Tuesday, March 3, 2015

Taxation in India - Part I (Direct and Indirect Taxes)

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Paying tax to the government is duty of the citizens. This collected tax is used for building the nation in terms of infrastructure or other developments, paying salary to public servants, and provide uncountable services to the general public. In other words, it is the taxpayer's money which is utilized to benefit them, where the government merely works as the manager of the fund.

Constitutional point of view on Taxes
According to Indian Constitutioncentral or state governments can impose taxation and make laws regarding it. There are total 3 lists -

  1. List Ispecific areas where only the central government (by Parliament) can make laws
    E.g., Income tax (except agricultural income), Customs duty, Corporation tax, etc.
  2. List IIspecific areas where only the state governments (by State Legislature) can make laws
    E.g., Agricultural income tax, Land revenue, Stamp duty, etc.
  3. List IIIsome common areas, where both central and state governments can make laws, known as concurrent list.

Classification of Taxes
Taxes are classified into broad categories depending on the ultimate bearer and transferability of the tax -

1.  Direct Taxes
If the liability to pay a tax and the burden of the tax falls on the same personthen it is known as Direct Tax. Now try to understand it with the example of Income tax -

Income tax is imposed on you, it means that you are liable to pay the tax (you will directly pay the tax to the government) and you cannot shift the burden to others.

2.  Indirect Taxes
If the liability to pay a tax is imposed on one person and the burden of the tax falls on some other personthen it is known as Indirect Tax. Now try to understand it with the example of Sales tax -

In case of Sales tax, the liability to pay the tax to the government is on shopkeeper, who in turn shifts the tax amount to the customer by including it in the price of the commodity. (He pays the tax to the government, but recovers the amount from the customer, thus shifting the burden to the customer)

So, in case of Indirect Tax, the liability is on someone (here, shopkeeper), but the burden is actually shifted to another person (here, customer).

to be continued.. 
(example of direct and indirect taxes with explanation)

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