unemployment benefits
- Pension schemes
- Public transportation
- Public education
- Public health
- Public utilities such as energy, water, and waste management systems
- Law enforcement
Taxes are applied to a variety of sources of income, including salaries, business profits, rental income, etc. In addition, wealth taxes, sales taxes, property taxes, payroll taxes, value-added taxes, and service taxes are also in place.
Advantages of Paying Taxes
Anyone who receives a taxable salary (one that exceeds the basic exemption limit) must file income tax returns, which is advantageous. This is true even if there’s no tax due after deductions. However, there are benefits to filing taxes, even if your income is below the basic exemption threshold. Here are a few advantages of timely tax payment:
Loan approvals: Major banks may ask for a copy of your income tax returns when you apply for a loan, particularly for a home loan or a car loan. This ITR can be from the last two to three years.
Self-employed individuals: Freelancers, entrepreneurs, consultants, and partners in firms are not eligible for Form-16. ITR receipts can be provided as proof of income if their yearly income exceeds the basic exemption level. In addition, it serves as evidence of tax payments. This will be useful during any commercial or financial transaction.
Visa applications: When you apply for a visa, many foreign consulates ask you to bring your tax returns from the previous years. While some only need the most recent one, others may require up to two or three years’ worth of returns.
Penalty for not Paying Taxes
Any person or organization who evades taxes is subject to a range of penalties from the government. Depending on the type of unpaid tax, a different penalty may apply. This means that in addition to paying the taxes that are due for payment, the fine and any associated interest must also be paid as a penalty.
Tax on Returns Earned Through P2P Lending
In P2P lending, investors earn income in the form of interest on the amount they lend. The fixed maturity peer-to-peer investment plan from LenDenClub offers up to 10–12%* annual returns on your investment. Similar to the interest earned on any other instrument, such as a fixed deposit, the interest income in P2P lending is also taxable. Lenders’ interest income from peer-to-peer lending is classified as “income from other sources” and added to their taxable income.