Introduction to tax, Meaning, definition, basic concepts, types of taxes, Indirect tax, direct tax, difference between indirect & direct tax

1. INTRODUCTION TO
TAXATION
Prepared by
Vinodhini.R
Asst.Professor

2. TAX
Tax is a compulsory financial obligation
levied by the government on income, goods,
and activities. It is one of the basic sources of
government income which is utilized for
providing various services to the people. The
authority to impose the tax is in the hands of
Central and State Government.

3. TYPES OF TAXES

5. Direct Tax
The tax, which is charged on the income or
wealth of a person is known as the Direct tax.
Here the tax burden falls on the person himself,
i.e. taxpayer and tax bearer is the same person. It
is a tax in which the money is directly transferred
from an individual’s pocket to the government’s
pocket.

6. Income Tax: Tax levied on the income of a
person.
Wealth Tax: Tax charged on the wealth of a
person.
Others: It includes entertainment tax and interest
tax.
Types of Direct tax

7. Indirect Tax
The tax, which is charged on the goods or
services, is known as indirect taxes. Here, the tax
burden is shifted to another person, i.e. the
taxpayer and tax bearer both are two different
persons. It is a tax in which the money is first
transferred from an individual to the taxpayer and
then to the government

8. TYPES OF INDIRECT TAX
On goods:
VAT (Value Added Tax): Tax on intrastate
sales.
CST (Central Sales Tax): Tax on interstate
sales.
Customs Duty: Tax on the manufacture of
goods.
Excise Duty: Tax on import or export of goods.
Others: Octroi, Entry Tax, etc.

9. On Services:
Service Tax

10. DUTY
A duty is a kind of tax payable to the
government, charged on goods and financial
transactions. It comes under the category of
Indirect tax. The right to levy duty is in the
hands of the Central Government. It also adds
to the revenue of the government.

11. TYPES OF DUTIES
Excise Duty Custom Duty

12. Excise Duty
Tax levied on the production of goods within
the country is known as Excise Duty. It is also
known by the name Central Value Added Tax
(CENVAT). Central Excise Act, 1944 and the
Central Excise Tariff Act, 1985 are the two
important statutes which govern the Excise
Duty in India. At present, the rate of excise duty
in the country is 12%.

13. Customs Duty
When the goods are traded outside India then the
tax levied by the Government of India is known
as Customs Duty. It is charged on the import and
export of the commodities. Customs Duty is
governed by the Customs Act, 1962 and
Customs Tariff Act, 1975. The tax charged on
imports is known as Import Duty whereas the
tax on exports is known as Export Duty.

14. Key Differences Between Tax and Duty
Tax is a financial obligation on Income which is to be paid to
the government compulsorily. Duty is a fee payable to the
government on the manufacture and import/export of goods.
The duty itself is a type of tax.
Tax is charged on individuals, wealth, services and sales,
whereas Duty is charged on goods.
There are two major types of taxes, i.e. Direct Tax and Indirect
Tax. Conversely, the major types of duties are Excise Duty and
Customs Duty.
The Central Government or State Government can impose taxes,
but only the Central Government has got the authority to levy
duty.

15. POWERS OF UNION /STATES
Indian constitution has divided the taxing powers as well
as the spending powers (and responsibilities) between the
Union and the state governments. The subjects on which
Union or State or both can levy taxes are defined in the
7th schedule of the constitution. Further, limited financial
powers have been given to the local governments also as
per 73rd and 74th amendments of the constitution and
enshrined in Part IX and IX-A of the constitution.

16. The Constitution provides for the formation of
a Finance Commission (FC) by President of
India, every five years, or any such earlier
period which the President deems necessary
via Article 280. Based on the report of the
Finance Commission, the central taxes are
devolved to the state governments.

17. Separation of Powers
The Union government is responsible for issues that usually concern the
country as a whole, for example national defence, foreign policy,
railways, national highways, shipping, airways, post and telegraphs,
foreign trade and banking. The state governments are responsible for
other items including, law and order, agriculture, fisheries, water supply
and irrigation, and public health.
Some items for which responsibility vests in both the Centre and the
states include forests, economic and social planning, education, trade
unions and industrial disputes, price control and electricity. Then, there is
devolution of some powers to local governments at the city, town and
village levels.

18. Some items for which responsibility vests in both the
Centre and the states include forests, economic and
social planning, education, trade unions and industrial
disputes, price control and electricity. Then, there is
devolution of some powers to local governments at the
city, town and village levels.

19. The taxing powers of the central government encompass
taxes on income (except agricultural income), excise on
goods produced (other than alcohol), customs duties, and
inter-state sale of goods. The state governments are vested
with the power to tax agricultural income, land and
buildings, sale of goods (other than inter-state), and excise
on alcohol. Local authorities such as Panchayat and
Municipality also have power to levy some minor taxes.

20. The authority to levy a tax is comes from the
Constitution which allocates the power to levy various
taxes between the Centre and the State. An important
restriction on this power is Article 265 of the
Constitution which states that “No tax shall be levied or
collected except by the authority of law.” This means
that no tax can be levied if it is not backed by a
legislation passed by either Parliament or the State
Legislature.

21. Sources of Revenue for Union Government
Income (except tax on agricultural income), Corporation Tax
& Service Tax
Currency, Coinage, legal tender, Foreign Exchange
Custom duties (except export duties)
Excise on tobacco and other goods.
Estate Duty (except on agricultural goods) (Kindly note that
its mentioned in the constitution but Estate duty was abolished
in India in 1985 by Rajiv Gandhi Government)
Fees related to any matter in Union list except Court Fee
Foreign Loans
Lotteries by Union as well as State Governments.

22. Post Office Savings bank, Posts, Telegraphs, Telephones, Wireless
Broadcasting, other forms of communication
Property of the Union
Public Debt of the Union
Railways
Stamp duty on negotiable instruments such as Bills of Exchange, Cheques,
Promissory notes etc.
Reserve Bank of India
Capital gains taxes, Taxes on capital value of assets except farm land
Taxes other than stamp duties on transactions in stock exchanges and future
markets
Taxes on the sale and purchase of newspapers and advertisements
published therein.
Terminal Taxes on Goods and passengers, carried by Railways and sea or
air.

23. Sources of revenue for State Governments
Taxes and duties related to agricultural lands
Capitation Taxes
Excise on liquors, opium etc.
Fees on matters related to state list except court
fee
Land Revenue, Land and buildings related taxes
Rates of Stamp duties in respect of documents
other than those specified in the Union List
Taxes on mineral rights subject to limitations
imposed by the parliament related to mineral
development
Taxes on the consumption or sale of electricity
Sales tax on goods (other than newspapers) for
consumption and use within state.

24. Taxes on advertisements except newspaper ads.
Taxes on goods and passengers carried by road
or on inland waterways
Taxes on vehicles, animals and boats,
professions, trades, callings, employments,
luxuries, including the taxes on entertainments,
amusements, betting and gambling.
Toll Taxes.

25. Concurrent Powers
The property of the Union is exempted from
State Taxation; and the property of the states
is exempted from the Union Taxation. But the
parliament of India can pass legislation for
taxation by Union Government of any
business activities / trade of the state which
are not the ordinary functions of the state

26. INDIRECT TAXES
The indirect taxes are the levies made by Central and
State government on the expenditure, consumption,
services, rights and privileges yet not on the property or
income. This includes duties of customs paid on imports,
as well as excise duty paid on production and value
added tax on certain stages of production and distribution
of products etc. Indirect tax is often also known as the
consumption tax, since they are a regressive measure in
application, and not rooted in paying ability.

27. Types of Indirect Taxes
Goods and Services Tax:
The law on GST was brought to action in July 2017, with 17
indirect taxes under its purview. All major services and service tax
has been subsumed under the GST-
On the state level:
State excise duty
Additional excise duty
Service tax
Countervailing duty
Special additional custom duties

28. At the central level, it covers:
Sales Tax
Entertainment Tax
Central sales Tax
Octroi and entry Tax
Purchase Tax
Luxury Tax
Taxes on lottery gambling and betting
Levies on products outside GST purview:
Taxes on products that use alcohol and petroleum products.

29. Sales Tax:
The tax levied on the sales of goods. The Union Government
imposes this sales tax on the Inter-State sale, while the sale tax
on Intra-state sale is levied by the State Government. This tax
has a three-segment bifurcation along
Inter-State Sale
Sale during import/export
Intra-State Sale

30. Service Tax:
Service tax are indirect indices which taxpayers pay on various
paid services. These paid services include-
Telephone
Tour operator
Architect
Interior decorator
Advertising
Health centre
Banking and financial service
Event management
Maintenance service
Consultancy service
Service tax interest is 15%

31. Value Added Tax:
The state governments collect this category of taxes. For
instance, when a person buys a product that it is
important, we pay an additional tax known as Value
Added Tax. Paid to the government, the VAT has a rate
that is composed along nature of item and respective
state of sale.

32. Custom Duty and Octroi Tax:
Levied upon goods imported into the country from
abroad. The tax of custom duty is paid at the entry port
of a country such as the airport. The rate of taxation is
variable as per product’s nature. Octroi is charged upon
the goods entering a municipal zone.

33. Excise Duty:
Excise duty is an indirect tax form that is charged on the
goods produced inside a country. This duty is different
from the custom duty. This is also known as CVAT, or
Central Value Added Tax.

34. Anti-Dumping Duty:
This is levied upon goods that are exported at a rate less
than the standard rate by the nation to some other nation.
This tax is levied upon by the Central government.

35. Newly Implemented Indirect Tax (GST)
GST is a highly regarded tax system for the country. It is amongst the
latest indirect tax systems operating under the constitution of India.
The importance of this taxation regime lies in the fact that it covers
under itself various other indirect taxes operating inside the country.
This tax regime has been brought in mark a change in the economy of
the country and to lessen the cascading effects from tax duties that
deliver overall market inflation.

36. Features of Indirect Taxes
Payment and Tax Load - The service provider makes payment of indirect
taxes and this is transferred to a final consumer.
Liability of Tax – Here the seller or service provider makes payment on
indirect taxes which are transferred to final consumer.
Nature – Initially, indirect taxes used to have a regressive nature. Yet, now with
the coming of GST, they have become quite progressive.
Evasion - Indirect taxes are hard to evade due to direct implementation through
goods and services.
Investment and Saving - Most indirect taxes are largely growth-oriented since
they de-motivate the consumer and encourage savings.
Social Coverage - The indirect tax has a much larger coverage since their
charge falls upon each individual buying products or services.

37. Advantages Of Indirect Taxes
Contribution by the poor
Poor folk are outside the purview of direct taxes and this is the only way that
this section of the society contributes. This goes along the basic principle of
giving every person a share towards the growth of the country using state
governments.
Convenient
Taxpayers are saved from indirect taxes since they are paid while buying
things. Also, it is easy for state authorities to gather this tax since they are
direct upon collection from the factories / ports, saving effort and time.
Easy collection
Gathering these taxes is an automatic function performed when purchasing
and selling goods and services.

38. Comparison of Direct and Indirect Taxes
Direct Taxes
It is levied on income and activities conducted.
Indirect Taxes
It is levied on product or services.
Direct Taxes
The burden of tax cannot be shifted in case of direct tax.
Indirect Taxes
The burden of tax shifted for indirect taxes.
Direct Taxes
It is paid directly by person concerned.
Indirect Taxes
It is paid by one person but he recovers the same from another person
i.e. person who actually bear the tax ultimate consumer.

39. Direct Taxes
It is paid after the income reaches in the hands of the taxpayer
Indirect Taxes
It is paid before goods/service reaches the taxpayer.
Direct Taxes
Tax collection is difficult.
Indirect Taxes
Tax collection is relatively easier.
Direct Taxes
Example Income tax, wealth tax etc.
Indirect Taxes
Example GST, excise duty custom duty sale tax service tax