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2 Feb, 2025

The current tax system, particularly under the Goods and Services Tax (GST) framework, retards growth that hinder business development, suppress consumption, and damage India’s investment reputation. 

How is the Tax System in India? 

  • About taxes: Taxes are mandatory financial charges or levies imposed by a government on individuals, businesses, or property to fund public services and government operations. 
    • There is no quid pro quo between the tax payer and the public authority. 
    • The Tax System in India consists of a mix of Direct Taxes, Indirect Taxes and Other Taxes. 
  • Types of Taxes: 
    • Direct Taxes: They are paid by individuals or entities to the government and cannot be transferred to others. 
    • Indirect Taxes: They are levied on goods and services, collected by intermediaries from consumers at the point of sale, and remitted to the government. 
    • Other Taxes: These taxes are levied for specific purposes, often funding infrastructure or welfare programs. 
  • Direct Taxes:  
    • Income Tax: It is imposed on income that is progressive in nature, with different slabs for various taxpayer categories. 
    • Capital Gains Tax: Tax on gains from investments, with different rates for short-term and long-term holdings. 
    • Securities Transaction Tax: Tax on transactions involving securities in the stock market. 
    • Perquisite Tax: Tax on benefits provided by an employer to employees (e.g., housing, cars). 
    • Corporate Tax: Tax paid by companies on their earnings, with different slabs for various income levels. 
      • Minimum Alternative Tax (MAT): MAT ensures companies pay a minimum tax, set at 18.5%. 
      • Fringe Benefit Tax (FBT): Tax on non-cash benefits provided by employers (abolished in 2009). 
      • Dividend Distribution Tax (DDT): Tax on dividends paid by companies. 
      • Banking Cash Transaction Tax: Tax on banking transactions (abolished in 2009). 
  • Indirect Taxes:  
    • GST: A consumption-based tax on value-added goods and services (ad valorem tax), levied at each stage of the supply chain.  
      • It is regressive in nature as it is imposed at the same rate on all individuals irrespective of income. 
    • Value Added Tax (VAT): Tax on goods sold, applied at each stage of the supply chain. It is imposed on goods that are excluded from the GST regime like alcoholic beverages, petroleum products etc. 
    • Custom Duty & Octroi: Taxes on imported goods (Custom Duty) and on goods crossing state borders (Octroi). 
    • Excise Duty: Tax on goods manufactured within India. 
  • Other Levies (Cess): 
    • Education Cess: A 2% tax to fund educational initiatives like developing classrooms, libraries, providing scholarships etc. 
    • Swachh Bharat Cess: Tax introduced in 2015 to fund cleanliness initiatives like  Swachh Bharat Mission. 
    • Krishi Kalyan Cess: Tax introduced in 2016 to support agricultural welfare like irrigation projects, subsidized seeds etc. 
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