Types of Taxes in India - 2 | Economics Optional Notes for UPSC PDF Download

Cess and Surcharge

Cess and surcharge serve as means for the Union Government to raise additional revenue for administrative expenses. Despite both contributing to increased government income, they differ in their characteristics and applications.

Cess

• In essence, a cess is an additional levy on existing taxes. It is important to note that the funds collected through a cess must be utilized for the specific purpose it was imposed, such as education. All taxpayers are obliged to pay this tax, and the collected amount goes to the Consolidated Fund of India. Typically, a cess is imposed temporarily until the government achieves its intended goal. 
• Unlike other taxes like excise duty and income tax, which are based on a percentage of the base tax, a cess is added on top of the existing tax. For example, adding a 5% education cess to a 20% income tax results in a total tax of 21%. Some of the current cesses include those for education, roads, infrastructure, clean energy, Krishi Kalyan, and Swachh Bharat.

Surcharge

• Individuals with a net taxable income exceeding Rs 1 crore face a 10% surcharge on their tax liabilities. Domestic corporations are subject to a 5% surcharge if their net income falls between Rs 1 crore and Rs 10 crore, and a 10% surcharge is applied to the net revenue exceeding Rs 10 crore. International firms experience a 2% surcharge if their net income is between Rs 1 crore and Rs 10 crore, which increases to 5% for income surpassing Rs 10 crore. 
• It's noteworthy that a surcharge on income contributes significantly to state funding, and the Union Government has the flexibility to allocate the funds as needed. It's crucial to understand that the surcharge is applied only to the tax amount, not the entire income. The Consolidated Fund of India receives this surcharge, which can be utilized for various purposes. For instance, a 10% surcharge on a 30% income tax rate results in a total tax burden of 33%.

Benefits of Taxes

Taxes in India serve as a crucial source of government revenue, helping fund various expenditures and preventing inflation. With different types of taxes applicable to various forms of income, such as wages, business profits, and rental income, the government can meet its financial requirements. Wealth taxes, sales taxes, property taxes, payroll taxes, value-added taxes, and service taxes are among the diverse tax categories in India.

The government utilizes revenue from these taxes for several purposes, including:

• Public Sector Investment: Funding infrastructure projects for welfare and development.
• Defense Budget: Allocating resources for national defense.
• Scientific Studies and Public Insurance: Supporting research initiatives and public insurance programs.
• Government and State Workers: Providing salaries to government and state employees.
• Public Transportation Network: Maintaining and operating the government's public transportation system.
• Unemployment Benefits and Pension Schemes: Supporting social welfare programs.
• Law Enforcement: Funding the application of law and order.
• Public Utilities: Managing essential services like garbage disposal, water, electricity, and public health.

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Conclusion

While different types of taxes in India have both advantages and disadvantages, their necessity in generating revenue for the government is undeniable. Direct taxes from the wealthy and indirect taxes from the broader population contribute to this revenue stream. Effective control and management of these tax systems can play a significant role in shaping a nation's economy, making the taxation system a crucial aspect of economic governance.