Taxes : Meaning, Types, Calculation & How to File

What are Taxes?

The government must levy taxes on eligible citizens to run the country wisely; paying taxes to the local government is an essential component of life for all individuals, irrespective of their geographical location. At present, taxes can be charged in many different ways, including but not limited to state and federal taxes, direct and indirect levies, and more. For understanding, the forms of taxation in India shall be classified as either direct or indirect.

Geeky Takeaways:

• A necessary financial contribution to the government, income tax is paid by both individuals and enterprises by their earnings.
• Its funding of public services, infrastructure, and numerous government initiatives is critical.
• The amount subject to taxation is obtained by deducting allowable deductions and exemptions from total income to ascertain taxable income.
• To promote equity within the tax system, governments frequently implement progressive tax rates, which levies a greater proportion of tax on higher income levels.
• It is a legal requirement to file timely and accurate income tax returns; failure to do so may result in sanctions and legal repercussions.

Types of Taxes in India

Whether it be an individual, a business, or an organisation, it is mandatory to pay taxes in different formats. In India, taxation is commonly categorised into two main classifications, Direct Tax and Indirect Tax. Let us examine these two categories of taxes to understand the difference between direct and indirect taxes.

Direct taxation is levied on individuals’ earnings or profits. To illustrate, a taxpayer pays funds to the government for various objectives, such as personal property tax, income tax, FBT, and so forth. The burden must be assumed by the individual subject to the tax; it cannot be transferred to another individual. The Central Board of Direct Taxes (CBDT) is in charge of managing and supervising direct taxes. On the other hand, the government imposes indirect taxation on specific products and services. As a result, it is capable of being transferred from one taxpayer to another. It could be transferred from the wholesaler to retailers, who would then resell it to consumers. Customers therefore bear the primary burden of indirect taxes. The Central Board of Indirect Taxes and Customs (CBIC) oversees the administration and regulation of indirect taxes.

The introduction of the Goods and Services Tax (GST) by the government in 2017 is regarded as the most innovative tax reform in independent India to date. In the past, governments imposed a variety of state and central taxes on the purchase of products and services. The issue with previous reforms was that the taxation process was confusing and the presence of clashing regulations allowed certain individuals to exploit shortcomings in the system to evade taxes. With the implementation of the Goods and Services Tax (GST), a greater proportion of individuals were subject to taxation, which hurt tax evaders by making it more difficult to avoid payment.

Main Categories of Indirect Taxes

Main Categories of Direct Taxes

1. GST: The products and Services Tax is an example of an indirect tax that is currently levied on a range of products and services. A notable benefit of the Goods and Services Tax (GST) is its ability to completely eliminate the tax-on-tax or cascading impact witnessed under the previous tax regime. 2. Excise Duty: Excise duty is a tax levied on the licencing, sale, and manufacture of specific domestically produced products. 3. Sales Tax: A form of indirect tax, sales tax is levied by the seller upon the purchaser during the transaction involving the exchange or sale of a taxable item. The vendor subsequently remits the tax payment to the government on the purchaser’s behalf. Nevertheless, the effectiveness of the sales tax is typically dependent on the policies enacted by the governing authority. Manufacturer’s sales tax, wholesale sales tax, use tax, value-added tax, and retai sales tax are all significant forms of sales tax.

Income Tax: Income tax is a form of taxation that is levied on the earnings and profits generated over the course of a given year. Direct taxes are most frequently illustrated through income tax. The tax referred to as “income tax” is a fiscal charge imposed by the central government on the profits acquired by businesses and individuals during a specific fiscal period. However, the quantity of income tax owed is dependent upon the earnings categorised under various heads of income. Moreover, individuals whose annual income surpasses ₹2.5 lakh p.a. will be subject to income tax during the fiscal year 2022-2023.

Furthermore, direct and indirect taxes include customs duty, corporate tax, and value-added tax, among many others.

Types of Taxes in US

1. Taxes on Individual Income: An individual or household’s earnings, including wages, salaries, investments, and other sources of income, are subject to an individual income tax (also known as personal income tax). Numerous individual income taxes are “progressive,” which means that as a taxpayer’s income rises, so do tax rates; as a consequence, those with higher incomes pay a greater proportion of income taxes.

2. Taxes on Corporate Income: Federal and state governments levy a corporate income tax (CIT) on company earnings, which are calculated by subtracting expenses (the cost of doing business) from revenues (the amount a business earns in sales).

There are two main classifications of businesses in the United States, C corporations, which are subject to the corporate income tax; and passthroughs, including sole proprietorships, partnerships, S corporations, and LLCs, which “pass through” their income to their owners’ individual income tax returns and thereby pay the individual income tax. Although C companies must submit the corporate income tax, the financial burden of this obligation is distributed among its consumers and employees in the form of increased costs and reduced compensation. As a consequence of the adverse economic impacts, an increasing number of nations have adopted a policy of taxing corporations at rates below 30 percent. This includes the United States, which implemented a reduction in its federal corporate income tax rate to 21 percent as a component of the Tax Cuts and Jobs Act of 2017.

Tax Delinquency in US

In the United States, tax delinquency relates to circumstances in which entities, including individuals and businesses, refuse to meet their tax responsibilities through the delayed payment of the mandatory tax amount. Delinquency regarding taxes may be found at different tiers of government, including the federal, state, and local sectors.

Why do we Pay Taxes?

In order to fund important public services and functions that contribute to the welfare and progress of society, individuals are required to pay taxes. Governments depend on tax revenues as their principal financial asset, which enables them to deliver essential services including but not limited to education, healthcare, infrastructure, and national defense. In addition to contributing to the redistribution of wealth, taxes boost social programs and safety nets in an effort to reduce economic inequality. Moreover, taxation plays an essential role in promoting economic stability by enabling governments to exert control over economic circumstances via fiscal policies. Tax payment is an important social obligation that contributes to the protection of the rule of law, the financing of public commodities, and the development of a community or nation as a whole.

Differences Between Direct Taxes and Indirect Taxes

Basis	Direct Taxes	Indirect Taxes
Nature of Tax	Levied on individuals and businesses	Levied on goods and services
Basis of Taxation	Depends on the income or profits of the taxpayer	Based on consumption or expenditure
Example	Income Tax, Corporate Tax, Property Tax	Value Added Tax (VAT), Goods and Services Tax (GST), Excise Duty
Impact on Behavior	Direct taxes may influence individual behavior (e.g., work, investment choices)	Indirect taxes may affect consumption patterns
Collection Method	Typically collected directly from the taxpayer by tax authorities	Collected indirectly through intermediaries like manufacturers or retailers
Progressivity	Can be progressive, with higher-income individuals paying a higher percentage of their income	May not be as inherently progressive, as everyone pays the same rate on the goods or services consumed
Ease of Administration	Can be complex to administer and enforce due to the need to assess individual incomes and assets	Often considered easier to administer, especially with modern systems like VAT or GST
Visibility to Taxpayer	The taxpayer is acutely aware of the tax amount paid, as it’s a direct deduction	The tax may be embedded in the price of goods or services, and the taxpayer might not be fully aware of the amount paid
Economic Efficiency	May impact economic efficiency due to potential disincentives for work or investment	Generally considered more efficient as it doesn’t directly influence individual decisions as much.

How do Income Taxes Work in U.S.?

Taxes are imposed on corporations and individuals by the city, state, or nation in which they conduct business or reside. The tax that is attributed to the government of the United States is called a federal tax. Federal governments depend on the revenue generated from federal taxes to finance the development and maintenance of the nation. Federal tax is perceived by some as the “rent” or “fee” required to utilise the resources given by a nation. You are investing in the economy when you pay taxes to the United States government, as the funds are used for the following:

• Infrastructure construction, maintenance, and repair fund the pensions and benefits of government employees Subsidies for the marketplace and social security programmes finance key health programmes, such as Medicare, Medicaid, and CHIP; provide assistance to low-income households through “safety net” programmes.
• Finance programmes for defence and international security
• Education, health, agriculture, utilities, and public transportation are all areas that should be enhanced.
• Undertake ambitious pursuits like space exploration.
• Deliver urgent disaster relief

How to Calculate Tax?

Depending on your location, the nature of your income, and the tax regulations of your jurisdiction, calculating taxes can be a complicated task. Listed below is an overview of how to compute income tax:

1. Determine Taxable Income: Start by calculating one’s total income, including wages, investment income, rental income, self-employment income, and so forth. Deduct any exemptions or deductions for which you qualify. This may consist of itemized deductions, standard deductions, and dependent exemptions.

2. Determine Your Tax Bracket: Since tax rates are frequently progressive, different proportions of your income are subject to various tax rates. For information on the applicable rates, consult the tax brackets in your jurisdiction.

3. Determine The Tax Liability: Determine the tax liability for each tax bracket by multiplying the income within that bracket by the associated tax rate. The resulting value is the tax liability for each tax bracket.

4. Determine The Total Income Tax Liability: This is done by adding the tax amounts that have been computed for each tax classification.

5. Take Tax Credits Into Consideration: Tax credits reduce the amount of tax owed in a direct manner. Energy efficiency credits, child tax credits, and education credits are all prevalent. These credits should be deducted from the overall tax liability.

6. Consider Withholdings & ayments: Deduct the amount of taxes deducted from your paycheck or estimated tax payments made during the year from your overall tax liability.

If deductions and payments surpass the computed tax liability, you might qualify for a tax refund. Should your liability be greater, the remaining balance will be your responsibility to pay.

How to File Taxes?

The process of filing taxes in India includes multiple stages and can differ depending on factors such as the source of one’s income, eligibility for exemptions, and employment status (salaried or self-employed). The following is an overview of the tax filing process in India,

1. Acquire a Permanent Account Number (PAN): Ensure you have a PAN card, which functions as a unique identification number for tax purposes, prior to filing your taxes.

2. Select the Appropriate Income Tax Form: Determine which income tax return (ITR) form is most applicable to your sources of income,

• ITR 1, also known as “Sahaj,” applies to individuals who possess a salary, one residential property, and other sources of income (excluding lottery and racehorse winnings).
• ITR 2, applies to individuals and Hindu Undivided Families (HUFs) who do not derive their income from a profession or business.
• ITR 3, applicable to individuals and HUFs that derive income from a proprietary profession or business.
• ITR 4, which relates to firms (excluding LLPs) and individuals, is applicable to HUFs and firms with a presumed business income.
• ITR 5, relates to entities other than individuals, HUFs, companies, and those who are filing ITR-7s.
• ITR 6, relates to organizations other than those that are seeking exemption under Section 11 (Revenue from property held for religious or charitable purposes).
• ITR 7, relates to individuals and organizations that are obligated to provide a return as specified in Sections 139 (4A), 139 (4B), 139 (4C), or 139 (4D).

3. Collect the Necessary Documents: Gather the necessary paperwork, including bank statements, investment particulars, Form 16 (for salaried individuals), and any other relevant information required to support deductions.

4. Determine the Total Income: Compute the total revenue by incorporating earnings from various sources and utilizing deductions permitted under sections such as 80C, 80D, and additional ones.

5. Submit a File Offline or Online: Utilize one of the authorized e-filing platforms or the official website of the Income Tax Department to file your income tax return electronically. You may also submit a physical copy of your return to the income tax office by submitting the appropriate ITR form.

6. Register on the e-Filing Website of the Income Tax Department: Register on the official Income Tax e-filing website (https://www.incometaxindiaefiling.gov.in) if submitting your return electronically.

7. Completion of the ITR Form: Fill out the designated ITR form with your personal information, income particulars, and deductions. The electronic filing system will provide step-by-step instructions.

8. Submit and Verify: Finally, submit the return after verifying the information entered on the form. Within 120 days of e-filing, you may utilise electronic verification methods such as Aadhar OTP, internet banking, or mail a hard copy of the ITR-V to the Centralised Processing Centre (CPC).

9. Accrue Taxes Owing: After deducting advance tax payments and TDS, if any taxes remain due, the balance must be paid through the proper channels.

10. Maintain Records: For future reference, retain copies of your filed returns, Form 16, and supporting documents.

Frequently Asked Questions (FAQs)

1. What is Income Tax?

Answer:

Income tax is a type of direct tax imposed on the earnings of both individuals and entities operating within a particular jurisdiction. It serves as an important revenue stream for governmental entities, financing essential public services and infrastructure.

2. How is Income Tax Calculated?

Answer:

The taxable income of an individual or entity is the foundation for calculating income tax. Frequently, tax rates exhibit a progressive nature, whereby increased income levels incur greater tax liabilities. Additionally, a variety of deductions and exemptions may have an impact on the ultimate tax requirement.

3. What are Tax Deductions?

Answer:

Expenditure or payments that can be deducted from total income in order to reduce the taxable amount constitute tax deductions. Deductions for educational expenses, home loan interest, health insurance premiums, and donations to charities are all popular.

4. What is Form 16?

Answer:

Form 16 is a certificate that employers in India issue to their staff members. It includes important details such as the salary earned and taxes deducted at source (TDS). Form 16 is used by employees when preparing their income tax returns.