• Taxation system in India is such that taxes are levied by central govt, state govt and some minor taxes are levied by local authorities such as municipality and local govt

Why are taxes levied?

• To manage the affairs of a state, money is required so the government imposes taxes on income of individuals, profits of companies and on goods and services.                                           Taxes are also essential for a better standard of living for citizens of a country. 
• Article 265: No tax shall be levied or collected except by the “authority of law”

TYPES OF TAX :-

Direct tax: A direct tax can be defined as a tax that is paid directly by an individual or organization to the tax imposing authority

• A direct tax cannot be shifted from one individual to another individual or entity. The organization or individual upon which tax is levied is responsible to pay the tax

• Central Board of Direct Tax (CBDT): is responsible for collection of direct tax, levying of direct tax and formulating various policies related to direct tax

Example of direct tax: Income tax, property tax, tax on assets. 

Indirect Tax:

• This tax is collected by an intermediary (such as retail stores) from the customer.
• Then the intermediary files tax returns and forward tax proceeds to the govt
• In simple words indirect tax is not directly collected by levying authority from the taxpayer.
• Example: value added tax, goods and services tax (GST) sales tax etc 

CESS

• It is form of tax levied and collected by govt for welfare of particular service or sector
• It is charged above direct tax and indirect tax
• CESS collected for a particular purpose cannot be used or diverted for any other purpose 
• It is not a permanent source of income for the government. it should be discontinued once the purpose of levying tax is fulfilled. 
• Example: Krishi Kalyan CESS, Educational CESS, Swachh Bharat CESS
• Like all other taxes, CESS may initially go to the consolidated fund of India and from there it has to go to meet the purpose for which it is collected.
• If CESS collected for a particular purpose in a year is unspent, it cannot be spent for any other purpose but has to carried over to next year

Surcharge

• It is an extra fee, charge or tax that is added on the cost of goods or service beyond initially quoted price. Often surcharge is added to an existing tax and is not included in the stated price of goods and services. 

“Tax on Tax”

• For example: If you earn ₹ 100 on which tax is ₹ 30 and surcharge is 10 % the surcharge will be 10 % of ₹ 30 i.e. ₹ 3. 

Specific and Ad valorem (Indirect tax)

Specific tax: when amount of tax is determined on the basis of quantity, size, weight of product. 

Ad valorem tax: When amount tax is determined on the basis of price/value of product generally: is in % term. Eg: Property tax

Proportional tax, progressive tax and regressive tax

Proportional tax: It is taxing mechanism in which tax authorities charges same rate of tax from each taxpayer, irrespective of income that means lower income group, middle income group or higher income group has to pay same amount of tax

Progressive tax :- Rate of tax increases with tax payers income

 Regressive tax:- Rate of tax decreases with increase in income

• Regressive taxation is a temporary taxation system
• It can be imposed to attract foreign investment
• Regressive taxation was once imposed in India to promote production in small scale industry. 

Q: Which is progressive? Specific or Ad valorem  

A: Ad valorem is progressive (As value increase tax increases)

Cooperative tax

• It is a tax imposed by government of India on net income or profit a corporate enterprise makes out of its business
• Corporate tax is direct tax, imposed as per provision of Income tax Act 1961
• Corporate tax is imposed at National level, state level and local level
• Private and public companies registered under Companies Act are liable to corporate tax in India
• The companies paying corporate tax are exempted frm the ambit of minimum alternate tax (MAT)

Minimum Alternate Tax (MAT)

• It is a measure to include all companies in the income tax loop. That means no companies with healthy finance can avoid paying income tax, even after claiming exemptions 

• It is levied on book profit
• It will also help to overcome the challenge of tax evasion by companies. 

Capital gain tax (Direct tax)

• Any profit or gain that arises from the sale of capital assets is called as capital gain tax
• The gain or profit comes under category of income
• So capital gain tax will be required to be paid for the amount in which transfer of capital asset takes place. 
• The capital gain tax can be short term as well as long term
• Long term capital gain tax: It is levied on the profits from sales of assets for more than a year. 
• Short term capital gain tax: It is levied on profits from sale of assets held for 1 year or less than a year 
• Net capital gain = Capital gain – capital loss

Capital gain 🡪 Profit or gain from selling of an asset. 

Capital loss 🡪 Its occurs when an asset is sold at a lesser price than purchasing price 

• Capital gains are not applicable on inherited property as there is no sale & purchase of property but only transfer of ownership
• As per income tax Act capital gain tax is not applicable on assets received as gift but if we transfer this asset further it will come under capital gain tax

Security transaction tax

• It is a tax which is to be paid by investor on ay transaction done through stock exchange
• This tax is applicable on transactions of shares, bonds, debentures, derivatives, mutual funds.
• It is not applicable on currency transaction, commodity transaction and transaction outside stock market

Dividend distribution tax

• It is a tax imposed on the amount distributed by the company by the method of a dividend among its shareholders. 
• It is paid in addition to income tax
• And the tax to be paid within 14 days from the date of distribution of dividend. 
• This tax was abolished by finance minister in 2020
• This tax was also applicable on mutual funds
• DDT was introduced by Finance Act of 1997

Wealth tax

• This tax is applicable to individuals, Hindu undivided families, and companies. This is levied on the wealth of an individual, companies or H.U.F. 
• Wealth tax is imposed on the richer section of society by doing this parity ca e brought among taxpayers
• However, wealth tax was abolished in financial year 2015-2016

Example: if individual, HUF or company exceeds wealth of ₹ 30 lakh, 1 % tax will be levied on excess amount of 30 lakhs

Professional tax

• It is a tax levied on professionals, trades and employment based on income received from such employment or profession
• It can be levied on a person carrying business or doing freelance work
• Subject to income exceeding the monetary threshold
• Professional tax is collected by commercial tax dept of municipality corporation

Fringe benefit tax (Direct tax)

• Apart from the compensation or salary the companies give allowances to employees. 
• These employers or companies have to pay certain amount as tax on the allowances they are giving to employees, such taxes paid to govt is called fringe benefit tax

Banking cash transaction tax

• It was introduced in 2005 and abolished in 2009.
• It was a type of Direct tax, levied on withdrawal of cash more than a specific limit from the bank. 
• The tax rate was set at 0.1 %. 

Equalization Levy or Google tax

• Any person or entity that makes a payment exceeding ₹ 1 lakh in a financial year to a non-resident technology company then the person or entity which makes payment has to withhold 6 % of gross amount and pay it as tax to the government. 
• This rule is applicable to companies which do not have permanent establishment in India
• It is only applicable when payment has been made for certain Business to Business services like online digital marketing, using digital market space.

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