Structure of taxation and classification of taxes

What is tax?
Tax is a compulsory payment by a person to
the Government .
Prof. Adams defined ‘Tax’ as , from the state
point of view; a tax is a derivative revenue; from
the point of view of the citizen, a tax is a coerced
payment.

Classification of taxes:

Direct
taxes

Indirect
taxes

What is direct tax?
A direct tax is one in which the immediate and
ultimate burden will be on the same person.
Direct taxes are those which are imposed on a
person either on his income or wealth and the
tax liability cannot be escaped.

What is indirect tax?
If the tax is levied on the prices of goods or
services then it is known as Indirect tax.
 Indirect tax is collected by middle men in the
channels of distribution of goods and it is
remitted to the Government treasury.

Indian Tax Structure Taxes /imposed by

Taxes levied by Central Government:
• Direct taxes: Following are the direct taxes
levied by Central Government.
 Income tax: The tax which is levied on the
income of the person is called direct
income. It is levied on the total income a
person has earned in the whole year.
Wealth tax: It is levied on the net wealth of
the person or is levied on the assets a
person possess.

Indirect taxes:
 Custom duty: Custom duty is levied on the goods
which are imported and exported. This is levied in
order to prevent illegal import and export of goods
to and from India.
 Excise duty: Excise duty is levied on the goods
which are produced in the country. Firstly the
manufacturer has to pay the tax to government and
then he charges that amount from customers.
 Services tax: It is a tax on the services rendered by a
business man or by Professional persons.
 Sales tax: Sales tax is a tax on the sale of goods sales
tax is payable by the seller, which is recovered from
the purchaser

Taxes levied by the State
Government:

• Direct taxes:
Professional tax: State Government fixes a
specified amount to be paid on each type of
profession like salaried person, professional
like Doctors, Advocates, Chartered Accounts.
Agricultural tax: As on today no government
has passed any legislation on agricultural
income. But still it is taken into consideration
for taxing non agricultural income.

• Indirect tax:
 Entertainment tax: State government levy
entertainment tax on cinemas, trade
fairs, exhibitions etc. Entertainment tax is
cinema is very popular.
 V.A.T: VAT(Value Added Tax) is a tax on final
consumption of goods and services. VAT will
be levied on the value added to goods on each
stage.
 State excise duty: It is levied on Alcoholic
consumptions, marijuana, opium. Revenue
from this duty is the major source of revenue
to State Government .

Tax levied by Local Government:
• Indirect tax:
 Property tax: Local bodies like Municipal
Corporation levy property tax on the basis on rental
capacity of the house.
 Water tax: Municipal Corporation levy water taxes
on the amount of usage of water.
 Sewerage tax: The municipality is responsible for
building and maintaining the sewer system in the
city. You must pay sewage tax if:
- a link to the sewer system is present;
- you directly or indirectly discharge wastewater via
the sewer system;
- you are a tenant or user of the property and/or
own the property.

Merits of direct taxes:
 Economy: The cost of collecting direct taxes is low as
compared to indirect taxes. The payment of these is
made directly to the government.
 Certainty: The tax payer knows how much to and
when he has to pay tax and the government also
knows who much to receive.
 Elastic : Direct taxes are elastic in nature . Government
can increase its revenue just by increasing the tax rate
and by withdrawing the deductions and exemptions.
 Equity: Direct taxes are equitable because rich has to
pay more tax and the poor has to pay less tax or no tax.

Demerits of direct taxes:
 Complex laws: Generally the provisions of direct
taxes contain deduction, exemptions and
chargeability of income etc. To a common man it
becomes a problem to understand the provisions
of the Act and is compelled to take the help of
“tax consultants”.
 Unpopular: Direct taxes are not popular when
compared to indirect taxes. No person is willing
to forego his part of income or wealth towards
payment of taxes. i.e., people will oppose
imposition of direct taxes.

Merits of indirect taxes:
 Convenience: Indirect taxes are included in the prices
the goods and services and as such tax payer is not
aware of tax payment while purchasing goods or
services.
 Productivity: Indirect taxes are highly productive. By
imposing few taxes government can get huge revenue.
 Wide coverage: Indirect taxes covers most of the
peoples irrespective of rich and poor will make to
contribute to the Government. Indirectly it is helping
one and all to participate in the development of the
nation.

Demerits of Indirect tax:
Inflationary in nature: Indirect taxes leads to a
rise in prices . The increase in the prices of
raw material , finished goods etc, creates
inflationary trend in the economy.
High cost of collection: Administrative cost of
collecting indirect taxes may be high because
they have to be collected from large number
of persons that too in small amounts.

Structure of taxation and classification of taxes

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