Tax is a compulsory charge imposed by the government on individuals and entities, serving as a major source of revenue to finance development and welfare projects. In India, taxation is regulated by laws such as the Income Tax Act, 1961, the Goods and Services Tax Act, 2017, along with other legislations. The proposed New Income Tax Bill is designed to reform the existing direct tax framework. India’s tax system includes both direct and indirect taxes, and the authority to impose these lies with both central and state governments.
This article explains the Indian tax structure, the meaning of taxation, and the different kinds of taxes applied in the country.
Tax Concepts in India
The Constitution of India lays down that no tax can be imposed without legal authority. According to Article 246, the power to levy and collect taxes is distributed between Parliament and the state legislatures. The authority to create laws on various matters is divided across three lists:
Union List
Parliament holds exclusive authority to legislate on matters included in the union list.
State List
State legislatures have exclusive rights to enact laws on subjects in the state list.
Concurrent List
On subjects under the concurrent list, both Parliament and state legislatures can make laws.
Since taxation is placed under the concurrent list, both central and state governments share the authority to frame tax laws in accordance with these provisions.
Types of Taxes in India
In India, taxes are generally divided into two categories: direct taxes and indirect taxes. This classification is mainly based on the distinction between tax incidence and tax payment. Before we move further, let’s understand these two concepts.
Tax Incidence
Tax incidence refers to the individual who ultimately bears the burden of the tax. Regardless of who submits the tax to the government, the liability rests on the person on whom the tax incidence falls. In simple terms, if the tax incidence is on someone, they are the ones shouldering the actual cost of the tax.
Tax Payment
Tax payment means the act of paying the tax liability. The payment may be made directly by the person from their own funds or passed on to another individual who bears the cost.
Classification of Taxes
- Direct Taxes – In this case, both tax incidence and tax payment fall on the same individual.
- Indirect Taxes – Here, the person who pays the tax and the person who ultimately bears the burden are different.
Concept of Direct Tax
Have you ever filed an income tax return and paid the tax yourself? Did you pass on that cost to anyone else? Most likely, you didn’t—you bore the expense directly. This is exactly how direct tax works. In a direct tax system, the responsibility for paying the tax and the actual tax burden both lie with the same individual. While income tax is the most well-known example, India has had other forms of direct taxation in the past. Let’s look at the main types of direct taxes.
Types of Direct Taxes
1. Income Tax
Income tax is charged on the earnings of an individual or entity. It is included in the Union List, giving Parliament authority over its legislation. Under the Income Tax Act, the taxpayer is called an assessee, and it can include:
- Individuals
- Hindu Undivided Families (HUFs)
- Partnership Firms
- LLPs
- Indian Companies
- Foreign Companies
- Certain Charitable Trusts
India follows a progressive tax system, where rates vary depending on income levels, the category of assessee, and applicable deductions.
Example
Income is taxed under five main heads:
- Salary – Taxed at slab rates.
- House Property – Taxed at slab rates with specified deductions allowed.
- Capital Gains – Taxed at special rates based on the holding period (short-term or long-term).
- Business or Profession – Includes earnings from freelancing, business, professions, or trading in shares and derivatives.
- Other Sources – Casual income taxed at a flat 30%, others at slab rates.
TDS in Income Tax
Tax Deducted at Source (TDS) is a common method of collection where tax is deducted before income reaches the recipient. The taxpayer can later claim credit for TDS when filing their return. Rates vary depending on the transaction, the parties involved, and in some cases, their residential status.
2. Wealth Tax
Wealth tax was once levied on the net wealth of individuals, HUFs, and companies, but it was abolished in the 2015 Union Budget. Similar to income tax, it was part of the Union List.
Example
Wealth tax applied to assets like immovable property, luxury cars, jewellery, yachts, and aircraft. Typically, it was charged at 1% of net wealth exceeding ₹30 lakhs as on the valuation date.
For instance, if Mr. A had net wealth of ₹5 crores, he would have been liable to pay ₹5 lakhs as wealth tax.
Property Tax
Property tax is a levy imposed on the total value of immovable properties owned by an individual, whether the property is in use or lying vacant. The authority to charge property tax rests with the respective state governments.
Example
Property tax may apply to vacant plots, land with constructed buildings, or even properties that are still under construction, regardless of whether they are occupied or rented out.
Professional Tax
Professional tax is charged on income earned through professions, trades, employment, or similar work. It falls under the State List, which means each state enacts its own law for the imposition and collection of this tax. Typically, slab rates are followed, and in some states, the rates differ by gender. The maximum professional tax any state can levy is ₹2,500 per year.
Example
| Class of Persons | Rate of Tax (₹) |
| Salary/Wage earners earning up to ₹7,500 per month | Nil |
| Male earning above ₹7,500 but not exceeding ₹10,000 | ₹175 per month |
| Female earning up to ₹10,000 | Nil |
| Salary exceeding ₹10,000 | ₹2,500 per annum |
For instance, Ms. Naina, who earns ₹35,000 per month working at an accounting firm, comes under the highest slab. She must pay ₹2,500 annually as professional tax. Her employer deducts ₹200 each month from her salary and remits it to the state government. Additionally, as per rules, an extra ₹100 deduction is made in February to meet the yearly cap.
Concept of Indirect Tax
Have you ever noticed a restaurant bill showing an extra charge as GST? That amount isn’t paid directly by you to the government. Instead, the restaurant collects it from you and later deposits it with the authorities.
In simple terms, indirect taxes are those where the person paying the tax and the person bearing its burden are different. Ultimately, the final consumer carries the cost of such taxes.
Types of Indirect Tax
The major forms of indirect taxes in India include:
- Goods and Services Tax (GST)
- Customs Duty
Goods and Services Tax (GST)
As the name implies, GST is a unified indirect tax system that replaced several earlier indirect tax laws. The burden of GST always falls on the end consumer, enabled through the Input Tax Credit mechanism. GST rates vary depending on how goods and services are categorized under the law.
Example:
Mr. ABC, a mobile dealer, buys a batch of phones for business and also one for his personal use.
For the phones purchased as stock, he is not the final consumer because they will eventually be sold to customers. Hence, he can claim input credit on the tax he pays. But for the phone he keeps for himself, he becomes the ultimate consumer and must bear the tax cost without any input credit.
This demonstrates how the GST system shifts the tax burden through the use of Input Credit.
Customs Duty
Customs duty is charged on imported goods once they cross India’s customs barrier at ports or airports. Typically, it is collected along with a Social Welfare Surcharge. The purpose of customs duty is to control the flow of imports, protect local industries, and keep the prices of foreign goods stable.
When both customs duty and GST apply, GST is calculated on the taxable value plus the customs duty paid. In certain export cases, customs duty may also be charged to restrict the export of essential items.
Example:
Mr. ABC imports textiles from China for his store in India. The shipment arrives at Mumbai port on 04-04-2025, and a bill of entry is filed the same day. He must pay customs duty on that date, after which the port authorities will release the goods.
Final Word
India’s economy is dynamic, and tax laws are structured to meet these complexities. Gaining clarity on basic tax principles makes it easier to handle compliance requirements with confidence.
FAQs on Tax Concepts in India
Q1. What is the difference between direct tax and indirect tax in India?
Direct taxes are paid directly to the government by the taxpayer (e.g., income tax), while indirect taxes are collected through intermediaries (e.g., GST, customs duty) and ultimately borne by consumers.
Q2. What are the main types of taxes in India?
The two major types are direct taxes (like Income Tax, Corporate Tax) and indirect taxes (like GST, Customs Duty, Excise Duty).
Q3. Who is responsible for paying GST in India?
Although GST is collected by businesses on the supply of goods and services, the final burden falls on the end consumer who pays it while purchasing.
Q4. Why is customs duty levied in India?
Customs duty is imposed on imports (and sometimes exports) to regulate trade, safeguard domestic industries, and maintain fair pricing in the local market.
Q5. Can businesses claim a refund of the taxes they pay?
Yes, under the GST framework, businesses can claim Input Tax Credit (ITC) on taxes paid for goods and services used in the course of business, except on items purchased for personal use.
Q6. How does the government use tax revenue in India?
Tax revenue is used to fund infrastructure, public welfare schemes, healthcare, education, defense, and overall economic development.
Q7. Do individuals pay both direct and indirect taxes?
Yes. Individuals pay direct taxes such as income tax and indirect taxes like GST when they purchase goods or services.
Q8. What is an example of indirect tax in everyday life?
Paying GST on a restaurant bill or while buying electronic items is a common example of indirect tax.
