Whenever we receive a salary or buy something, a question often comes to mind – what is tax? Why does the government take money from us and where is it used? Simply put, the definition of tax is that it is a contribution made by the government to run essential services like roads, hospitals, education, and security. So, if you ask what do you mean by tax, the answer will be it is a shared responsibility in which every citizen is a partner. In this blog, we will understand the concept of tax in detail and learn about the different types of tax systems in India.
What Do You Mean by Tax?
Simply put, tax is a mandatory fee that the government collects from citizens and companies to provide essential services and development work for the country. It’s not a voluntary contribution, but a legally mandated contribution. Therefore, when we ask “define tax” or “tax definition,” the answer is: it’s the government’s legitimate right to raise funds for the public good. In simple terms, what is tax means that we all collectively contribute money to the government to maintain roads, hospitals, education, security, and welfare programs. This is the concept of taxing every citizen’s participation in nation-building.
Example : Suppose you shopped online for ₹1,000. A 5% GST is levied, or ₹50. This ₹50 will go to the government and will later be used for roads, hospitals, or government programs. Similarly, the income tax deducted from your salary also helps run the country.
The story of the tax system in India is very old. Here I will explain it in simple language, with up-to-date information, so you can understand how the tax concept evolved.
Historical Evolution of Tax in India
Ancient Period: Principles and Beginnings
- In ancient Indian texts such as the Arthashastra, Chanakya held that the king has the right to impose taxes and that taxes should be determined according to a person’s economic status (income and expenditure).
- Manu Smriti also contains a similar idea that taxes should be based on justice and efficiency.
Colonial Period (British Raj): Formal Taxes and Reforms
- Modern income tax was first introduced in India by Sir James Wilson in 1860, specifically to meet government expenses after the 1857 Revolution.
- In 1886, a new income tax law was introduced, categorizing income and setting tax rates.
- Land revenue systems such as Permanent Settlement, Ryotwari, and Mahalwari were introduced. These systems shared land tax and produce tax between farmers and landowners, but often burdened farmers.
Post-Independence and Modern Reforms
- The Income Tax Act, 1961, provided a systematic and permanent legal framework for the entire income tax system, which remains in use today with frequent amendments.
- In 2017, India implemented the Goods & Services Tax (GST)—a major transformational scheme that eliminated many indirect taxes and aimed to simplify the tax system.
- Recently, (with the cooperation of all states and the central government), several GST slabs have been revised to simplify and make tax rates simpler.
Thus, the history of taxes has evolved from “primitive justice,” through formal laws under British rule, and today’s digital and simplified system. This journey demonstrates that tax definition is not simply a sliver of the pie, but a balance between the economy, society, and government.
Types of Taxes in India
The tax system in India is divided into two broad categories: Direct Taxes and Indirect Taxes. Below are the main types of both in simple terms.
Direct Taxes
These are taxes that you or your company pay directly, not through intermediaries based on income, profits, etc.
- Income Tax : Applies to individuals and families’ income (salary, business, other sources). India has income tax slabs no or no tax on low income earners, and higher rates on high income earners.
- Corporate Tax : Is levied on the profits of companies. If the company is registered in India, its global income is taxed. Recently, some companies have the option of special rates.
- Capital Gains Tax : This tax is levied when you sell an asset (such as shares, land, mutual funds) and realize a profit on the sale. It can be both short-term and long-term, depending on how long you held the asset.
- Securities Transaction Tax (STT) : Securities Transaction Tax (STT): A tax levied on the purchase and sale of securities in the stock market. For example, if you sell shares on a stock exchange, STT is levied on that trade.
Indirect Taxes
These are taxes that are included in the price of goods or services and are ultimately borne by the consumer through higher prices for goods/services.
- Goods and Services Tax (GST) : Implemented in India from July 2017, This is a comprehensive indirect tax on goods and services. It replaced multiple central and state taxes such as Service Tax, VAT, Excise Duty, Central Sales Tax, Luxury Tax, and more. GST has different slabs—0%, 5%, , 18%—depending on the type of goods or services.
- Customs Duty : When goods are imported into or exported from India, customs duty is levied on them. Special rates apply on imports, depending on the HSN classification of the item.
- Excise Duty: Levied on domestically manufactured goods. Before the implementation of GST, excise duty was very high; but now GST has replaced it in most cases.
- Stamp Duty: Tax levied on documents, property transfers, legal papers, etc. It is levied at varying rates by state governments/local bodies.
Read More: Types Of Taxes In India: Direct Tax And Indirect Tax
New GST Structure in India (Implementation from 2025)
The biggest complaint about GST was that the rates were too complicated. The government addressed this and simplified the rules in 2025. Now, most goods and services fall under just three rates 0%, 5%, and 18%.
For example, everyday food and essential medicines are now completely GST-free. Commonly used items, such as clothing and some services, have been placed at 5%. Mobile phones, televisions, and restaurant meals are placed in the 18% slab. The government has further tightened the tax on products like luxury cars and tobacco, raising it to 40%. This change has made consumer bills easier to understand and reduced paperwork for small businesses.
Read more on GST 2.0 reforms and market impact Click Here.
Key Features of the Indian Tax System
- In India, taxes are collected at two levels – the central government and the state governments, both of which play their roles.
- Most taxes here are based on self-assessment, meaning people calculate their income and pay taxes themselves.
- Most work is now done online. Whether filing returns or paying taxes, everything can be done from home.
- The government makes periodic improvements to simplify the rules. The recently introduced GST 2.0 is a major step in this direction.
Read Also: Why Do We Pay Taxes to the Government?
Challenges in the Indian Taxation System
India’s tax system is constantly improving, but there are still many problems that cannot be ignored.
- The primary problem is the low number of taxpayers. The population is in the billions, but only a handful file returns. The reason is clear: most people are engaged in informal work, where it’s difficult to track income.
- The second issue is GST. While it’s fine for large businesses, small shopkeepers and traders find it a burden to file returns and deal with the paperwork every month. The government has made changes, but it still needs to be simplified.
- The third challenge is that the government still derives most of its revenue from indirect taxes. This results in everyone, rich and poor, having to pay taxes on everyday items, which doesn’t always seem fair.
- To move forward, the system must be simplified further and both trust and awareness among the public must be increased. Only then will the tax base be strengthened and the country’s financial foundation strengthened.
Read Also: Tax-Free Bonds: Their Features, Benefits, and How to Invest
Conclusion
People often think of taxes as a mere burden, but the reality is that they are the biggest source of the country’s economy. From roads to hospitals and education, every facility is funded in part by our taxes. Therefore, it is important to understand the definition of tax and its various forms. Filing returns on time and following the rules is not only our responsibility but also our contribution to nation-building.
Frequently Asked Questions (FAQs)
What is tax in simple words?
Tax is a contribution made to the government to maintain infrastructure like roads, education, and healthcare.
What are the main types of taxes in India?
There are two types of taxes in India – Direct Tax (such as Income Tax) and Indirect Tax (such as GST).
Why do we pay tax to the government?
So that the government can provide public services and provide development work.
What is the difference between direct and indirect tax?
Direct tax is levied directly on income or profits, while indirect tax is added to the price of goods and services.
What happens if we don’t pay tax?
Breaking the rules can result in fines or legal action.
