The Intermediate Guide to Taxes

Taxes are referred to as mandatory payments made by people or businesses that fall within a certain tax bracket to the Indian government. Taxes are imposed at every level in India, from municipal to national, and are one of the main ways the government makes money.

Taxes are imposed by the government on its citizens to raise revenue for economic development initiatives, strengthen the national economy, and raise citizens' standards of living. The Indian Constitution grants the State and Central governments the exclusive right to raise taxes, which gives our government the power to do so. All domestic taxes must be supported by an authorizing law that has been approved by the State Legislature or the Parliament.

What Are the Most Common Types of Taxes?

There are numerous sources of taxes. The many sorts of taxes are frequently determined by the nature of what is taxed and the procedure necessary to collect the tax. You can handle your own money more effectively if you understand taxes.

Annuities are taxed slightly differently; in this case, taxes aren't required until you begin receiving income in installments from your annuity.

Common Types of Taxes

1. Income taxes

These taxes cover both earned income, such as salaries, wages, tips, and commissions, as well as unearned income from investments, such as interest, and dividends. Income taxes are gathered by the federal government, 43 states, and numerous municipal governments.

2. Payroll taxes

Both Medicare and Social Security taxes are included in payroll taxes. Certain are deducted from your salary to pay for the expenses of these individual programs.

3. Capital gains taxes

The profit you make when you sell an investment, such as stocks, bonds, or real estate, is subject to capital gains taxes.

4. Corporate taxes

The federal and state governments impose taxes on a corporation's earnings. Based on corporate income less manufacturing costs, administrative fees, and other operational costs, businesses pay taxes.

5. Estate taxes

 Taxes you must pay to transfer property after your death are known as estate taxes. They are based on the fair market value of any assets and interests you have at the time of your passing.

6.  Property taxes

Typically, property taxes are based on the value of your real estate. However, they might also apply to large-ticket assets like your personal cars, boats, or other vehicles, as well as commercial stocks.

7. Sales taxes

Sales taxes are levied on the retail goods you buy, and they are calculated as a fixed percentage of the item's price. Local and state governments frequently use these.

8. Tariffs

Tariffs are taxes imposed on imports of goods from other nations. The tariff is paid by the consumer, not by the importer or foreign nation from whom the goods were made.

Why do tax rates matter?

A business's tax burden has an impact on growth and investment. Businesses have a greater propensity to leave the formal economy in areas with high taxes. There are fewer formal enterprises and less private investment when tax rates are higher, according to a study. The ratio of investment to GDP can be reduced by up to 2 percentage points, and the pace of new businesses starting up can be reduced by around 1 percentage point, for every 10 percentage points that the effective corporate income tax rate is raised. 3 Over the following three years, the output is reduced by roughly 3% with a tax increase of 1% of GDP.

A 1-percentage-point rise in the statutory corporate income tax rate would, according to research on multinational corporations' investment decisions, result in an average 1.3% reduction in local earnings from existing investments. 5 Creating a subsidiary in an economy is 2.9% less likely for every percentage point increase in the effective corporate income tax rate.

Only a portion of corporate taxes—about 39% on average—go toward profit taxes. For instance, in República Bolivariana de Venezuela, the nominal corporate income tax is based on a progressive scale of 15-34% of net income, but the overall business tax burden—even after accounting for deductions and exemptions—is 73.31% of commercial profit due to several other taxes (a profit tax, four labor taxes, and contributions, a turnover tax, a property tax and a science, technology, and innovation tax).

Tax rates should be kept affordable to promote the growth of the private sector and the formalization of firms. Small and medium-sized businesses, which contribute to economic growth and jobs but do not considerably increase tax income, are especially in need of reasonable tax rates. 7 Micro, small, and medium-sized firms account for more than 90% of taxpayers in Sub-Saharan Africa, the Middle East, and North Africa yet only generate 25–35% of tax revenue, according to typical distributions of tax revenue by company size for these regions' economies. 8 High tax burdens on companies of this size may not significantly increase government tax collection, but they may force them to go out of business or, worse yet, discontinue operations.

To make tax collection for micro and small businesses in Brazil easier, the government established Simples Nacional. The initiative led to an increase of 11.6% in the business license rate, a 6.3% increase in the registration of microenterprises, and a 7.2% increase in the number of businesses registered with the tax authorities while reducing overall tax costs by 8%. As a result of increased tax payments and social security contributions, revenue collections grew by 7.4%. Additionally, Simples Nacional was credited with raising the fixed capital, revenue, profit, and paid employment of formal-sector businesses.

The tax benefits that businesses receive are important. Because it is so crucial to decide where economic activity takes place and the potential sectors that can emerge, a country's infrastructure must be of a high standard to ensure that its economy runs smoothly. The competitiveness and productivity of an economy are dependent on the health of its workforce, hence it is imperative for moral and financial reasons that healthcare services be provided. Each worker becomes more productive with basic education, and economies can advance up the value chain past simple production methods and goods by obtaining high-quality higher education and training.

Around the world, there are differences in how well tax money is turned into public goods and services. Recent information from the World Development Indicators and the Human Development Index demonstrates that countries with relatively low total tax rates, like Malaysia and Ireland, efficiently collect tax revenues and invest the benefits in high-quality public goods and services. The data for Angola and Afghanistan show the contrary. The requirement for extra tax income to pay for expanding governmental spending is frequently increased by economic progress. 

Nevertheless, to supply those demands, an economy is necessary. But how money is spent with the money is more significant than the tax rate. There are other factors at play in emerging economies that contribute to low rates of tax collection besides high tax rates and shoddy tax administration. Furthermore, the size of the informal sector is important because it has a substantially smaller tax base due to the low wages paid to the majority of its workers.

How to File Your Taxes?

The majority of Americans consider submitting their federal and state income tax forms to be "filing your taxes." Ensure that you pay the taxes you are due on your income, it entails disclosing information about your income as well as other information.

You have the option of filing your income taxes online or on paper. You have three options for submitting your taxes: electronically, through hiring a tax preparer, or by doing it yourself.

6 Steps to File Your Federal Income Tax Return

1. Gather your paperwork

If you are itemizing deductions on your return, make sure you have your W-2 form from each employer you had the prior year, other income and interest statements (Forms 1099 and 1099-INT), and receipts for all charitable donations, medical expenditures, and business expenses.

2. Choose your filing status

Your filing status is determined by your marital status and may be impacted by how much you contribute to household costs.

3. Decide how to file

You should file your taxes electronically and use tax preparation software, according to the Internal Revenue Service (IRS). This method of filing your tax returns is typically the quickest, simplest, and most accurate. However, if you want, you can choose to file a paper return.

4. Decide if you are itemizing or taking a standard deduction

The amount of income taxes you must pay is decreased through deductions. Several factors, including your age and tax status, affect the standard deduction. It alters annually. If your itemized deductions total more than your standard deduction, you should go that path. In other cases, you can also not be qualified for a standard deduction.

5. Pay taxes if you owe any

You will receive a refund if you overpaid your taxes by using withholding or other payments from the previous year. However, if you owe taxes, you can pay them in several ways, including by writing a check, paying with a debit or credit card, or paying with a direct bank transfer.

6. Pay your taxes before the deadline

It's crucial to keep in mind that to avoid interest and penalties, you must submit your taxes and pay any sums owed before the deadline each year. Generally speaking, this is April 15 of each year for federal income taxes. However, it could differ if the fifteenth falls on a weekend or a specified state holiday. A three-month extension was provided in 2020 due to the COVID-19 pandemic.

Without having to reenter all the data from your federal income tax return, most income tax filing software will allow you to complete your state income tax forms as well.

State-by-state differences exist in the due dates for filing state income tax returns. To find out when your state forms are due, you need to contact your state.