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Advantages and Disadvantages of Income Tax in India [Explained]

Sukanya Mukherjee -

An income tax is an amount that every citizen of India, an individual or a business, is required to pay to the income tax authorities of India for the fiscal year which starts from April 1 and ends on March 31 of the next year. The rate is prescribed by the government itself.

It is calculated by using the net taxable income of an individual or a business. For the convenience of a citizen of India, the government has set certain slab rates, i.e., higher and lower slab rates.

Who all are liable to pay income tax in India?

  • Self-employed individuals
  • Salaried individuals
  • Hindu Undivided Family
  • Body of individuals
  • Association of Persons
  • Corporate firms or companies
  • Local authorities

Income taxation can be regressive, progressive, or proportional.  Income tax in India is categorised as direct and indirect taxes.

Direct taxes are those which are levied directly on the income earned. On the other hand, indirect taxes are those which are collected on your behalf and are paid to the Government of India. Businesses where indirect taxes are applicable cover e-commerce entities, theatres, or any services availed where you are liable to pay tax.

Types of Direct Taxes

There are two main forms of direct taxes:

  • Income tax: It is levied on a Hindu Undivided Family or individuals on their net taxable income during a financial year which starts from April 1 and ends on the following March 31.
  • Corporate tax: It is a tax that a company is liable to pay on the profits earned during a financial year.

Types of Indirect Taxes

There are three main forms of indirect taxes:

  • Service tax, applicable on movie tickets or restaurant bills.
  • Goods and services tax, which has replaced all indirect taxes, and business owners are responsible for collecting that tax.
  • Value-added tax.

Advantages of Income Tax in India

The benefits of having income tax in India can be divided into certain categories:

Personal benefits

  • Visa applications

If you are planning to visit countries like Canada, the USA, or the United Kingdom, it is compulsory for Indians to provide the income tax return (ITRs) of the last 3 years for easy visa approval. Payment of income tax to the home country government acts as an assurance for other countries that you are not leaving the origin country for tax evasion purposes.

  • Quick credit approval

Regular payment of income tax to the Government of India is considered important when you have applied for big-ticket loans like home loans, business loans, or personal loans. Before approving the loan, the lender always asks the loan applicant to submit copies of ITR.

  • Income proof

For all self-employed professionals like freelancers, firm partners, or consultants, filing income tax acts as income proof. It works in cases where professionals are not getting a fixed salary from any particular company. It plays an important role in all financial and business transactions.

Public benefits

  • Acts as the main source for augmenting country’s revenue

The primary objective of taxing the citizens of India is to raise revenue for the smooth running of government activities.

  • Helps to improve public infrastructure

The income tax paid by the citizens of India is used by the Government of India for improving the quality of infrastructure like public places, smart cities, and government institutes. All the funding of infrastructure projects arises from the tax amount collected from the country’s taxpayers.

  • Launching of various welfare schemes

From education and health, to housing and employment, the government is launching and running various welfare schemes to provide benefits to Indian citizens. The main source of funding for all these government schemes is the cumulative income tax paid by taxpayers.

  • Use in defense and scientific research

We are all proud of missions conducted by the Indian Space Research Organization, and all these missions require huge funding. This is provided by the Government of India. A percentage of the tax money collected is earmarked by the government to space research organizations for running space missions.

  • Reducing income inequalities

The taxation policy of the government is the best way to reduce income inequalities in India. By applying a progressive taxation system, the rich are asked to pay more taxes as compared to the poor. Taxes paid by the rich section of the society are utilised for social services that particularly benefit the disadvantaged sections of society.

Other areas where tax collections are put into use by the Government of India are:

  • Pension schemes
  • Law enforcement
  • Government operations
  • Paying salaries to Government employees

The Disadvantages of Income Tax in India

  • Inability to carry forward losses

Each of the assessees is entitled to carry forward the losses if they were unable to set off any of the losses incurred against the earned income subjected to income tax rules and provisions. In case the assessee attempts a tax evasion, he or she cannot carry forward the losses.

  • Need to pay a heavy penalty

If you delay filing an income tax return, then you are liable to pay a penalty of Rs 5000. The assessing officer has the authority to waive the levied penalty. The taxpayer gets a reasonable opportunity of being heard before the penalty is imposed. But it is always wise to adhere to the rules and regulations.

  • Deductions under Chapter VIA

If you are not paying income tax in India, then you are not liable for any tax deduction, as per Chapter VIA, for investments like insurance premiums, medical premiums, etc.

  • May affect people’s will to work and save

Imposing higher rates of taxation on people may escalate discouragement to work hard and save. They will start believing that the more their earnings and savings, higher will be the taxation.

  • Inflation

When taxation is imposed on a commodity, the cost of that commodity also increases. It will indirectly also increase the cost of production due to which one needs to pay higher wages to workers; this will, in turn, further increase the price of the commodity.

  • Other implications

Payment of income tax is of prime importance to assess the creditworthiness of a taxpayer. If you are not paying tax on time, it may prove to be a hindrance to your financial activities in many ways.

Conclusion

Availing tax benefits under Section 80C and 10 (D) of the Income Tax Act, 1961, is proving to be beneficial both for the country and its citizens. To contribute to this gain, you need to implement proper tax planning so that you can file an income tax return within the prescribed timelines. If you fail to do so, you will face a lot of financial consequences, as mentioned above. Be it investing in mutual funds or insurance, to get the benefits of these investments, you need to understand the tax structure, to begin with.

As a responsible citizen of India, you should always pay income tax as a sacred duty, not considering it as a burden. It not only improves the quality of your life but of all Indian citizens.

Also Read:

1) The USA vs India: Taxation System
2) How Many Types of Taxes are There in India?
3) What is the Difference Between Commerce and Business?
4) What are some differences between property tax & wealth tax in India?

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FAQs

Q. What is Form 16?

Ans. When you get a salary, your employer makes a deduction of a certain amount as income tax and deposits the same with the government. This process is known as ‘tax deducted at source’ (TDS). With the financial year-end, the employer shares Form 16 with the employee, which outlays all the details related to total TDS carried out during the entire financial year.

Ans. You may share other income details with the employer if you wish to; it will help the employer to determine TDS accurately. If you do not want to share this information with the employer, you are required to pay additional or self-assessment tax.

Q. What is the standard deduction?

Ans. According to income tax rules and laws, each individual can avail tax benefit of standard deduction of Rs.40,000 if your annual income is Rs.540,000. After the standard deduction, you have to pay tax only for an annual income of Rs.500,000.

Q. What is exempt income and taxable income?

Ans. An exempt income is a non-taxable income. As per the Income Tax Act, 1961, there are special grants exemptions specified, due to which one can save tax if their income is a part of those grants. Income earned on which the government asks you to pay tax is known as taxable income.