When a person pays for a pizza or for a dress or anything else including the essentials, it never pinches him to the extent as it pinches him while paying taxes to the government. This happens because the tax you pay reduces your purchasing power. That is, higher the rate of tax, the smaller will be the amount in your hands to spend. This amount after taxes is known as real income or purchasing power.
I know a person who got a higher package on changing his job. He had mix feelings – he was happy for he got a higher package and he was confused for now he stepped one level up in the tax bracket. Which means that he will have to pay a high amount as tax. However, we calculate the proportion then definitely for him the amount of gain would have been more. (see tax saving tips)
As an individual, have you ever though that how much tax do you exactly pay including the surcharges? Are you sure that you pay only income tax? I know most of us have actually not applied the miser character of our brains on this thought. If you think that there is only income tax that digs a hole in your spending power, then you are surely mistaken.
Let us take a quick look on what all types of taxes, that actually affects you.
As the name suggests, direct taxes are paid directly to the Union Government of India. A rise in the total amount of direct tax collection suggests economic growth and a good tax administration by the government. Income tax alias personal income tax is a direct tax. Income under the head salary, income from house property, profits and gains of business or profession, capital gains and income from other sources. Apart from the income tax and surcharges thereupon, which most of us are aware of, there are few more types of direct taxes which generally remained unnoticed by most of the people. In our routine lives, we often pay the following direct taxes:
- Banking cash transaction tax – This tax used to be applicable on withdrawal of cash from the banks in India. However, this tax is not applicable anymore.
- Corporate tax – Resident companies pay tax on the income from all the global sources and the non-resident companies are liable to pay tax on the income emanating through India based business connection only.
- Double tax avoidance treaty
- Fringe benefit tax
- Wealth tax
- Gift tax – If an individual receives a gift of more than Rs. 50,000 without any consideration (with certain exemptions), then he/ she will be liable to pay tax on it as the value of gift will be treated as income from other sources and therefore, will be computed in the calculation of total income.
The impact of indirect taxes is different on different persons. Though the liability to pay these taxes lies on the shoulder of the person who collects it, but the actual burden of the taxes falls on somebody else. You go for shopping, you feel happy on the acquisition but in reality you end up paying a high price because of the indirect taxes. Let us take an example of LED Television. You purchased it from a shop whereby it was the duty of the shopkeeper to pay the VAT on it. But this tax payer (seller) instead of paying it from his own pocket puts a VAT (value added tax) on the selling price and recover this indirect tax from the buyer, i.e. from you. You go to a restaurant and you end up paying service tax in addition to the usual food you have taken.
In India, the different types of indirect taxes includes service tax, custom duty, excise duty, sales tax and VAT, security transaction tax levied on the transactions related to stocks, derivatives, mutual funds, etc. which are done through stock exchanges.
In nutshell, you can say that whatever you are purchasing or enjoying as a service, you end up paying tax on it. Therefore, it is not only personal income tax that cuts your purchasing power but there are other taxes as well.