Why are taxes levied in India?

Tax is an involuntary charge levied upon individuals or businesses to raise revenue for government administration. There are different taxes that we pay to the local, state, and central governments. Every tax levied in India is backed by an accompanying law passed by the Parliament or the State Legislatures.

In India, there are two major types of taxes – Direct Tax and Indirect Tax. It is classified based on the manner in which the tax is paid to the taxation authorities.

Direct tax

Direct tax is a type of tax that the taxpayer pays directly to the government. The incidence and impact of direct tax are on the same entity, and it cannot be passed to someone else. The Central Board of Direct Tax (CBDT) is the statutory body that deals with matters related to levy and collection of direct taxes in India.

Examples of direct taxes include Income tax. This type of tax is levied on the annual income or profits gained by an individual or entity.

Indirect tax

Indirect tax is imposed on goods or services when they are bought or sold. The seller of the product or service will collect the indirect tax. Generally, the price you pay for a product or service will be inclusive of indirect tax.

The primary example of indirect tax is Goods and Service Tax (GST). This consumption-based tax is levied on “supply” in India, where you have the ultimate liability to pay while the seller deposits it to the State Government.

Other taxes

There are various subcategories of indirect tax which work as revenue generators for the government. Some common examples are professional tax, entertainment tax, entry tax, road tax, stamp duty, property tax, etc.