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What is Tax ?

Tax is one of the most common financial terms. Taxes are one of the primary sources of income for the government through which it fulfils various projects and initiatives. They are levied by the central and state governments. Read on to know about the various aspects of tax.

Classification of taxes

Be it an individual or any business/organization, all have to pay the respective taxes in various forms. These taxes are further subcategorized into direct and indirect taxes depending on the manner in which they are paid to the taxation authorities. Let us delve deeper into both types of tax in detail:

Direct Tax

  • These taxes are paid directly by the citizen to the government and cannot be remitted to others. In India, the Central Board of Direct Taxes or CBDT is the governing authority on direct taxes. The most common examples of direct taxes are income tax, property tax, personal property taxes and taxes on assets.These taxes are based on the ability-to-pay principle. It is a kind of disincentive as it leads to people working hard more and earning more money, because the more money a person earns, the more taxes he is likely to pay.

Indirect Tax

  • Indirect taxes are slightly different from direct taxes and the collection method is also a bit different. These taxes are consumption-based that are applied to goods or services when they are bought and sold.
  • The indirect tax payment is received by the government from the seller of goods/services.
  • The seller, in turn, passes the tax on to the end-user i.e. buyer of the good/service.
  • Thus the name indirect tax as the end-user of the good/service does not pay the tax directly to the government.

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