DEFINITION OF TAX:
In every country major part of the revenue is raised through taxation. According to Prof.
Taylor Taxes are compulsory payments to governments without expectations of direct return or benefit to
the tax payer.
MEANING OF TAXATION
Taxation is the inherent power of the state, acting through the legislature, to impose and collect
revenues to support the government and its recognized objects. Simply stated, taxation is the power of the
State to collect revenues for public purpose.
PURPOSE OF TAXATION
Primary Purpose - is to provide funds or property with which the government discharges its
appropriate functions for the protection and general welfare of the its citizens.
MEANING OF TAXES
Taxes are enforced proportional contributions from persons and property levied by the lawmaking
body of the state by virtue of its sovereignty for the support of the government and all public needs.
Tax in a general sense, is any contribution imposed by the government upon individuals for the use
and service of the state, whether under the name of toll, tribute, impost, duty, custom, excise, subsidy, aid,
supply or other name. Tax, in its essential characteristics , is not a debt.
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OBJECTIVES OF TAXATION:
The primary purpose of taxation is to raise revenue to meet huge public expenditure. Most
governmental activities must be financed by taxation. But it is not the only goal. In other words, taxation
policy has some non-revenue objectives.
Truly speaking, in the modern world, taxation is used as an instrument of economic policy. It affects
the total volume of production, consumption, investment, choice of industrial location and techniques,
balance of payments, distribution of income, etc.
2. Types of taxes
Taxes are classified under two categories namely direct and indirect taxes. The largest difference
between these taxes is their implementation. Direct taxes are paid by the assessee while indirect taxes are
levied on goods and services.
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A) Direct taxes
Direct taxes are levied on individuals and corporate entities and cannot be transferred to others. These
include income tax, wealth tax, and gift tax.
Income tax
As per the Income Tax (IT) Act, 1961 every assessee whose total income exceeds the maximum
exempt limit is liable to pay this tax. The tax structure and rates are annually prescribed by the Union Budget.
This tax is imposed during each assessment year, which commences on 1st April and ends on 31st March.
The total income is calculated from various heads such as business and profession, house property, salaries,
capital gains, and other sources. The assesses are classified as individuals, Hindu Undivided Family (HUF),
association of persons (AOP), body of individuals (BOI), company, firm, local authority, and artificial
judiciary not falling in any other category.
B) Indirect taxes
Indirect taxes are not directly paid by the assessee to the government authorities. These are levied on
goods and services and collected by intermediaries (those who sell goods or offer services). Here are the most
common indirect taxes in India:
Value Added Tax (VAT)
This is levied by the state government and was not imposed by all states when first implemented.
Presently, all states levy such tax. It is imposed on goods sold in the state and the rate is decided by the
state governments.
Customs duty
Imported goods brought into the country are charged with customs duty which is levied by the Central
Government.
Octroi
Goods that move from one state to another are liable to octroi duty. This tax is levied by the respective
state governments.
Excise duty
All goods produced domestically are charged with excise duty. Also known as Central Value Added Tax
(CENVAT), this is paid by the manufacturers.
Service Tax
All services provided domestically are charged with service tax. The tax is paid by all service providers
unless specifically exempted.
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Four laws (IGST, CGST, UTGST & GST (Compensation to the States), Act) have received President
assent. All the States & UT expected to pass State GST Act, by end of May 2017. GST law is expected to
take effect from July 1, 2017.
3. Revenue Authorities
CBDT
The Central Board of Direct Taxes (CBDT) is a part of the Department of Revenue under the Ministry
of Finance. This body provides inputs for policy and planning of direct taxes in India and is also responsible
for administration of direct tax laws through the Income Tax Department.
CBEC
The Central Board of Excise and Customs (CBEC) is also a part of the Department of Revenue under
the Ministry of Finance. It is the nodal national agency responsible for administering customs, central excise
duty and service tax in India.
CBIC
Under the GST regime, the CBEC has been renamed as the Central Board of Indirect Taxes &
Customs (CBIC) post legislative approval. The CBIC would supervise the work of all its field formations and
directorates and assist the government in policy making in relation to GST, continuing central excise levy and
customs functions.
The Indian taxation system in India has witnessed several modifications over the years. There has
been standardization of income tax rates with simpler governing laws enabling common people to understand
the same. This has resulted in ease of paying taxes, improved compliance, and enhanced enforcement of the
laws.
TYPES:
Direct Tax Vs Indirect Tax:
Direct taxes are paid in entirety by a taxpayer directly to the government. It is also defined as the tax
where the liability as well as the burden to pay it resides on the same individual. Direct taxes are collected by
the central government as well as state governments according to the type of tax levied. Major types of direct
tax include:
Income Tax: Levied on and paid by the same person according to tax brackets as defined by the
income tax department.
Corporate Tax: Paid by companies and corporations on their profits.
Wealth Tax: Levied on the value of property that a person holds.
Estate Duty: Paid by an individual in case of inheritance.
Gift Tax: An individual receiving the taxable gift pays tax to the government.
Fringe Benefit Tax: Paid by an employer that provides fringe benefits to employees, and is collected
by the state government.
Indirect tax, as mentioned above, include those taxes where the liability to pay the tax lies on a
person who then shifts the tax burden to another individual.
Some types of indirect taxes are:
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Excise Duty: Payable by the manufacturer who shifts the tax burden to retailers and wholesalers.
Sales Tax: Paid by a shopkeeper or retailer, who then shifts the tax burden to customers by charging
sales tax on goods and services.
Custom Duty: Import duties levied on goods from outside the country, ultimately paid for by
consumers and retailers.
Entertainment Tax: Liability is on the cinema owners, who transfer the burden to cinemagoers.
Service Tax: Charged on services rendered to consumers, such as food bill in a restaurant.
Therefore, the prime difference between direct tax and indirect tax is the ability of the taxpayer to shift the
burden of tax to others. Direct taxes include tax varieties such as income tax, corporate tax, wealth tax, gift
tax, expenditure tax etc. Some examples of indirect taxes are sales tax, excise duty, VAT, service tax,
entertainment tax, custom duty etc. However, this is not an exhaustive list of taxes and more types of taxes
are levied by the government on specific cases.
1. Direct taxes are paid entirely by a taxpayer 1. Indirect tax is ultimately paid for by the end-
directly to the government consumer of goods and services.