Taxation In India

What is Tax?

Tax is a compulsory financial charge or levy imposed by a government on individuals or entities within its jurisdiction to fund public expenditures and government activities. Taxes are not payments for specific goods or services, but rather general contributions to public revenue.

Types of Tax

Taxes are broadly classified into two main categories:

Direct Tax   :    Levied directly on individuals or organizations, based on income or wealth. Income tax, corporate tax, property tax

Indirect Tax  :   Levied on goods and services, paid indirectly via intermediaries (like sellers or service providers).   GST, sales tax, customs duty, excise duty

Direct Taxes in India

Income Tax: Paid by an individual on the basis of their earnings.

Corporate Tax: Paid by corporations on their earnings.

Capital Gains Tax: On profit made on sale of assets.

Securities Transaction Tax: On trading in securities.

Perquisite Tax: On non-monetary benefits given by employers.

Indirect Taxes of India

Goods and Services Tax (GST): Integrated tax on sale of goods and services.

Customs Duty: On imports.

Excise Duty: On production of goods (now largely under GST).

Entertainment Tax: On film tickets, events, etc.

 

Tax Provisions in India

Income Tax Regimes: Two regimes are provided by India—old (with exemptions/deductions) and new (lower tax rates, less deductions).

Tax Slabs: Income is taxed progressively, with higher incomes getting taxed at more rates. For FY 2025-26, slabs in the new regime vary from NIL for income up to ₹4 lakh to 30% for income above ₹24 lakh.

Special Rates: Some incomes (e.g., capital gains, lottery prizes) are taxed at specific rates.

 

Double Taxation Relief: Indian residents who receive income in foreign countries and are taxed there can credit in India to prevent double taxation, according to tax treaties (DTAA).

 

Tax Provisions Outside India

Global Practices: Most nations have direct and indirect taxes, although types and rates differ.

Direct Taxes: Typically comprise income tax (usually progressive), corporate tax, and property tax.

Indirect Taxes: These include sales tax, value-added tax (VAT), excise duties, and customs duties.

Tax Treaties: Several nations enter Double Taxation Avoidance Agreements (DTAAs) to avoid taxing the same income twice.

 

India's taxation framework is a combination of direct and indirect taxes, with changing provisions for compliance and relief.

Tax structures abroad are analogous in concept but vary in detail, rates, and administration.

Principal Types of Taxes Collected by Governments Across the World

Governments all over the world charge a range of taxes to finance public goods and infrastructure. The principal types of taxes can be classified as follows:

 

Tax Type      

Description & Examples

Income Taxes- Collected on individual and business income (e.g., personal income tax, corporate tax, capital gains tax).

Payroll Taxes- Withheld from salaries of employees to finance social programs (e.g., Social Security, Medicare, unemployment insurance).

Property Taxes- Assessed on land and property holdings (e.g., real estate tax, vehicle tax).

Consumption Taxes- Collected on goods and services (e.g., sales tax, value-added tax (VAT), excise duties).

International Trade Taxes- Applied to cross-border trade (e.g., tariffs, customs duties, export taxes).

Estate and Inheritance Taxes- Imposed on posthumous transfer of wealth (e.g., estate tax, inheritance tax).

Other Taxes- Poll taxes, stamp duties, environmental taxes (e.g., carbon tax, sin taxes on tobacco/alcohol).

 

Classification by Tax Base

 Direct Taxes: Channeled directly by individuals or institutions (e.g., income tax, property tax).

 Indirect Taxes: Collected by intermediaries on goods/services (e.g., VAT, sales tax, excise duties).

 

👉Some Important Points

•  The majority of nations apply a combination of these taxes, and the balance varies with economic structure and policy objectives.
•  Developed economies tend to tax more through direct taxes, but developing nations might tax more from consumption.
•  Taxes can also be structured to effect behavior, including environmental taxes or "sin taxes" on undesirable products.
•  This arrangement allows governments to have varied and stable sources of revenue to enable their operations and policy outcomes.

How is India's tax regime different from that of other nations' tax provisions

India's tax regime has a number of unique features and structural differences with those of other nations:

1. Federal Structure and Tax Authority

India: The power to tax is shared between the Central Government, State Governments, and local governments, as demarcated in the Constitution. The Central Government collects income tax (other than agricultural income), corporate tax, customs, and excise, whereas states collect VAT, stamp duty, and state excise. Local governments collect property and utility taxes.

 

Other Countries: In the USA, federal and state/local governments impose taxes independently like income tax, sales tax, and property tax. In the UK, central and local governments impose taxes, but the system is administratively more efficient and streamlined.

 

2. Types of Taxes

 India: The structure revolves around two broad categories—direct taxes (such as income and corporate tax) and indirect taxes (mainly GST, customs, and excise). GST, initiated in 2017, consolidated most of the indirect taxes into a single regime, lowering double taxation and ease in compliance.

 

Other Nations: Direct and indirect taxes exist in most nations, but the taxation structure and taxation rates are different. In the US, for instance, there are federal, state, and local income taxes with differing taxation rates and allowances. European nations tend to use VAT rather than GST, with different tax rates and exceptions.

 

3. Tax Regimes and Compliance

 India: Individual taxpayers have the option to switch between two regimes of income tax: the old regime (exemptions and deductions) and the new regime (lower rates but less deductions). Corporate tax rates are some of the highest in the world, but India's tax-to-GDP ratio still lags behind many other nations.

 

Other Countries: The US has standard or itemized deductions. The UK system is less complex, with fewer exemptions and emphasis on effective administration.

 

4. Recent Reforms

 

India: Key reforms are the implementation of GST, tax rate rationalization, and simplification of tax legislation for improved compliance and enforceability.

 

Other Countries: Most developed countries possess mature, stable tax systems with regular readjustments, but less frequent large-scale overhauls in recent times.

 

5. Tax Collection and GDP

 India: Although having relatively high nominal rates of tax, India's tax-to-GDP ratio is lower than that of most developed nations, reflecting a narrower tax base and issues in tax enforcement and compliance.

 

Other Countries: Developed nations have higher tax-to-GDP ratios, which reflect broader bases for tax and more efficient collection systems.

 

6. International Taxation

India: Has double taxation avoidance agreements (DTAA) with most countries, just like other countries, but it might have varying rules and implementation.

 

Other Nations: Most nations do not have DTAAs, but the applicability, enforcement, and relief mechanisms can differ.