Taxation System in India: Tax Structure, Types & More!

By Amrit Gouda|Updated : August 13th, 2022

The taxation system is an integral part of the General Awareness section of many Bank, Insurance, and Regulatory Body exams. There are high chances that you will encounter questions from this chapter in the upcoming exams.

In this article, we will focus on the taxation system of India comprehensively including the types of tax, benefits of the taxation system, and the working of the entire taxation system in India. Kindly read the entire article.

Table of Content

What is Tax?

Governments impose taxes on their citizens to raise money for implementing initiatives that would strengthen the nation's economy and increase the standard of living for its citizens. The Constitution of India, which grants the Central and State governments the ability to impose taxes, is the source of the government's right to do so in India. In India, a supporting law must be passed by the State Legislature or the Parliament to support any taxes that are imposed.

The government's primary and largest source of revenue comes from taxes. Tax revenue is used by the government for a number of initiatives aimed at advancing the country. The three-tier federal structure of the Indian tax system is well-designed.

Importance and Objectives of Taxation System

Go through the importance and objectives of the Taxation System in the below infographic.

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Types of Taxes

The Central Government and the State Governments each levy their own taxes under India's system of taxation. Local governments like the Municipality and Local Governments also impose a few small levies.

Although direct taxes are assessed on taxable income received by both individuals and corporations, it is the assessees' responsibility to deposit taxes. The responsibility of tax collection and deposit falls on the sellers rather than the direct assessees in the case of indirect taxes, which are imposed on the sale and provision of products and services, respectively.

1. Direct Taxes

2. Indirect Taxes

Direct Tax

A direct tax is one that is imposed directly upon the taxpayer and is paid by individuals directly to the Govt. Levying and collecting direct taxes as well as developing other direct tax regulations fall within the purview of the Central Board of Direct Taxes.

Examples: Income Tax, Wealth Tax, Corporate Tax, Capital Gain Tax, Property Tax, Gift

Indirect Tax

The tax is imposed on the taxpayer's use of the products and services rather than their income, profit, or revenue. Indirect taxes, as opposed to direct taxes, can be transferred from one person to another.
In the past, service tax, sales tax, value-added tax (VAT), central excise duty, and customs duty were among the indirect taxes that were levied against taxpayers. But starting on July 1, 2017, the goods and services tax (GST) regime has taken the place of all indirect taxes imposed on goods and services by the state and federal governments.

Examples: Sales Tax, Customs Duty, Excise Duty, VAT, Stamp Duty, Service Tax

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Income Tax:

One of the most well-known yet least comprehended taxes is this one. It is the tax assessed on your income for a given fiscal year. Income tax has a wide range of aspects, including tax slabs, taxable income, tax deducted at source (TDS), lowering taxable income, etc. Companies and people are both subject to the tax. The tax that an individual must pay is determined by the tax bracket they are in. 

Corporate Tax:

They are imposed on the revenue of business enterprises or sectors. A firm must pay a separate tax in addition to its owner's personal income tax since it is regarded for tax purposes as a separate entity. Corporate tax is due by all firms incorporated in India under the Companies Act of 1956.

Capital Gain Tax

Any profit or gain realized from the sale of a capital asset is referred to as a capital gain. Taxation is imposed on capital sale profits. Capital assets include things like land, structures, homes, jewelry, patents, and copyrights.

Securities Transaction Tax

It goes without saying that you stand to make a sizable sum of money if you know how to trade securities and the stock market efficiently. This is a source of income as well, but it is subject to a separate tax called the Securities Transaction Tax. This tax is collected by including it in the share price. This implies that you must pay this tax each time you acquire or sell shares. This tax is a part of every security exchanged on the Indian stock exchange.

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Sales Tax

Sales tax, as its name suggests, is a tax imposed on the purchase and sale of goods. This product may have been made in India or imported, and it may even have included services. This tax is imposed on the product's seller, who then transfers it to the buyer by including the sales tax in the product's price. Sales tax cannot be charged to a product if it is sold more than once due to the restriction that it can only be assessed once for a specific product.

Custom Duty

It is a tax the government imposes on commodities exported and imported. Import taxes are used to control trade as well as provide the government with revenue. Most of them are assessed on an ad valorem basis.

Excise Duty

This tax is applied to all commodities produced or manufactured in India. It is distinct from customs duty because it only applies to goods made in India and is often referred to as CENVAT, or Central Value Added Tax. The manufacturer of the items is where the government collects this tax from. Additionally, it can be obtained from organizations that purchase manufactured goods and hire individuals to convey those goods from the producer to the receiving organization.

VAT(Value Added Tax)

Because of the way it is designed, the VAT does away with distortions. As a result, VAT has been imposed in all of India's states and union territories (except the UTs of Andaman Nicobar and Lakshadweep). The state determines the amount of the tax, which is levied on a range of goods sold in the state.

Service Tax

Similar to how sales tax is applied to the cost of items sold in India, service tax is also added to the cost of services rendered in India. The service tax will increase from 12.36 percent to 14 percent, according to the reading of the 2015 budget. It is only applicable to businesses that offer services, not goods, and is paid every month or once every three months, depending on how the services are rendered.

For businesses, the service tax is due at the time the invoice is raised, regardless of whether the consumer pays the bill. If the establishment is a single service provider, the service tax is only paid when the customer pays the bills.

Difference Between Direct & Indirect Tax

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Benefits of Taxation Syatem

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Conclusion

Taxes, therefore, have both benefits and drawbacks, but there is no denying that they are necessary to raise money. While the wealthy can pay direct taxes, the poor have the chance to make a little contribution through indirect taxes. There is a lot of potentials to change things by controlling these taxes systems. These factors make a nation's taxation system crucial to its economy.

General Awareness questions can be asked from this chapter in the following bank exams.

S. No

Name of the Bank Exams

1

SBI Clerk

2

 SBI PO

3

IBPS Clerk

4

IBPS PO

5

 IBPS RRB

6

RBI Assistant

7

 RBI Grade-B

8

 NABARD Grade-A

9

 Bihar State Cooperative Bank

10

 SBI Apprentice

11

 Bank Note Press Dewas

12

 LIC AAO

13

 FCI

14

 SEBI

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FAQs

  • The two forms of taxes are direct taxes and indirect taxes. Some are paid in an indirect manner, such as sales tax, service tax, and value-added tax, while some are paid directly, such as income tax, corporate tax, and wealth tax.

  • A direct tax is one that is imposed directly upon the taxpayer and is paid by individuals directly to the Govt. Levying and collecting direct taxes as well as developing other direct tax regulations fall within the purview of the Central Board of Direct Taxes.

    Examples: Income Tax, Wealth Tax, Corporate Tax, Capital Gain Tax, Property Tax, Gift

  • Indirect tax is paid for by the final consumer of products and services, whereas direct tax is assessed and paid for by individuals, Hindu undivided Families (HUF), businesses, companies, etc. Direct taxes cannot have their tax burden changed, however, indirect taxes can have their burden shifted.

  • As the Taxation system is one of the major topics of various Govt. exams, you should know the nitty gritty of it. Our experts have compiled a comprehensive study note on the Taxation system of India in this article. Kindly read the entire article.

  • The government levies a consumption tax known as a sales tax on the purchase of goods and services. At the point of sale, a standard sales tax is imposed, collected by the shop, and paid to the government. A company is liable for sales taxes in a particular jurisdiction if it has a nexus there, which, depending on the local rules, can be a physical location, an employee, an affiliate, or some other presence.

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