What is Tax? – Types of Tax, Benefits, and Penalty in Tax

Tax in India is imposed on legal entities and individuals. Legal entities, including corporations, development organisations, private associations, and non-profit organisations, must pay their share of direct and indirect taxes. Individual goods entering India are also subject to taxation. These tax revenues are critical to sustaining vital public services and enhancing national development and prosperity.

What is Tax?

Taxes are funds levied on organisations and individuals, which are used to support various services and programs to benefit the general public, promote public welfare and meet social needs. These services include infrastructure, national security, a social welfare system, the construction of various types of public bridges, satellite systems, schools, etc.

What Are the Different Types of Taxes?

To answer how many taxes in India exist, we have laid down the major types below.

Direct Tax

Direct taxes are specific payments individuals and businesses must make directly to the government, and they cannot transfer this tax liability to others. Here are some examples of direct taxes:

• Income Tax: When talking about tax, the first tax that comes to mind is Income tax. Now, what type of tax is income tax? Income tax is one of the most common direct taxes imposed on earnings by individuals and businesses during a financial year. Taxpayers must pay their income tax dues directly to the government, with potential deductions available to reduce tax liability.

• Securities Transaction Tax (STT): This tax is associated with stock exchange trading activities. It is collected by stockbrokers from traders, regardless of whether the trade results in a profit or loss. The collected STT is then forwarded to the securities exchange and paid to the government.

• Capital Gains Tax: Capital gains tax applies when individuals earn profits from investments or property sales. The tax amount varies based on the type of capital gains and the investment duration. Long-term capital gains tax applies to earnings from investments held for an extended period, while short-term capital gains tax applies to those from assets held for a shorter duration. Like other direct taxes, individuals must pay capital gains tax directly to the government.

Indirect Tax

Indirect taxes differ from direct taxes in focus and collection. They are levied on the consumption of goods and services, not income, and are collected from consumers via intermediaries who then remit the tax to the government. Here are examples of indirect taxes:

• Goods and Services Tax (GST): GST is a comprehensive indirect tax applied to all goods and services in India. The GST Council sets tax rates. Businesses collect GST from customers when selling products or services and remit it to the government. Ultimately, consumers bear the GST burden.

• Customs Duty: Imposed on imported and exported goods, customs duty ensures taxation of foreign products entering the country and goods delivered to foreign countries. Importers pay this duty to the government, which raises the cost of imported goods in the domestic market.

• Value-Added Tax (VAT): VAT is an indirect tax imposed by state governments in India. It is levied as products move through the supply chain, with the tax rate determined by the state. Businesses collect VAT and remit it to state authorities. Although GST has replaced VAT in many cases, it still applies to specific items like alcoholic beverages.

Also Read: Difference Between Direct Tax and Indirect Tax

Benefits of Tax in India

Taxes play a vital role in the functioning of a nation’s government and the well-being of its citizens. Here are some significant benefits of paying taxes:

• Funding Public Services: Taxes provide the government with the resources needed to build and maintain infrastructure, support social programs, and invest in education and healthcare.

• National Security: Tax revenue helps secure the nation by funding defence and law enforcement agencies.

• Supporting Government Operations: Taxes compensate for government employee salaries and pensions, ensuring efficient governance.

• Debt Management: Taxes help manage government debts, maintaining financial stability.

• Infrastructure and Transport: Taxes fund public transport and critical infrastructure.

• Social Safety Nets: Taxes support social security programs for those in need.

• Healthcare: Tax revenue contributes to healthcare and medical services, which is especially important during crises like pandemics.

Taxes are essential for a country’s development and well-being, representing a civic duty that benefits society as a whole.

Penalties Charged in Tax

The Income Tax Act imposes penalties on taxpayers for different violations. Some penalties are mandatory, while others are discretionary. Penalties under the Income Tax Act:

• Penalty for default in Self-Assessment Tax: Taxpayers must calculate their income tax, including credits for advance tax and Tax Deducted at Source (TDS), before filing their returns. Failure to remit self-assessment tax or interest results in penalties. The Assessing Officer can impose a fine up to the pending tax amount.

• Penalty for late filing of TDS returns: Those with Tax Deduction and Collection Account Numbers (TAN) must file TDS returns quarterly. Late filing incurs a daily fine of Rs. 200 until rectified, not exceeding the TDS due.

• Penalty for failure to comply with official notice: Non-compliance with an Income Tax Officer’s notice can lead to a Rs. 10,000 penalty for each instance.

• Penalty for concealing income: Attempting to reduce tax by concealing or providing false income information can result in a penalty ranging from 100% to 300% of the evaded tax.

• Penalty for not maintaining books of account: Failure to maintain accounting books may result in a penalty of up to Rs. 25,000.

• Penalty for not maintaining records of specified transactions: Not keeping records of international or specified domestic transactions may lead to a penalty equal to 2% of each transaction’s value.

• Penalty on undisclosed income: Penalties for undisclosed income range from 10% (with substantiation) to 20% (declaration) or a minimum of 30% to a maximum of 90% (other cases) of undisclosed income.

• Penalty for not getting accounts audited: Failing to get accounts audited or furnish an audit report can result in a penalty of 1.5% of total sales or Rs. 1,50,000, whichever is less.

• Penalty for not furnishing a report from a CA: For specified domestic transactions, failing to obtain and submit a CA report incurs a penalty of Rs. 1,00,000.

• Penalty for failure to remove TDS: Failure to deduct tax at source results in a penalty equal to the TDS amount.

• Penalty for failure to pay tax on casual income: Failing to deduct tax from casual income, such as substantial prize money, can lead to a penalty equal to the unpaid tax.

• Penalty for not collecting Tax at Source: Failure to collect tax at source results in a penalty equal to the uncollected tax amount.

• Income Tax penalty for accepting loans and deposits in cash: Accepting loans or deposits exceeding Rs. 20,000 in cash may incur a penalty equal to the loan or deposit.

• Penalty for delay in filing the Income Tax Return: Late filing can result in a penalty of up to Rs. 5,000. Non-filing of financial transaction statements incurs a daily penalty of Rs. 100.

• Penalty for failure to file TDS return: Failing to file TDS returns for over a year incurs a penalty ranging from Rs. 10,000 to one lakh rupees, along with daily fines.

• Penalty for failure to cooperate with authorities: Failure to provide information or cooperate with authorities can lead to penalties of up to Rs. 10,000 for each instance.

• Penalty for failure to comply with PAN requirements: Non-compliance with PAN provisions or quoting incorrect PAN can result in penalties of up to Rs. 10,000.