Personal Finance

Explainer: Different types of taxes in India

Updated : September 26, 2019 06:25 AM IST

The concept of taxation is an important notion that plays a key role in sustaining economies and countries.

Direct taxes can be defined in simple words as those taxes that are levied directly on the income and wealth of an individual or organisation.

Indirect taxes can be defined as those taxes that are collected by an intermediary mainly during the purchase of goods and services.

Tax can be defined as a mandatory charge levied on citizens by the state in order to meet its expenditure. Taxation plays a key role in sustaining economies and countries and is considered an obligation of every citizen of a nation.

What are the different types of taxes?

While there are different types of taxes, they are broadly classified into two categories, i.e. direct taxes and indirect taxes.

Direct Taxes

Direct taxes can be defined in simple words as taxes levied directly on the income and wealth of an individual or organisation. The liability of direct taxes cannot be transferred to a third party and the payment should be made directly to the government authority.

The main types of direct taxes imposed in India are the Income Tax and the Corporation Tax.

Income tax is is levied on an individual for the income generated from various sources, including salary and investment, among others. Similarly, corporation tax is levied on firms on their earnings.

Indirect Taxes

On the other hand, indirect taxes are taxes collected by an intermediary mainly during the purchase of goods and services. As the name suggests, it is not a direct transaction between the individual and the authority. Instead, the institution or individual responsible for paying the tax transfers the responsibility to others.

This is best observed in the market supply chain where the tax is passed on to consumers who are on the lower rung of the chain. Excise duties and customs duties are among the most known forms of indirect taxes.

Excise duty is a levy paid by the manufacturer on items manufactured within the country, whereas customs duty is the charge levied when goods are imported into the country, and is paid by the importer or exporter.

Explainer: Different types of taxes in India

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