TYPES OF TAXES

TYPES OF TAXES:
There are four ways to classify different types of taxes in India:
1. Taxes Levied by the Central Government and State Governments
2. On the Basis of Relationship between Tax Base and Tax Rates
3. On the Basis of Method of Assessment
4. On the Basis of Incidence and Impact of Taxes

1. TAXES LEVIED BY THE CENTRAL GOVERNMENT AND

STATE GOVERNMENTS

 By the Central Government: These include Income taxes, GST, Customs duties,
Corporation taxes, Excise duties, Estate duty and more
By the State Government: These include State GST, Excise on Liquor, VAT(value Added
Tax) on Petrol & Diesel, Tax on Agricultural Income, land revenues, tolls and more.
 By the Local Civic Bodies: Municipal corporations and other local governing bodies collect
taxes like property taxes, Water Taxes, etc.

2. ON THE BASIS OF RELATIONSHIP BETWEEN TAX BASE AND TAX

RATES:

On this basis the Taxes are classified into Four types, such as;

Proportional Tax: A proportional tax, also referred to as a flat tax, impacts low-, middle-,
and high-income earners relatively equally. They all pay the same tax rate, regardless of
income. Taxes which very in direct proportion to the change in Tax Bases. The Tax base
could be income, Value of Goods and Value of Wealth or Property.
Example: Wealth Tax and Sales Tax.

Progressive Taxes: A progressive tax has more of a financial impact on higher-income

individuals and businesses than on low-income earners. That means A progressive tax
imposes a greater percentage of taxation on higher income levels, operating on the theory that
high-income earners can afford to pay more.
Example: Income Tax
 Regressive Taxes: Low-income individuals pay a higher amount of their incomes in taxes
compared to high-income earners under a regressive tax system because the government
assesses tax as a percentage of the value of the asset that a taxpayer purchases or owns. This
type of tax has no correlation with an individual’s earnings or income level.
Example: Taxes on Goods & Services, Such as GST, Excise Duty, etc.

Digressive Taxes: A tax is called Digressive when the rate of progression in taxation does
not increase in the same proportion as the income increases. In this case, the rate of tax
increases up to certain limit, after that a uniform rate is charged and become constant.

3. ON THE BASIS OF METHOD OF ASSESSMENT

On this basis, taxes are classified into two types, Such as;

Specific Duty: Taxes levied according to some unit of a product is called as Specific Duty.
For example, Excise Duty on cigarettes are levied on the basis of length of the cigarettes.

Ad-Valorem Tax: Taxes levied on the basis of value of the goods is called as Ad-Valorem
Duty. It is generally expressed in percentage form.

4. ON THE BASIS OF INCIDENCE AND IMPACT OF TAXES:

Before discussion on the types of taxes in this basis, you have to understand the meaning of
two important terms, i.e. ‘Incidence’ and ‘Impact’ of Tax are as follows;
Incidence of Tax: Incidence of Tax means the first burden of tax. Incidence of tax falls on a
person on whom the tax levied for the first time. Incidence of tax can be shifted to another
person.
Impact of Tax: Impact of tax means the ultimate/final burden of tax. Impact of tax falls on
the person who ultimately bears the burden of tax, i.e. the Consumer.

On the basis of incidence and impact of tax, a tax can be either,

‘Direct Tax’ or ‘Indirect Tax’

DIRECT TAXES: 
The individuals directly pay these taxes to the respective governments. In this case the both
Incidence and Impact will fall in a single person, i.e. an assesse.
The most notable examples include Income tax, Capital gains tax, Corporate tax, Wealth
Tax and Securities transaction tax.
INDIRECT TAXES: 
These taxes are not directly paid to the governments but are collected by the intermediaries
who sell or arrange products and services. In this case, the Incidence and impact of taxes will
fall on two different persons.
GST (Goods and Service Tax), Service tax, sales tax, octroi, customs duty, value-added tax,
and excise duty, customs duty, are some of the top examples

DIRECT TAX VS. INDIRECT TAX

Particulars Direct Tax Indirect Tax

1. Meaning Direct Taxes are the taxes Indirect Taxes are such type
in which the incidence of taxes where incidence
and impact falls on the and impact fall on two
same person/assesse different persons.

2. Nature of tax Direct Tax is progressive in Indirect Taxes are regressive in

nature. nature.

3. Taxable Event Taxable Income / Taxable Purchase / Sale / Manufacture of

Wealth of the Assessees. goods and /or rendering of
services.

4. Levy & Collection Levied and collected from the Levied & collected from the
Assessee. consumer but paid / deposited to
the Exchequer by the Assessee /
Dealer.

5. Shifting of Burden Tax Burden is directly borne Tax burden is shifted to the
by the Assessee. Hence, the subsequent / ultimate user.
burden cannot be shifted.

6. Tax Collection Tax is collected after the At the time of sale or purchases
income for a year is earned or or rendering of services.
valuation of assets is
determined on the valuation
date.

7. Tax Evasion Comparatively more because Comparatively less because of

of presence of Unorganised presence of organised sector.
sector.

8. Administered by Direct Tax is administered by Indirect Tax is administered by

  Central Board of Direct Taxes Central Board of Indirect Tax &
(CBDT) Customs (CBIC). It is formerly
known as Central Board of
Excise & Customs (CBEC).
 DIRECT TAX

MEANING

Direct taxes are one type of taxes an individual pays that are paid straight or directly to the
government, such as income tax, poll tax, land tax, and personal property tax. Such direct
taxes are computed based on the ability of the taxpayer to pay, which means that the higher
their capability of paying is, the higher their taxes are.

For example, in the case of income taxation, an individual who earns more pays higher taxes.
It is computed as a percentage of the total income. Additionally, direct taxes are the
responsibility of the individual and should be fulfilled by no one else but him.

As mentioned above, one good example of direct taxes is a person’s income tax. Usually,
income tax is filed annually, although deductions from one’s salary can be done on a monthly
basis. If, for example, an individual incurs tax amounting to $30,000 a year for his annual
salary of $120,000, the $30,000 is his direct tax.

TYPES OF DIRECT TAXES

1. Income tax

It is based on one’s income. A certain percentage is taken from a worker’s salary, depending

on how much he or she earns. The good thing is that the government is also keen on listing
credits and deductions that help lower one’s tax liabilities.
2. Transfer taxes

The most common form of transfer taxes is the estate tax. Such a tax is levied on the taxable
portion of the property of a deceased individual, including trusts and financial accounts. A
gift tax is also another form wherein a certain amount is collected from people who are
transferring properties to another individual.

3. Entitlement tax

This type of direct tax is the reason why people enjoy social programs like Medicare,
Medicaid, and Social Security. The entitlement tax is collected through payroll deductions
and is collectively grouped as the Federal Insurance Contributions Act.

4. Property tax

Property tax is charged on properties such as land and buildings and is used for maintaining
public services such as the police and fire departments, schools and libraries, as well as roads.

5. Capital gains tax

This tax is charged when an individual sells assets such as stocks, real estate, or a business.
The tax is computed by determining the difference between the acquisition amount and the
selling amount.

THE SALIENT FEATURES ARE LIKELY TO BE PRONOUNCED UNDER THE

NEW DIRECT TAX LAW.

1. Single Destination for all Direct Tax laws

It can be said that all direct tax law which are in force gets replaced by the direct tax code.
DTC will emerge as a single window solution for all taxpayers. It will eventually paves the
way for unified direct tax reporting system.
2. Digitalization in legal prosecution.
Introduction of the assessment unit for tax proceedings to deal with individual & corporate
taxpayers, will turns to be a big step by that one may get rid from the harassment faced by
taxmen. All communication between taxpayers and taxmen will be in digital form. Moreover,
all digital communication shall bears a unique document identification number.
3. Easy to Amend.
The New direct tax code has been designed in such a manner where the statue have been
reflected by the essential and general principles, upto the extent possible and the detail matter
are contained in the rules/schedules.
4. No dividend distribution Tax
The new tax law brings another good concept that might help companies to get relieves from
paying Dividend Distribution Tax which is (15% +12% surcharge+3% cess) therefore
Effective is 20.35% as well. There is a possibility that dividend shall be taxed only in the
hands of shareholders. It may encourage the companies to declare higher rate of dividend in
contrast with early trends.
5. Simplified language
The expansion of Indian economy boosts the number of taxpayers in last six decade. But the
amount of tax collections was increased moderately in the meantime which forces the
department think over the cost of compliance incurred by them.
6. Stable Tax rates
In Current scenoario, there is a lot of uncertainty regarding tax rates of relevant year  which
are stipulated to finance act of that year due to which taxpayers face difficulties in tax
planning for each year. But this issue also get resolve in DTC under which all tax rates are
proposed to be prescribed in schedules which obviating the needs of the finance act of every
relevant year. Further, any changes is proposed in rate schedules of new tax law shall firstly
brought before the parliament in form of amendment bill for approval to commence such
changes.

ADVANTAGES OF DIRECT TAXES

Though it is strictly implemented on every individual who does not qualify for an exemption,
there are actually numerous advantages of paying taxes directly. They include:

1. Promotes equality

Since direct taxes are based on the ability of a person to pay, it promotes equality among
payers and citizens. Every person is charged a different amount, depending on how much
they make.

2. Promotes certainty

The good thing about direct taxes is that they are determined and made final before they are
even paid. In the case of income tax, the annual tax is the same every year as long as the
salary does not change.

3. Promotes elasticity

Taxes are the earnings of the government, and when they fluctuate, the earnings also change.
They can go higher or lower.

4. Saves time and money

The government does not need to spend on the collection of taxes because they are already
taken right at the source of the income. Some companies use automatic payroll deduction
systems, which help save time and money.

 
 INDIRECT TAX

Indirect taxes are basically taxes that can be passed on to another entity or individual. They
are usually imposed on a manufacturer or supplier who then passes on the tax to the
consumer. The most common example of an indirect tax is the excise tax on cigarettes and
alcohol. Value Added Taxes (VAT) are also an example of an indirect tax.

TYPES OF INDIRECT TAXES

What many people are not aware of is that practically everyone pays taxes, especially indirect
taxes. This is because taxes are imposed on almost all the products that we consume. Here are
some of the types of indirect taxes. 

1. Sales tax

Whenever people go to the malls or department stores to shop, they are already about to pay
indirect taxes. Goods such as household items, clothing, and other basic commodities are
subject to such types of taxes. Upon payment at the counter, the final sale price is padded
with a sales tax that the store collects and pays to the government.

2. Excise tax

Excise tax is also very common. When a manufacturer buys the raw materials for the
company’s products, for example, tobacco for cigarette companies, they already need to pay
indirect taxes on the items. Through a part of the normal course of business, the manufacturer
can pass on the burden to the consumers by selling the cigarettes at a higher price.

3. Customs tax

Ever wonder why imported products are expensive? It is because of customs tax. When a
container filled with bananas from another country enters the US, the importer pays a tax
(customs tax), which is then passed on to consumers.

4. Gas tax

Yes, buying gasoline for vehicles contains an indirect tax.

EXAMPLE OF INDIRECT TAXES

Let us use the example of VAT to illustrate how an indirect tax is imposed. Say, for example,
John goes to the outlet store to buy a refrigerator that’s priced at $500. When he asks the
sales representative, he or she will declare the sale price, which is $500, and that is the right
answer.
The refrigerator’s real value is actually less than that, but because a VAT has been added
(usually 10% to 20%), the sale price is now $500. If John looks at his receipt, he will see the
actual price of the refrigerator before the tax was added. It is the manufacturer of the unit or
item who collects the tax from the sale price and pays it to the government.

ADVANTAGES

Taxes may sound like an added burden for consumers, but indirect taxes are not always just a
negative thing. Here are some of their advantages:

1. The poor can do their share

Unlike direct taxes that usually exempt the poor, indirect taxes allow them to actually
contribute their part in collecting funds for a country or state.

2. They aren’t very obvious

Indirect taxes, as they are incorporated in the sale price of an item, are not very obvious.
People don’t feel they are being taxed simply because the tax comes in small values. Plus,
add the fact that they are not indicated in the price tag, but can only be seen on the purchase
receipt. Also, they can be avoided by not buying the goods.

3. Collection is easy

Unlike direct taxes where documents need to be accomplished and filing is required, indirect
taxes are paid the moment a consumer buys a product. The tax is collected by the supplier
and paid to the government.

4. Discourages consumption of harmful products

Alcohol and cigarettes are heavily taxed. By taxing such products, people are discouraged by
their price, thereby saving them from consuming harmful items.

Context Direct Tax Indirect Tax

1. Income and profits All the goods and

Imposed services
on
2. Who Individuals and End-consumers
pays businesses
3. How Depends on income and Same for everyone
much profits
4. Not transferable Transferable
Transfera
bility
 5. Tax Possible Not possible
Evasion
6. Nature Progressive Regressive
7. Complex Convenient
Collection
s
8. Income tax and securities GST, excise duty,
Common transaction tax and VAT
examples

Direct Taxes Indirect Taxes

It is levied on income and activities

It is levied on product or services.
conducted.

The burden of tax cannot be shifted The burden of tax shifted for indirect
in case of direct tax. taxes.

It is paid by one person but he recovers

It is paid directly by person the same from another person i.e. person
concerned. who actually bear the tax ultimate
consumer.

It is paid after the income reaches in It is paid before goods/service reaches

the hands of the taxpayer the taxpayer.

Tax collection is difficult. Tax collection is relatively easier.

Example GST, excise duty custom duty

Example Income tax, wealth tax etc.
sale tax service tax