How taxation works in India and what are the taxation problems faced?

taxation works


Taxation is an important part of India’s financial system that enables the government to fund essential projects and services to boost economic growth and improve the living standards of its citizens.

In India, taxation requires individuals, businesses, and other organisations to pay taxes each year. Each type of tax sourced from these different sources helps the government raise revenue for investment in necessary infrastructure development, maintain essential public services, and create a secure future for its citizens.

How does taxation work in India? 

Taxation in India is divided into direct taxes such as income tax and indirect taxes such as GST. Let’s look at this in greater detail.

  • Direct taxes

A direct tax refers to a tax that the taxpayer pays directly to the government. This includes income tax (as per the current income tax slab of the taxpayer), property taxes, or taxes on assets. They are often progressive in nature, meaning that taxpayers with higher incomes pay more relative to their income or real estate values.

Direct taxes cannot be passed onto another individual or entity, which means that the person or business upon which the tax is imposed is accountable for its payment. Direct taxes have a critical role in funding essential public services such as education and infrastructure.

  • Indirect taxes

Indirect tax is a type of taxation system in which taxes are applied to goods and services rather than to individuals or companies. Examples of indirect taxes include Value-Added Tax (VAT), Goods and Services Tax (GST), import duties or tariffs on imported goods, etc.

These types of taxes can be regressive since they do not consider an individual’s ability to pay them before imposing them – meaning everyone pays the same percentage regardless of their earnings or wealth status.  

What are some common taxation problems in India?

  • Tax evasion

Tax evasion is one of the biggest problems that the Indian taxation system faces. It occurs when individuals or businesses deliberately avoid paying their taxes by hiding their income or underreporting it. This can have a major impact on the nation’s economy and can lead to reduced revenues for essential services such as healthcare and education.

  • Complex tax structure

The Indian tax structure is complicated and confusing for both individual taxpayers and businesses alike due to the multiple levels of taxation and numerous deductions under income tax available. As such, many taxpayers are unable to understand the complexities involved in filing their taxes correctly, leading to errors and omissions, which can be costly if detected by the authorities later on.

Additionally, there are discrepancies between different states regarding taxation rules, which further complicates matters for taxpayers who are doing business across state lines or employed by companies operating out of multiple states.

  • Lengthy processes

The process of filing taxes can be lengthy and time-consuming due to the complexity of India’s tax laws and regulations. Taxpayers often have difficulty understanding what documents and forms need to be submitted, as well as how these documents should be submitted, which can result in delays and thus lead to penalties.

Final words

While the taxation system in India can be a bit complex, it is still possible to benefit by implementing a proper tax planning strategy in place. Adopting effective income tax planning strategies can help taxpayers become more aware of the deductions and exemptions available and can significantly reduce their overall income burden.

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