The concept of taxation is not new; it has been around since the times of monarchies and kings. The tax used to be levied in the form of crops, farm animals, etc, during old times. Taxation has evolved since then. Understanding the concept of what is tax is important for better financial management and planning. 

This article provides insights into the concept of what is the meaning of tax and some methods for efficient planning for taxation. 

What is Tax?

The tax system is the means through which the government draws revenues from individuals and entities, which they spend on improving public services and infrastructure for the good of all citizens. Some countries can charge higher taxes than others based on population, level of income and wealth, etc, and some countries can choose to not collect any taxes, called Tax Haven.

India has a rich history of tax collection that predates its independence, evolving into a system designed to impose a progressive tax structure. This means that individuals and organizations contribute more to taxes as their earnings increase, promoting wealth redistribution and facilitating infrastructure development to enhance business operations. 

Purpose 

The revenue from taxes contributes to important spending like building new roads, improving the police force, increasing defence, and constructing public amenities, all of which contribute to safety, stability, and better quality of life.

Additionally, tax funds are allocated to support the welfare and upliftment of economically disadvantaged and marginalized groups in society, promoting greater equity and opportunity for everyone. 

To further support societal growth, the government can offer tax exemptions to specific organizations, such as NGOs and social welfare groups, which align with its developmental objectives. It is crucial for governing authorities to establish a taxation framework that meets revenue needs while ensuring citizens are not overburdened, fostering a fair and effective economic environment.

Types of Tax 

There are two major types of taxes that are levied on individuals and organizations by the government. These are Direct taxes and Indirect taxes. 

Direct Tax 

Direct taxes are charged directly based on the level of income or profits. These taxes progress as income or profits rise. The liability of direct taxes can not be transferred onto others. Some of the most common direct taxes are as follows: 

  • Income Tax: The income tax structure in India is designed to be progressive, meaning that individuals with higher incomes pay a larger percentage in taxes. Income tax, however, comes with a major perk: a person earning less than Rs. 3,00,000 Structure pays no income tax, which is necessary to relieve those in lower segments.

As of January 12, 2025, the Indian government has successfully collected Rs. 8,74,442 crores in income tax revenue for the fiscal year 2025.

  • Corporate Tax: In India, corporate tax is levied on both domestic and foreign companies and is levied based on several factors, including turnover and profit. Similar to the personal income systems, the percentage ranges increase as the company’s profits increase.

As of January 12, 2025, the total amount collected in corporate taxes stands at Rs. 7,68,128 crores. 

  • Capital Gains Tax: Individuals face capital gains tax when they sell assets like properties, stocks, or bonds and achieve a profit in return. The tax rate is based on the time the asset is held before being sold. 

Transactions are divided into long-term capital gains and short-term capital gains according to how long the asset is held before it is sold.

  • Securities Transaction Tax: This tax is levied on securities being traded on stock exchanges. The proceeds from this tax are used for making the stock exchanges more efficient. 

As of 12th January 2025, the government collected Rs. 44,538 crores as STT or Securities Transaction Tax. 

  • Wealth Tax: A tax levied along with income tax on the incomes of super-rich sections of society is called wealth tax. This tax no longer exists in India. It has been replaced by a surcharge, imposed on individuals making over Rs. 10 crores per annum. 

Indirect Tax

After direct taxes comes Indirect taxes. The tax burden of indirect taxes is transferable from one person to another. The prevailing indirect tax in India is the Goods and Services Tax (GST). 

  • Goods and Services Tax or GST: GST is charged by the government on goods and services. Different goods and services bear different GST rates. GST starts from 5% and goes up to 28%. 

Petrol and Alcohol are outside the domain of GST, and taxes on these items are charged by states. The government collected Rs. 1,54,366 crores net GST (after refund) in December 2024. 

The burden of GST is passed from retailers or service providers onto end customers. GST is further categorized into: 

  1. Central GST: Collected by the central government on transactions done within a state. 
  2. State GST: Collected by the state government on transactions done within a state.
  3. Integrated GST: Collected by the government on transactions done among two different states and imports
  • Custom Duty: Custom duty is charged on goods imported from other countries. This tax helps in the regulation of the movement of goods across borders. This tax can vary based on the country from where the goods originated and the type of goods. This tax also helps in promoting domestic manufacturing. 

Tax Planning in India

Individuals and corporations can claim refunds and certain deductions before paying taxes. Tax planning includes paying taxes and legally maximizing savings. Key considerations during tax planning include:

  • Understanding Tax Rates and Slabs: It is important to understand taxation on various levels of income and sources from where they are generated. 
  • Understanding Deductions: Certain investments and donations help in reducing tax liability. Such as PPF or Public provident fund, ELSS or Equity linked Saving schemes, etc. 
  • Timely Filing of Taxes: Taxes have to be fined in the timeline suggested by the government, and failure to do so can lead to penalties. 
  • Professional Advisory: To avoid any penalties and maximize your deductions and savings, you can take advice from a professional Chartered Accountant (CA). 

Conclusion 

Systems of tax is a process through which the governing bodies earn their revenues. Taxes are important for the maintenance and development of a country. It is the responsibility of all the citizens to pay taxes on time. Avoiding taxes and delaying tax payments can lead to penalties. Are you willing to start your investment and learning journey? Download the Powerup’s Financial Planning app today!