Tax Concepts in India: Meaning, Types & Examples

Tax is a charge levied by the government on the people of the country and helps the government generate revenue to fund developmental projects. The tax system in India is governed by the Income Tax Act 1961, Goods and Services Act 2017, and various other legislatures. The New Income Tax Bill aims to change the direct tax system. The Indian tax structure comprises both direct taxes and indirect taxes. Both the central and state governments have the power to levy taxes. 

This article will discuss the tax system in India, the concept of taxation, and the types of taxes levied in India. 

Tax Concepts in India

The Indian Constitution specifies that no tax can be levied except under the authority of law. As per Article 246 of the constitution, the power to levy and collect different taxes is delegated to the parliament and state legislatures, respectively. The power to frame laws on particular matters is specified under 3 lists explained below:

Union List

The Parliament has exclusive powers to make laws on the matters specified in the union list.

State List

The State Legislature has exclusive powers to make laws on the matters specified in the state list.

Concurrent List 

Both the parliament and state legislatures have the power to make laws on the matter specified in the concurrent list.

The concept of tax is covered under the Concurrent list of the constitution. Therefore, the power to make tax laws is delegated to central and state governments, respectively through the lists described above.

Types of Taxes in India

Taxes can be broadly classified into direct and indirect taxes, mainly based on tax and tax payment incidence. Let us first understand the concept of tax incidence and tax payment.

Tax Incidence

• Tax incidence refers to the person who ultimately bears the tax burden.
• Irrespective of whether the tax has been remitted to the government by that individual, the responsibility for the tax liability rests with him.
• When we say that the tax incidence has fallen on a person, it means they are the ones who effectively bear the cost of the tax.

Tax Payment

• Tax payment is an apparent concept wherein the person who has ultimately paid the liability.
• It could be that he pays taxes out of his pocket or recovers them from another person.

Based on tax incidence and tax payment, taxes are broadly classified into

• Direct taxes  - where tax incidence and tax payment fall on the same person
• Indirect taxes - where tax incidence and tax payment fall on two different persons.

Concept of Direct Tax

Have you ever filed income tax returns and paid taxes? Have you ever recovered the taxes from anybody else? You would have paid it from your pocket! This is a typical situation of direct tax. It is a tax in which the tax liability and tax payment falls on the same person. Though income tax is the most popular form of direct tax, there were other direct tax systems in India. Let us dive into the types of direct taxes.

Types of Direct Taxes 

Income Tax

Tax paid on income earned by a person is called Income Tax. In India, income tax is one of the items mentioned in the Union List. The person whose income is considered for tax calculation purposes is called an assessee. There are various kinds of assessees in the Income Tax Act, as follows:

• Individuals
• Hindu Undivided Family
• Partnership firms
• LLPs
• Indian Companies
• Foreign Companies
• Also, Charitable trusts in specific situations.

Tax rates differ based on the level of income earned as India follows a progressive tax rate system, the assessee's type, and the assessee's eligibility to claim specific deductions.

Example 

In Income Tax, income is classified into five major heads and taxed at respective rates. 

1. Salary - Taxed at Slab rates
2. House Property Income - Taxed at Slab rates. Specified deductions can be claimed under this specific head.
3. Capital Gains - Taxed at special rates depending on the period of Holding (Long Term or Short Term)
4. Business Income - Any income earned from freelancing, business, professions, or intraday trading of shares and derivatives is taxed under this head.
5. Other sources - Casual income is taxed at flat 30%. Others are taxed under slab rates.

TDS in Income Tax

TDS is one of the popular tax collection mechanisms under the Income Tax Act, wherein the government recovers the tax before the income even reaches the taxable person. However, credit of TDS can be claimed when the taxpayer files the return of income. 

Rates of TDS differ depending on the nature of transactions, payer and payee, and sometimes their residential status.

Wealth Tax

Wealth tax was levied on a person's net wealth on a valuation date. It was also levied on individuals, HUFs, and companies. Similar to Income Tax, wealth tax is related to the union list. The Wealth tax in India was abolished in Budget 2015.

Example

Wealth tax is levied on immovable properties like land and buildings and assets like luxury cars, jewellery, yachts, and aircraft. Generally, wealth tax is levied at 1% of the net wealth on the valuation date, more than Rs. 30 lakhs.

Mr. A, an individual with a net wealth of Rs. 5 crores, would have to pay a professional tax of Rs. 5 lakhs.

Property Tax

Property tax is levied on the value of the aggregate properties owned by the person, irrespective of whether the property is used in some way or left vacant. The respective state governments levy property taxes.

Example

Property tax can be levied on different types of immovable property, such as vacant land, land with buildings, property under construction, etc., regardless of whether it is rented.

Professional Tax

Tax on Profession, trade, calling, and employment is a matter of state list. Each state government has a separate act governing the levy and collection of professional taxes in India. Usually, slab rates are specified for professional taxes. In exceptional cases, they vary based on the gender of the worker. The maximum amount of professional tax that can be levied by a state has been capped at Rs. 2,500.  

Example

Ms. Priya works in an accounting firm and earns Rs. 35,000 per month. Since her monthly salary exceeds Rs.10,000, professional tax is applicable. She is liable to pay Rs. 2,500 per annum. Monthly, Rs. 200 would be deducted from her salary by the employer and remitted to the respective State Government on due dates. As per provisions, extra Rs.100 needs to be deducted in February - which should be complied with accordingly. 

Concept of Indirect Tax

Have you ever checked restaurant bills before you paid and seen a couple more bucks added to your bills as GST? You have never paid GST directly to the government; it is collected from you and paid to the government by the restaurant. 

Broadly speaking, in indirect taxes, the tax incidence and the tax payment fall on two different persons. The burden of indirect tax is on the end consumer. 

Types of Indirect Tax

Popular indirect taxes in India are

• Goods and Services Tax
• Customs Duty

Goods and Services Tax

As the name suggests, it is a comprehensive indirect tax mechanism encompassing areas previously covered by different indirect tax laws. Tax incidence is always borne by the ultimate consumer, which is made possible by the mechanism of Input Tax Credit. GST rates differ depending on the classification of goods and services under the law.

Example

Mr A, a mobile phone dealer, buys a stock of phones for sale and purchases one for his personal use. 

As we already discussed, the ultimate consumer should bear the tax incidence. For the mobile phones he bought as stock, he is not an ultimate consumer since he is going to sell them to people who ultimately use them. However, for the mobile phones he purchased for personal use, he is the ultimate consumer.

The ultimate tax liability for a mobile he purchases for himself falls on him. He will pay taxes on that mobile, for which credit cannot be taken. He will pay the taxes on mobiles purchased for stock, but input credit will be claimed for the taxes paid.

This is how tax incidence is shifted through Input Credit in GST.

Customs Duty

Customs duty is levied on imports of goods when the goods cross the customs barrier at ports and airports. In most cases, customs duty is charged along with a Social Welfare Surcharge. Customs are levied to stabilise the prices of imported goods, protect the domestic market, and regulate goods entering India. 

 It is to be noted that for transactions where customs and GST are applicable, GST must be paid for taxable value plus total customs duty.

Customs duty would also be paid in a few export cases to discourage exports of essential commodities.

Example

Mr A has imported textiles from China for his showroom in India. The goods reached Mumbai port on 04-04-2025, and a bill of entry was filed on the same date. He is liable to pay customs duty on the same date. On payment of duty, the port authorities will release the goods.

Final Word

The economic landscape in India is complex, and tax laws are designed in such a way that it caters to the complexities of the environment. Understanding of the basic tax concepts helps us to navigate compliance burden with better ease.