Classification of Modern Taxes

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  • Topic: Indirect tax, Tax, Excise
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  • Published : August 28, 2010
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1.1.1 Classification of Modern Taxes:
Taxes, nowadays, are broadly classified into:
(a)Direct Taxes; and
(b)Indirect Taxes. Direct Taxes

Direct Taxes are those, which are paid by the taxpayers directly from their income. The government collects direct taxes, directly from the taxpayers through levies such as Income Tax, Wealth Tax ,etc. as part of the direct tax revenue.

Direct taxes are considered to be harsh and form a minor part of government's revenue.

Indirect taxes are those taxes, which are paid by the taxpayers indirectly, when purchasing some goods or commodity or when hiring some services, which are taxable. These taxes are although borne by the taxpayers, but not paid by them directly to the Government. Examples

Excise duty, Customs duty, Service tax, Sales tax, Octroi, Entry tax, Luxury tax, Trade tax, Consignment tax, Value added tax, etc.

Indirect taxes are paid before the goods reach to the hands of the taxpayer, unlike the direct taxes, which are paid after the income accrues or reaches to the hands of the taxpayer.

Indirect taxes form major part of government's revenue, both at the Centre as well as States.

Almost 90% of the Indian tax revenue comes from the levy of indirect taxes. The proceeds from the duties of Custom and Excise go to the Central Government. The proceeds from Sales tax go to the State Governments and the proceeds from Octroi or Entry tax to the local governments.

In today's global markets, indirect taxes have assumed great significance and can affect every link in the supply chain, both domestically and internationally, since one person's sale is another's purchase and one country's export is another's import.

1.1.2 Features of Indirect Taxes

Some essential features of indirect taxes can be briefly stated as follows: (a) Indirect taxes are levied on:
i) Manufacture of goods,
ii) Import of goods into India,
iii) Entry of goods into a local territory,
iv) Purchase of goods, or
v) Hiring of services, etc.;
(b) These taxes are borne by the taxpayers, but not paid directly to the government; (c) The tax is paid before the goods reach to the hands of taxpayer or services are enjoyed by him; (d)Indirect taxes are levied at the time of manufacture of goods or their transfer from one hand to another; (e)Indirect taxes form major part of the government's revenue.

1.1.3. Advantages of Indirect Taxes
The indirect taxes have following advantages:
(a) Indirect taxes are major source of Governments' revenue in India, both at the Centre as well as at the States. About 90% of the gross government revenue is generated from indirect taxes, while direct taxes contribute only a minor portion of around 10%. (b)The collection cost of indirect taxes is much less than the cost of collection of direct taxes. It is estimated that in 2001-2002, the cost of collection of indirect taxes was about 1.05% and that of direct taxes about 1.38% of tax collected. (c) The tax evasion is also much less in case of indirect taxes, due to simplicity of procedures and convenience in compliance and better control. It is comparatively easier to detect tax evasions in case of indirect taxes, as compared to evasion in case of direct taxes. (d) Indirect taxes play significant role in planning industrial growth and encouraging setting of industries in selected backward areas by offering concessions, rebates and holidays.

(e)The role of indirect taxes is also important in regulating international trade competition by levying customs duties in accordance with the domestic needs. By levy of high custom duty and antidumping duty, the Government controls import of goods into India and thus, provides protection to the trade and industry in India. (f)All indirect taxes are paid by a taxpayer indirectly. Therefore, it does not cause a pinch to him and hence taxpayers have no resistance. (g)...
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