Tax is an involuntary fee the government collects from individuals or corporations every year. Tax collection and Tax payment is indeed a law enforced by every government.
Tax and Taxation policies may differ from country to country. However, the primary purpose of collecting tax is to finance several government activities. The system of taxation has existed for an extended period in this world.
Earlier, the import tax was levied when goods were sent to a particular country. There were certain countries which levied a tax on consumption too.
With time and the need for funds during war times, governments started levying taxes on various other aspects too. They were traditionally charging tax on real property, and that too temporarily.
Great Britain first introduced Income Tax in 1799 as a war measure. This was followed by turnover or purchase tax later by Germany.
Taxes are of many types in modern days. The most prominent tax that exists in the current era is the GST and Income tax.
Both these taxes benefit the government in one or the other way, but there are differences in the taxation policy.
Key Takeaways
- GST (Goods and Services Tax) is an indirect tax levied on the supply of goods and services, while income tax is a direct tax imposed on an individual’s or a company’s income.
- GST is a consumption-based tax, meaning it is charged at the point of sale and is ultimately borne by the end consumer, while income tax is charged based on the income of individuals or businesses and is paid by the income earner.
- GST aims to eliminate the cascading effect of multiple taxes on goods and services, simplifying the tax system. In contrast, income tax generates revenue for the government from the earnings of individuals and businesses.
GST vs Income Tax
GST and Income Tax differ in that GST is levied on the consumption of goods and services, while Income Tax is levied on income or profit earned. In a way, GST is the indirect tax, while Income tax is the direct tax.
Comparison Table
| Parameter of Comparison | GST | Income Tax |
|---|---|---|
| Meaning/ Definition | GST is the tax levied on the supply or consumption of goods and services. | Income Tax is the tax that is levied on the income made in a particular year. |
| Tax Type. | GST is an indirect tax that is paid to the government. | Income tax is the direct tax paid to the government. |
| Tax filing Norms | GST registration is mandatory if the turnover is more than 20 lakhs annually. | Income tax must be filed if the annual income exceeds 2.5 lakhs. |
| Tax Payment norms | The tax burden can be shifted to the final consumer. | The person cannot shift the burden to anyone, the person who earns an income of 2.5 Lakhs and more must pay the tax on his own. |
| Heads of Tax | GST is levied on goods purchased or services offered. | Income tax is levied on Salary, House Property, Profit from the business, and Income from Capital Gain. |
What is GST?
GST abbreviated as Goods and Services Tax, is an indirect tax paid to the government. It is also called a consumption tax. GST is considered as a comprehensive, multi-stage, destination-based tax.
It is called comprehensive because it has subsumed many indirect taxes into one form. It has replaced central excise duty, services tax, additional customs duty, surcharges, and specific value-added tax.
It is a multi-staged taxation system is because GST is imposed on every step of the production process. The tax is refunded in various stages of production, and the final consumer pays the tax in buying the product or using the service,
Thus called a destination-based tax, as the tax is levied on where it reaches and not where it came from. Therefore the burden of tax can be shifted from one person to another person.
GST becomes one indirect tax for the entire country. Cascading of many taxes is avoided by using this taxation policy.
As it is, GST has removed the tax on tax, which means the price of the product has been reduced. GST is technology-driven, and it can be filed online.
It is a mandate that if the yearly turnover is 20 lakhs and above, then registration of GST is a must. GST has improved the tax collection for a country.
What is Income Tax?
Income tax is a type of tax levied on income earned per year. It is the tax that the government imposes on the income generated by a business.
Income tax is one of the sources of income for the government. The collected tax is utilized for many developments in the country.
The tax percentage is directly proportional to the income earned by an individual. Higher the income, the higher the tax to be paid.
Indeed, Income tax is the direct tax paid to the government. The income tax must be filed if an individual earns 2.5 lakhs or more in a particular year.
Individual income tax is also known as personal income tax. There is another one called business income tax which applies to businesses, corporations, partnerships, and also self-employed people.
Individual income tax is levied on the salary a person receives every year. It also includes the business income that a person makes in a particular financial year.
There are many ways to get tax exemptions. If invested in non-taxable forms, that amount of money does not come under taxable income.
Mainly, these exemptions are given to any loan repayment, insurance policies and House rent allowances. In a few cases, medical exemptions can be cited to get exemptions from paying taxes.
Main Differences Between GST and Income Tax
- Both taxes benefit the government in many ways. The main difference between GST and Income tax is GST is levied on the consumption of goods and services, whereas Income tax is levied on income earned in a financial year.
- In the way of collecting tax, GST is the indirect tax paid to the government, whereas Income tax is the direct tax paid to the government.
- GST is levied only on buying a product and using a service, whereas Income tax is levied on salary, house, revenue from a business, and income from capital gain.
- The tax burden of GST shifts from the manufacturer to the consumer, whereas no such transfer can happen in income tax. If a person earns income which reaches the benchmark of taxation, he/she is liable to pay the income tax.
- GST registration is mandatory if a company makes an annual turnover of 20 lakhs per year, while Income tax is levied on individuals if the annual salary is more than 2.5 lakhs.
- https://www.rse.anu.edu.au/researchpapers/CEPR/DP684.pdf
- https://pdfs.semanticscholar.org/2aae/2a3ea27c1c6b1063a27b35b02c8f947e503c.pdf
I’ve put so much effort writing this blog post to provide value to you. It’ll be very helpful for me, if you consider sharing it on social media or with your friends/family. SHARING IS ♥️
Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
