Last updated on June 30th, 2025 at 10:05 am
As a working individual, you must have seen the deductions on your payslips and have wondered why it must have happened. You may have a vague idea that this is because of taxes but you may not know where this tax money goes, or what might be the purpose of it – and also, why every working citizen has to pay tax not only on their salary, but also again as income tax.
For many, the tax system is just too complicated but they see their earned money being taken, with almost no idea on how it is used. This article is meant to give a straight-up view of how the tax system has changed over time, what types of taxes are out there, especially in India, and how these systems affect us on a daily basis.
Now, if all this tax talk makes you think you need to level up your finance knowledge, the ACCA course is a brilliant option. It’s a professional course recognised around the world.
What is a Tax System?
Before going into where taxes go, first let’s understand what a tax system actually is. The government as a body needs to fund public services like infrastructure, subsidies and more. Now, the government needs a source of revenue for these funds. For the government, one of the major sources of revenue is taxes, which is how they collect money from individuals and businesses and then use that money to pay for public services, like roads, schools, hospitals, and the military.
Every country has their own rules with regards to taxation – their own tax systems. Some are quite simple. Others can make your head spin. But no matter the complexity, the goal is usually the same: raise enough money without being unfair.
Types of Taxes in India
Let’s look at how it works in India specifically. The tax system here is divided broadly into two types; direct and indirect taxes. Here’s a quick table that breaks it down:
| Type | Examples | Who Pays It |
| Direct Tax | Income Tax, Capital Gains Tax | Individuals & Companies |
| Indirect Tax | GST, Excise Duty, Customs Duty | Consumers (indirectly) |
Direct Taxes
Direct taxes are paid straight to the government and are based on what you earn or profit. The most common one is income tax, where higher earners pay more under a slab system. Companies also pay corporate tax on their net profits.
India used to have a wealth tax too, but it was scrapped in 2015 since it didn’t bring in much and was hard to manage. These taxes are seen as fairer since they’re linked to how much you can afford to pay.
Indirect Taxes
Indirect taxes are added to the price of goods and services and collected by sellers, so consumers pay them without even realising it. In 2017, India rolled out GST, which replaced older taxes like VAT and service tax with one system. It’s charged at different rates, 5% for basics, up to 28% for luxury items, and it’s built into almost everything you buy, from groceries to movie tickets.
How India’s Tax System Compares Globally
India’s tax-to-GDP ratio is lower than many developed nations. This basically means that the government here collects less tax relative to the size of its economy.
| Country | Tax-to-GDP Ratio (%) |
| India | ~11% |
| UK | ~33% |
| Germany | ~38% |
| USA | ~27% |
That’s one of the reasons why there’s a push for more people to pay taxes, especially in a country where a huge chunk of the population is outside the tax net.
Common Problems with the Tax System
Like most things, tax systems aren’t perfect. Here are some issues people often talk about:
- Complexity – Tax laws can be confusing. Many people don’t even know what deductions they’re eligible for.
- Evasion – Let’s be honest. Tax evasion is a big issue in India. From small traders to big companies, many try to dodge paying.
- Inequality – Some say the rich get away with too much, while the middle class bears the brunt.
Governments are trying to simplify the process. Digital tax filing has helped, for sure. Schemes like faceless assessments aim to reduce corruption.
How to File Taxes in India (In Simple Steps)
Filing taxes in India has been made quite simple by the Government, but even then it has to be meticulously done. Here’s a quick step-by-step guide:
- Collect all your documents (Form 16, investment proofs, etc.)
- Log in to the Income Tax portal
- Choose the correct ITR form
- Fill in your details
- Verify and submit
You can also use apps or consult a CA if that’s too much.
Conclusion
Financial literacy is important, and unlike earlier, many younger people are looking at finances differently – being more responsible on where each penny is going. However, a surface-level learning can do more harm than good – so, any person should know how taxation works and why it matters. Also, the Indian government has created a tax payment portal for individuals to file their own taxes. In these cases, if you are filing on your own, you should have enough knowledge about taxation.
And if you’re looking to actually understand the tax system and maybe even work in finance, check out Imarticus Learning. They’ve got practical courses that break it down really well.
FAQs
- What is a tax system?
A tax system is a set of rules or methods set by the government to collect money from individuals or businesses. Now, this tax system is different for different countries. Generally, the tax collected by the government is used to fund public services like infrastructure.
- What are the types of taxes in India?
India has both direct taxes and indirect taxes. As individuals, when you pay tax directly to the government – let’s say, like income tax – that is a direct tax. Indirect taxes, however, are charged when you are paying a tax while purchasing any goods or services – example, GST.
- What’s the difference between direct and indirect taxes?
Direct taxes are something that you yourself need to file and pay the government like income tax that comes straight from your earnings. Indirect taxes are included when you are purchasing something and are included in the price of product or service, like GST.
- Why is tax evasion a problem in India?
Many people often try to find ways to avoid paying taxes -they feel that they would not want to give a percentage to the Government. One of the reasons is because in India there are different tax slabs, and sometimes, for people earning a significant income, the percentage of tax on that income could be a large amount. As a result, these individuals try to find ways to not give this money as tax.
- Is GST the same across all items?
No, different items are taxed at different rates under GST; some at 5%, others at 12%, 18%, or 28%.
- What is the ACCA course?
ACCA is a global accounting qualification and is a holistic financial course that covers several aspects like: finance, taxation, audit, and more. It’s designed for anyone who wants to build a strong career in accounting or financial management.
- Can I file my taxes online in India?
Yes, the government offers an Income Tax portal that allows for online filing. It’s easier now with e-verification too.