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The USA vs India: Taxation System

Sukanya Mukherjee -

Taxes are the backbone of every economy. An entire country's taxation system helps build the government based services, institutions, medical facilities, educational buildings, and so much more. Taxes are legally a duty for every citizen residing in their respective countries. Consider it as consent to live in a state.

Numerous taxes are doled out by the governments, businesses, international import-export companies, and many. Tax helps to reduce the gaps between Haves and Have-not of the system. These taxes are applicable or deducted when you-

  1. Purchase groceries or daily items
  2. Electronics
  3. Automobiles
  4. Income Tax Filing
  5. Buying immovable assets like- house, apartment, etc.
  6. Luxury or heritage items
  7. Premium imported products

The system of income tax dates back 3000 years ago when it was earlier implemented by the inhabitants of ancient Greece and Egypt, where they used to pay-

  • Consumption taxes
  • Customer duties
  • Income Tax

Principles Of Taxation

A good taxation system depends on vital characteristics which makes it worthy. A certain set of principles is needed for any tax system to exist and be relevant. Many economists and Adam Smith (father of economics) had formulated the 4 canons of taxation that include-

  1. Canon of Equality
  2. Canon of Certainty
  3. Canon of Convenience
  4. Canon of Economy

Why do you need to pay taxes?

  • Economic Growth- Every country's economic strata depend on the taxes and revenues collected and received by their respective state governments.
  • Regulate Consumption & Production- This indicates all types of goods and services across the country.
  • Domestic Industry Encouragement- To support small businesses and local merchants alongside providing subsidy for village or town traders.
  • Stimulating Investments- Taxes monitor the investments and stocks market majorly.
  • Backward Region Development- The government uses people filed/paid taxes to nurture and advance rural area conditions. May it be providing electricity, the latest technology, better housing facilities, medicals, and pharmacies, or construction of better roads; most of this work is possible via taxation.
  • Diminishes Inequality in Income- This is not a direct factor, but it does create a difference in the salary packages between the manager and the employees, especially in private sectors.
  • Stable Pricing- The tax system of any country helps in assuring the stabilisation of pricing regarding various goods, commodities & services across the country.
  • Encourage Foreign Trade- A primary concern and motive of the taxation system are to grow its development margin by attracting foreign trade that also includes import-export services.
  • FDI- Foreign Direct Investment is a vast area that is attracted by the taxes levied. This sector helps in improving the GDP and the overall market structure.
  • Political Campaigns- Most people are unaware of the fact that taxable income is also used for running and managing political campaigns across the states.

Tax Rate Determination: India & USA

  • Before we understand the criteria and difference between Indian and US taxation management systems, it's important to understand their classification.
  • Both countries exercise a progressive tax system.
  • In this lower class, people would be charged lesser, while the higher-earning individuals would be charged more.

Tax Slabs

To estimate tax proceeds in both countries, we must understand how the tax measures are divided into sections.

INDIA

In India, the tax system is divided into slabs and implemented to explicit varieties of due income. The categories are-

  1. People up to age 60
  2. Senior Citizens- Between age 60 to 80
  3. Super Senior Citizen- 80 and above

USA (United States of America)

In America, the tax system is called "tax brackets" and they are not differentiated on age like India. They are divided into the marital status of the individuals like-

  1. Single- Unmarried and Divorced
  2. Married (Joint Filing)- Married couples who merge their incomes.
  3. Unmarried (Separate Filing)- Also for the married couples, but filing individually, thereby, lowering their income.
  4. Household Head- Can be unmarried, and pay half of the money needed to keep the home for a qualifying person.
  5. Widow/Widower- Surviving spouses who have dependents, relatives, and children.

Tax Forms

There are standard forms for varied needs in both countries like-

  1. INDIA- A salaried individual working in India has to file IT Returns under Form 16. While for other sources of income, citizens have to fill ITR-2, ITR-4 form generated by the Indian Tax System.
  2. USA- Here, the salaried individuals need to fill W-2 form under the American Tax System. While for other needs, the states have a series of 1099 forms like-
  • 1099-R for annuities
  • 1099-MISC for miscellaneous sources of income
  • 1099-G for unemployment compensation
Dollars vs Rupees

Tax Deductions

INDIA

  1. In India, if your income is under Rs 2.5 lakhs, then you are exempt from paying specific taxes.
  2. Above this threshold, if you want to file or check returns, you have to fill the forms- Section 80C, 80CCD, and 80E.

USA

  1. An option of deduction from your taxable income is granted in the form of Standard Deduction.
  2. You can also personally itemise your tax returns.

Who are liable to pay taxes? (India)

  1. Individuals
  2. Undivided Hindu families
  3. Companies or Organisations
  4. Partnership Firms
  5. Associated personnel or individual bodies
  6. Municipal bodies or local authority
  7. Artificial juridical person

Tax-free states in USA

Some states in the USA do not impose state income tax like-

  1. Alaska
  2. Florida
  3. South Dakota
  4. Texas
  5. Washington
  6. Wyoming

Types of Taxes in INDIA

India has 2 types of taxation which are Direct & Indirect Tax. However, the rate of slabs differs in the implementation of the two. The commonly applicable to maximum citizens are-

  1. Direct Taxes- levied by Central Board of Direct Taxes (CBDT)
  2. Income Tax
  3. Gift Tax- levied over Rs. 50,000
  4. Wealth Tax- levied when net wealth is more than 1 crore
  5. Capital Gains Tax
  6. Securities Transaction Tax- for shares and stocks only
  7. Corporate Tax
  8. Indirect Taxes- Includes Sales, Service, GST, VAT, Customs Duty, Toll Tax.

Additional taxes and cess levied by the government for specific purposes include-

  • Krishi Kalyan Cess
  • Swachh Bharat Cess
  • Infrastructure Cess Tax

Income Tax Authority Of India

The Income Tax Authority in our country is divided into 3 sectors namely-

  1. Central Government- Income Tax, Excise Duty, Customs & GST.
  2. State Governments- Sales Tax, VAT (Value Added Tax), Excise, Taxes on Agricultural Income along with Goods and Services Tax.
  3. Municipalities- House Property Tax, Octroi, area maintenance, etc.

Types of Taxes in USA

The United States of America has a miscellaneous variety of taxes which include-

  1. Federal
  2. Local
  3. State
  4. Special-purpose governmental jurisdictions
  5. Income Tax
  6. Sales Tax
  7. Excise Tax
  8. Payroll Tax (includes Social Security tax)
  9. Property Tax
  10. Estate Tax (exceeding over $5.34 million)
  11. Gifting Tax (levied over $14,000)
  • Every tax is imposed or levied in a manner that partially or fully funds all operations in the states.
  • Taxes that are inflicted on individuals with similar incomes, property, or activity without offset on one another.

Types of taxpayers in the USA

  1. Business entities
  2. US Residents
  3. Estates
  4. Trust Funds
  5. Other forms of Organisation.
  • Taxes can also be based on-
  1. Immovable assets like Property
  2. Salaries
  3. Transactions
  4. Goods import
  5. Transferring
  6. Business-related ventures

IN CONCLUSION

Both the tax systems, types, and filing formats have their pros and cons. In terms of saving and returns, both countries enjoy familiar rules and return policies.

You can always speak to a financial consultant or a CA (Chartered Accountant) to monitor your taxes better and file impeccably.

Also read:

Indian Economy & All About It
GST Council: All you should know about it
What is GDP? All about the GDP of India

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