Tax

In last couple of days, I came across many people who don’t know a lot about the general concept of taxation and how does the system work. So, I decided to write this article to let the people know about the Concept of Taxation and familiarise them with some commonly used terminology. Before getting Started

Disclaimer

The explanation given below is very simplified, this is done to inculcate the general understanding to the concept. However, the actual concept of taxation is much more complicated and includes interpreting a lot of Laws, Rules, Guidelines, Notifications, Case Laws and other Caveats.

Now that we are done with this, let’s get started.

Broadly, there are only 2 type of Taxes.

1. Direct Tax

2. Indirect Tax

Direct Tax

This is the tax Levied on Income of a person, popularly known as Income Tax. This tax is progressive in nature, it means the tax rate increases as the income increases, and the burden of this tax falls upon the person who is earning the income.

To pay this tax a person needs to file an Income Tax Return (ITR) and based on this ITR a person’s tax is calculated and paid through online payment methods. This ITR can be filled from Income Tax Department’s Website.

What Is ITR?

ITR is simply a form that a tax payer has to fill to communicate the Tax Department about his/her income in a certain Financial Year. The tax payable by a person is calculated based on the details of income earned by him/her, the deductions allowed to him/her under the prevailing rules, and the TDS details provided by him/her in the ITR.

What Are Deductions?

Deductions are the amount(s) that the Tax Department allows you reduce from your income and pay tax on the remaining amount which in turn reduce your tax liability. These deductions are generally linked to an idea that the government want to promote. For Example- To promote people to buy Life Insurance there is a deduction under section 80c of the Income Tax Act.

What Is TDS?

TDS (Tax Deducted at Source), as the name suggest it is the tax deducted at the source of income. Like when a salaried employee gets his/her salary paid, a small portion is deducted and deposited to the Tax Department on his behalf. This serves two-fold motive, first is that the government receives a continuous flow of money in the form of TDS and second is it helps regulating some transactions which can easily be done off the books. For example- there is TDS requirement on payment of winnings from lottery under section 194B.

 

Indirect Tax

This is the tax levied on goods and services. There are many types of Indirect Taxes currently being levied in India which includes, GST (Goods and Services Tax), Customs Duty, Excise Duty, VAT (Value Added Tax) etc.

GST

It is the tax levied on sale/provision of goods/ services. The GST makes up majority of the Government’s Tax revenue. Here, the Government levies a specified %age of tax on sale of goods and provision of services. The most common GST rates are 5%, 12%, 18% and 28%. To make sure that there is no cascading affect GST runs on a pretty simple yet effective Tax-Credit system.

Input Tax Credit (ITC)

ITC means, at the time of paying Tax you can reduce the final amount payable by the tax you’ve already paid on your inputs. For Example.

Here, Mr. A sold a product of ₹100 to Mr. B, Assuming the tax rate is 10%, he added ₹10 as GST which brings the invoice amount to ₹110. When Mr. B received the good he recorded the tax part and the cost part in different account, as Mr. B sells such goods to customer with ₹20 of profit he then adds tax @10% on his final amount which brings the total to ₹132. Mr. B is required to pay ₹12 as tax. However, he avails ₹10 as ITC and pays only ₹2 as tax. The Government receives ₹12 as tax i.e. ₹10 from Mr. A & ₹2 from Mr. B.

Customs Duty

Customs Duty is the tax imposed on the import and export of goods.

Excise Duty

Excise Duty is the tax imposed on production, licensing, and sale of goods. In India after the introduction of GST excise duty is imposed only on a small number of goods namely, Alcohol, Tobacco, and Petroleum etc.

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