Taxation

Taxation is the process through which a government or taxing authority imposes and collects taxes from its citizens and businesses.
Learn the functions of taxation and its role in India's development
3 min
29-March-2024

Taxation is the method through which a government or its taxing authority imposes taxes on citizens and businesses. It includes various taxes such as income tax and goods and services tax (GST), which affect all levels of society.

What is Taxation?

India's tax system is a complex tapestry overseen by the central and state governments. Both entities play a important role in determining the types of taxes levied, the tax rates, and ultimately, the revenue generated to fund public services and infrastructure development. In recent years, there has been a concerted effort by both central and state governments to streamline the taxation process and enhance transparency. This push for reform aims to create a more predictable and efficient tax system that helsps economic growth.

One of the most significant policy reforms undertaken in this pursuit was the introduction of the Goods and Services Tax (GST) in 2017. This reform replaced a multitude of indirect taxes levied at different stages of production and distribution with a single, unified tax. The GST aimed to simplify the tax regime, reduce cascading effects (tax on tax), and ultimately, make the movement of goods and services across state borders seamless.

Types of Taxes

There are two main categories of taxes:

1. Direct taxes

These are levied directly on an individual's income or wealth. Examples include income tax, wealth tax, inheritance tax, and capital gains tax. The amount of tax paid is directly proportional to the individual's income or wealth.

Direct taxes are levied directly on taxpayers, meaning the burden of payment falls squarely on the individual or entity responsible. Unlike indirect taxes, these cannot be shifted to another person. The government collects them directly from the taxpayer's income or profits.

Here are some direct taxes levied on Indian taxpayers:

  • Income tax: This tax applies to the income earned by individuals or businesses. The amount of tax owed varies depending on the taxpayer's income bracket and applicable deductions.
    For example, if you have invested a certain amount in a fixed deposit, the income you earn on it is considered taxable income and falls under the head of "Income from Other Sources" in the income tax framework.
  • Corporate tax: Companies are subject to a tax on the profits generated from their business activities. This tax rate can vary depending on the type of company and its size.

2. Indirect taxes

Unlike direct taxes that target your income or profits, indirect taxes are levied on the value of goods and services you consume. These taxes are not directly collected from you, but rather embedded in the final price you pay. Essentially, the seller acts as a collection agent, passing on the tax burden to the consumer. Earlier taxpayers were subject to a range of indirect taxes, comprising service tax, sales tax, value added tax (VAT), central excise duty, and customs duty.

A significant transformation occurred on July 1st, 2017, with the implementation of the Goods and Services Tax (GST). This major reform replaced the multitude of indirect taxes levied by both state and central governments. Prior to GST, businesses faced a complex system with various taxes applied at different stages of production and distribution.

The GST streamlined this process by consolidating these various taxes into a single, unified levy. This simplification has not only made the tax system easier to navigate but also reduced the number of administrative touchpoints needed for businesses.

Functions of taxation

Taxes serve several critical functions:

  • Revenue generation: The primary function of taxation is to generate revenue for the government. This revenue is used to finance a wide range of public services, including education, healthcare, national defense, infrastructure development, and social security programs.
  • Income redistribution: Progressive tax systems aim to redistribute wealth by collecting a higher percentage of income from those who earn more. This helps to reduce income inequality and provide social support for those in need.
  • Economic regulation: Taxes can be used to influence economic activity. For example, governments may use tax breaks to incentivise investment in certain sectors or to discourage harmful activities like pollution.
  • Market correction: Taxes can be used to correct for market failures. For example, a tax on cigarettes can be used to discourage smoking and offset the healthcare costs associated with it.

Disclaimer

As regards deposit taking activity of Bajaj Finance Ltd (BFL), the viewers may refer to the advertisement in the Indian Express (Mumbai Edition) and Loksatta (Pune Edition) furnished in the application form for soliciting public deposits or refer https://www.bajajfinserv.in/fixed-deposit-archives
The company is having a valid Certificate of Registration dated March 5, 1998 issued by the Reserve Bank of India under section 45 IA of the Reserve Bank of India Act, 1934. However, the RBI does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.

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