GST and Income Tax are the most crucial taxes applicable to Indian Individuals and businesses. In this comprehensive guide, we will unlock the key difference between GST and Income tax on various parameters like types of taxation, regulatory laws, governing authorities, applicability, tax rates, and more. Understanding these differences will help you navigate the Indian tax regime with ease and efficiency. For any further knowledge, you can consult our experts!
In India’s ever-evolving tax landscape, understanding the difference between GST and Income Tax becomes paramount. While Income Tax is a direct tax levied on individuals and businesses based on their earnings, GST, or Goods and Services Tax, is an indirect tax levied on the sale of goods and services. Both these taxes apply to individuals and businesses in their capacities. However, they are governed under different statutes and are administered by separate regulatory bodies. Moreover, their purpose, tax rates, compliance requirements, and legal frameworks are entirely different. Our purpose in this blog is to give you a clear insight into each of these differences so that you’ve got a better understanding of the two pillars on which India’s tax economy rests!
Direct vs Indirect Tax
The dichotomy between direct and indirect taxes plays a pivotal role in India’s tax regime. Direct taxes, such as Income Tax, are levied directly on individuals and businesses, proportionate to their income or profits. This means that the burden of payment rests directly on the taxpayer. Income Tax, a prime example of a direct tax, is a fundamental component of a nation’s revenue generation, contributing to public services and infrastructure.
On the flip side, we encounter indirect taxes, where the burden of taxation is shifted from the taxpayer to the end consumer. Goods and Services Tax (GST) stands as a prominent example of an indirect tax. Unlike Income Tax, GST is applied to the supply chain, impacting the sale of goods and services at each stage. The burden is ultimately borne by the end consumer. The foundation of the difference between GST and Income Tax lies in their respective types.
Income Tax & Its Regulatory Framework
The foundation to understanding the key difference between GST and Income tax lies in grasping their concepts and applicability separately. Income Tax, a direct tax, is imposed on the income earned by individuals, businesses, and entities, serving as a vital source of government revenue. Regulated by the Income Tax Act of 1961, the essence of this tax lies in taxing various income streams such as salaries, business profits, capital gains, and more.
Regulatory Framework of Income Tax Act
The regulatory framework of Income Tax has been meticulously defined within the legislative provisions of the Income Tax Act,. This comprehensive document outlines rates, exemptions, deductions, and assessment procedures through specific sections promoting savings and investments for taxpayers. The Central Board of Direct Taxes (CBDT) oversees the administration of the Income Tax Act, ensuring compliance and fair implementation. Key Laws Governing Income Tax include,
- Income Tax Act, 1961: The foundational legislation outlining principles and provisions.
- Finance Act: An annual legislation amending and supplementing the Income Tax Act.
- Double Taxation Avoidance Agreements (DTAA): International treaties preventing dual taxation.
Applicability of Income Tax Act
Income Tax applies to a diverse range of entities—individuals, Hindu Undivided Families (HUFs), companies, partnerships, etc. Taxpayers are categorized based on income levels, leading to different tax slabs and rates. Businesses may have distinct tax rates, and deductions are often available based on expenditures, investments, and specific activities. Individuals, for instance, enjoy deductions for expenses such as medical insurance premiums and contributions to provident funds. Moreover, businesses can leverage deductions for research and development expenses, fostering innovation and growth within the corporate landscape.
GST & Its Regulatory Framework
GST is an indirect tax that revolutionized India’s taxation landscape by consolidating various indirect taxes into a single, comprehensive and uniform framework. The concept revolves around taxing the supply of goods and services at each stage of the supply chain, ensuring a seamless and efficient system of transactions. GST is designed to eliminate the cascading effect of taxes, promoting a unified market, which includes both intra-state and inter-state supply chains.
The introduction of GST aimed to simplify the tax structure by replacing multiple indirect taxes such as Value Added Tax (VAT), Central Excise, and Service Tax. This consolidation not only streamlined tax administration but also enhanced ease of doing business, reducing complexities for businesses and individual taxpayers. GST brings several benefits to the table, including the elimination of tax cascading, formalisation of businesses in the tax economy, unified tax rates and compliance across the nation, and easy access to tax services on GST portal. By subsuming various indirect taxes, GST promotes transparency and reduces the overall tax burden on end consumers.
Regulatory Framework of GST
The regulatory framework for GST is outlined in the GST Act; to be specific the CGST & SGST Acts of 2017. These Acts define the principles, rates, and procedures for GST implementation, providing a comprehensive guide for businesses and tax authorities to comply with. The GST Council, comprising representatives from the central and state governments, plays a pivotal role in decision-making, including rate adjustments and policy amendments. This collaborative approach ensures a dynamic and responsive system that can adapt to changing economic conditions and evolving business landscapes across Indian states.
Applicability of GST
Goods and Services Tax (GST) is a comprehensive taxation system that applies to a diverse spectrum of transactions, encompassing the supply of goods and services. This inclusive framework impacts manufacturers, service providers, traders, and consumers alike. Businesses falling under the ambit of GST are categorized based on turnover, with mandatory registration for those surpassing the prescribed threshold limits. The limits of GST registration in India stands at INR 40 lakhs for merchandise businesses, INR 20 Lakhs for service providers, and INR 10 Lakhs for businesses operating in North-East and Hilly States.
However, certain businesses, regardless of turnover, are mandatorily obligated to register for GST. This includes inter-state suppliers, casual taxable persons, e-commerce aggregators/operators, NRIs, Importers/exporters, and OIDAR service providers. Additionally, businesses that fall under the Reverse Charge Mechanism also have to mandatorily enroll under GST regardless of the turnover.
What is the Difference between GST and Income tax?
Operating a business in India requires a keen understanding of its tax structure, which primarily stands on two fundamental pillars – Income Tax and GST. The difference between GST and Income Tax lies at the core of their purpose, regulatory compliances, and burden of tax payment. While Income Tax directly taps into the earnings of individuals and businesses, GST, as an indirect tax, is levied on the sale and purchase of items, where the burden shifts to the end-user or consumer. The table below has a detailed comparison of the two taxes on multiple fronts and aims to provide a distinct clarity to the readers!
Table of Difference between GST and Income Tax
| Parameter | Goods and Services Tax (GST) | Income Tax |
|---|---|---|
|
Nature of Tax |
Indirect Tax |
Indirect Tax |
|
Applicability |
Applies to the supply of goods and services over Rs.40 lakhs and Rs.20 lakhs respectively |
Applies to the income of individuals and businesses beyond Rs. 2.5 lakhs (Rs.3 Lakhs for senior citizens under the new tax regimes) |
|
Taxation Point |
Taxed at each stage of the supply chain |
Levied annually on the total income |
|
Taxpayer Types |
Businesses, service providers, consumers |
Individuals, HUFs, senior citizens, businesses |
|
Threshold Limit |
Threshold limit on aggregate annual turnover |
Threshold limit on annual income |
|
Tax Rates |
Multiple rates for different goods and services categories (5%, 12%, 18%, 28%) |
Progressive tax rates based on income slabs (5% to 30% for individuals) |
|
Input Tax Credit |
Available for tax paid on inputs and services |
Not applicable |
|
Administration |
Governed by the GST Council and respective GST Acts |
Governed by the Central Board of Direct Taxes (CBDT) and Income Tax Act |
|
Compliance |
Regular filing of GST returns (Monthly/Quarterly) |
Annual filing of IT returns |
|
Penalties |
Penalties for late filing, incorrect information |
Penalties for late filing, tax evasion, incorrect information |
|
International Transactions |
Applicable for imports and exports |
Governed by DTAA Agreements |
Latest GST & Income Tax Rates for AY 2024-25
Wondering what are the dynamic GST and Income Tax Rates for AY 2024-25? These rates, reviewed and adjusted regularly, shape the financial obligations of businesses and individuals. Understanding these latest rates is imperative for strategic financial planning, influencing pricing strategies for businesses, and determining tax liabilities for individuals in the upcoming assessment year. Explore the detailed breakdown below for insights!
Goods and Services Tax (GST) Rates for AY 2024-25
GST employs a multi-tiered tax rate structure, categorizing goods and services into different slabs. For AY 2024-25, the GST rate slabs in India are 5%, 12%, 18%, and 28%. Additionally, certain goods and services may fall under the exempt or nil category. Understanding the applicable rate for a specific good or service is crucial for businesses to determine their tax liability and pricing strategy. The GST Council regularly reviews and revises these rates to adapt to economic conditions and industry dynamics.The dynamic nature of these rates reflects the government’s efforts to balance revenue generation and affordability.
- 5% Slab: Essential goods and services, such as household items and transportation services.
- 12% – 18% Slabs: Standard rates covering most goods and services, LIKE everyday consumables and services.
- 28% Slab: Applicable to luxury items and sin goods.
Income Tax Rates FOR ay 2024-25
Income Tax rates in India adhere to a progressive structure, wherein the percentage of tax increases with higher income levels. This progressive system is designed to ensure that individuals with higher incomes contribute a larger share of their earnings to government revenue, promoting a sense of fiscal equity. For FY 2024-25, individual taxpayers in India are categorized into different income slabs, each with its corresponding tax rate. The basic idea is to apply higher tax rates to higher income brackets, creating a graduated scale.
Individuals (Below 60 years):
- Up to ₹2.5 lakhs: Nil
- ₹2,50,001 to ₹5,00,000: 5%
- ₹5,00,001 to ₹10,00,000: 20%
- Above ₹10,00,000: 30%
Senior Citizens (60 to 80 years):
- Up to ₹3,00,000: Nil
- ₹3,00,001 to ₹5,00,000: 5%
- ₹5,00,001 to ₹10,00,000: 20%
- Above ₹10,00,000: 30%
Very Senior Citizens (Above 80 years):
- Up to ₹5,00,000: Nil
- ₹5,00,001 to ₹10,00,000: 20%
- Above ₹10,00,000: 30%
Understanding the difference between GST and Income Tax is pivotal for making informed financial decisions, ensuring compliance, and optimizing tax liabilities. While GST, as an indirect tax, transforms the dynamics of supply chains with its multi-tiered rate structure, Income Tax, a direct tax, follows a progressive system, aligning tax rates with varying income levels. As these two pillars of taxation coexist in our fiscal landscape, the key lies in navigating their distinctions with acumen and foresight, fostering a robust and equitable economic ecosystem shaped by the disparities inherent in the difference between GST and Income Tax.
FAQs
Q1: What is the basic difference between GST and Income Tax?
The fundamental difference between GST and Income Tax lies in their nature and application. GST is an indirect tax applicable to the supply of goods and services, impacting businesses and consumers in the supply chain. On the other hand, Income Tax is a direct tax levied on the income of individuals and businesses, with rates varying based on income levels.
Q2: How do the rates of GST and Income Tax differ?
The rates of GST and Income Tax differ significantly. GST follows a multi-tiered structure with rates such as 5%, 12%, 18%, and 28%, while Income Tax rates are progressive, increasing with higher income levels (5% – 30%).
Q3: Can the same entity be subject to both GST and Income Tax?
Yes, the same entity can be subject to both GST and Income Tax. Businesses are typically liable for GST on the supply of goods and services, while Income Tax applies to their earnings. This dual obligation emphasizes the importance of comprehending the difference between GST and Income Tax for effective financial planning.
Q4: Are there any exemptions or deductions available under GST and Income Tax?
Yes, both GST and Income Tax provide exemptions and deductions. GST may exempt certain goods and services, while Income Tax allows individuals and businesses to claim deductions for specified expenditures and investments. Understanding these provisions is crucial for optimizing tax liabilities and ensuring compliance with relevant laws.
Q5: How does the difference between GST and Income Tax impact international transactions?
The difference between GST and Income Tax significantly influences international transactions. While GST applies to imports and exports, Income Tax implications for international transactions are governed by Double Taxation Avoidance Agreements (DTAA). Navigating these variations is essential for businesses engaged in global trade and cross-border transactions.