Taxes play a crucial role in a country’s economic system, and in India. The two primary types of taxes that individuals and businesses deal with are Goods and Services Tax (GST) and Income Tax. While both contribute to the government’s revenue, they serve different purposes and have distinct rules, rates, and compliance requirements. Understanding their differences is essential for every taxpayer to ensure proper compliance and optimize tax planning.
Nature of Tax
- GST (Goods and Services Tax): GST is an indirect tax levied on the supply of goods and services at each stage of the supply chain.Ultimately borne by the end consumer.It is a consumption-based tax. Meaning it is charged at every stage of production or distribution but is ultimately paid by the final consumer.
- Income Tax: Income tax is a direct tax levied on the earnings of individuals, businesses, and other entities based on their income levels. It is progressive, meaning that those who earn more pay a higher percentage in taxes.
Governing Laws For GST and Income Tax
- GST: Governed by the Goods and Services Tax Act, of 2017, which replaced multiple indirect taxes such as VAT, service tax, excise duty, and more. The tax is administered by the Central Board of Indirect Taxes and Customs (CBIC).
- Income Tax: Governed by the Income Tax Act, of 1961, which outlines the rules for tax rates, exemptions, deductions, and filing requirements. The tax is administered by the Central Board of Direct Taxes (CBDT).
Applicability
- GST: GST applies to businesses, traders, service providers, and manufacturers involved in the supply of goods and services. Businesses with an annual turnover exceeding ₹40 lakh (₹20 lakh for services) in most states must register for GST.
- Income Tax: Income tax applies to individuals, businesses, salaried employees, professionals, and corporate entities earning taxable income above a specified threshold. All eligible taxpayers must file an Income Tax Return (ITR) annually.
Tax Collection Method
- GST: Businesses collect GST from customers at multiple stages of production and distribution and remit it to the government, while the consumer ultimately bears the tax.
- Income Tax: Taxpayers pay income tax based on their annual earnings. Employees pay through Tax Deducted at Source (TDS), while businesses and self-employed individuals pay via advance tax or self-assessment tax.
Tax Rates
- GST: GST is divided into five tax slabs: 0%, 5%, 12%, 18%, and 28%, depending on the type of goods and services.
- Essential items like food grains are exempt from GST, while luxury goods and sin goods attract higher rates and additional cess.
- Income Tax: For individuals (as per the new tax regime, FY 2023-24): Tax slabs range from 0% to 30%, depending on income levels.
- Corporate tax rate: 22% (for domestic companies under special provisions), 30% (for others).
Registration Requirements
- GST: Registration is mandatory for businesses with a turnover exceeding ₹40 lakh for goods and ₹20 lakh for services in most states. Certain businesses, such as e-commerce operators, must register regardless of turnover.
- Income Tax: Individuals earning above ₹2.5 lakh annually and businesses with profits must register for and file income tax returns.
Filing and Compliance Under GST and Income Tax
- GST: Monthly or quarterly filing of GSTR-1, GSTR-3B, and annual return (GSTR-9).
- Businesses must maintain detailed invoices and records of Input Tax Credit (ITC) to avoid penalties.
- Income Tax: Annual filing of Income Tax Returns (ITR-1 to ITR-7 based on taxpayer category).
- Employees and businesses must comply with TDS regulations, advance tax payments, and audits where applicable.
Tax Deduction and Credit
- GST: Businesses can claim Input Tax Credit (ITC) on the GST paid for purchases, thereby reducing their overall tax liability.
- ITC can only be claimed if suppliers file GST returns correctly.
- Income Tax: Individuals can avail of deductions under various sections (80C, 80D, 80G, etc.) for expenses such as life insurance, medical insurance, and home loan interest.
Exemptions and Concessions
- GST: Some goods and services, such as healthcare, education, agricultural produce, and financial services. Are exempt from GST to reduce the tax burden on essential sectors.
- Income Tax: Individuals can avail of tax exemptions on investments, housing loans, education loans, and donations to reduce their taxable income.
Impact on Business and Individuals
- GST: Directly impacts business transactions, product pricing, cash flow management, and supply chain efficiency.
- Income Tax: Affects individual earnings, savings, and corporate profitability, influencing investment and spending decisions.
Compliance and Penalties
- GST Non-Compliance: Late filing of GST returns attracts a penalty of ₹50 per day.
- Wrongful ITC claims or tax evasion can lead to fines and legal action.
- Income Tax Non-Compliance: Late ITR filing incurs a penalty of up to ₹10,000.
- Underreporting of income or tax evasion can result in severe penalties and even prosecution.
Audit and Scrutiny
- GST: Businesses with an annual turnover exceeding ₹5 crore must undergo a mandatory GST audit.
- Income Tax: Businesses and professionals with a turnover above ₹1 crore (or ₹50 lakh for professionals) must undergo a tax audit under Section 44AB.
