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Important Tax-Related Terms in India – UPSC Notes | Direct & Indirect Tax Glossary

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Important Tax-Related Terms in India – UPSC Notes | Direct & Indirect Tax Glossary

Important Tax-Related Terms in India

Understanding taxation is essential for grasping the fiscal structure of any country. In India, taxes are broadly classified into direct and indirect taxes, with a complex yet well-defined terminology governing how taxes are levied, collected, and regulated. This glossary of essential tax-related terms offers clarity on various components of the Indian tax system—from types of duties to methods of compliance, evasion, and planning. Mastery of these concepts is crucial for UPSC aspirants, policymakers, and citizens alike.

Dividend Distribution Tax

DDT is the tax imposed by the Government on domestic companies which pay dividends to their investors.
DDT was introduced by the Finance Act of 1997.

Withholding Tax

Tax deducted at the time of payment (e.g., salaries, professional fees).

Presumptive Tax

Tax calculated on estimated income rather than actual profits.
Presumptive taxation involves the use of indirect means to ascertain tax liability, which differ from the usual rules based on the taxpayer’s accounts.

Wealth Tax

Tax imposed on accumulated wealth.
Abolished in Union Budget 2015–16 and replaced by a 2% surcharge on high-income individuals.

Securities Transaction Tax (STT)

STT is a direct tax levied on every purchase and sale of securities that are listed on the recognized stock exchanges in India.

Perquisites (“Perks”)

Perquisites refer to extra benefits provided by an employer to an employee, either in cash or kind. They do not include reimbursements but are categorised into taxable perquisites, benefits such as rent-free accommodation, company cars, or stock options that are subject to tax.Non-Taxable Perquisites like employer contributions to provident funds or medical benefits up to specified limits, are exempt from tax under specific conditions.Profits in Lieu of Salary include payments received instead of salary and are taxed as salary income.

Tax Incidence

Refers to who is legally responsible for paying the tax.
Different from tax burden, which is who ultimately bears the cost.

Tax Base

It is the total value of taxable income, assets, or economic activity used as the foundation for calculating tax owed to the government.

Tax Shelters

Refers to legal methods to reduce tax liability (e.g., investments offering tax deductions).
Tax Planning:Tax planning is the legal structuring of financial activities to reduce tax liabilities while fully complying with the law. It involves utilizing provisions clearly allowed by tax regulations, such as investing in tax-saving instruments and claiming eligible deductions and exemptions.
Tax Avoidance:Tax avoidance involves using legal strategies and provisions to reduce the amount of income tax payable by an individual or a business.
Tax Evasion: It is the illegal practice of reducing tax liability through deceitful means such as hiding income, falsifying expenses, or manipulating accounts.

Hidden Taxes

A hidden tax is a tax that is not directly visible to the taxpayer. Such taxes can increase the prices of goods and services and reduce workers’ salaries, thereby significantly eroding individuals’ purchasing power, even though the tax itself is not immediately apparent.

Consumption Tax

Tax levied on spending (e.g., VAT, sales tax).
It is imposed on the purchase of goods and services. The concept is straightforward: the more you spend, the more tax you incur.

Types of Taxes by Progressivity

Proportional Tax: Same rate for all income levels.
Progressive Tax: Higher rate on higher incomes.
Regressive Tax: Lower effective rate as income increases.

Specific Duty

Tax assessed based on quantity, weight, or number.

Ad Valorem

Tax based on the value of goods (e.g., VAT on fuel).

Compound Duties

A specific duty is calculated based on factors such as weight or quantity, whereas an ad valorem duty is determined by the value of the goods. These two types are often combined to create a more comprehensive and balanced tax rate.
- Taxes calculated based on a combination of value and other measurable factors.

Customs Duty

Tax imposed on import or export of goods/Tax imposed on goods when they are transported across international borders.

Excise Duty

Excise duty is a tax imposed on the production, licensing, and sale of goods within a country. As an indirect tax, it is collected by the Government of India from producers of goods. Unlike customs duty, which applies to imports, excise duty is levied on goods manufactured domestically.
Previously, excise duty at the central level included levies like Central Excise Duty and Additional Excise Duty. However, with the introduction of the Goods and Services Tax (GST) in July 2017, many forms of excise duty were subsumed under GST.

Negative Income Tax

A system where people below a certain income level receive subsidies instead of paying tax.
Universal Basic Income (UBI) is an example.

Tax Buoyancy

It refers to the percentage change in tax revenue with the growth of national income.
Indicator of how responsive tax collections are to GDP growth.

Tax Elasticity

It is defined as the percentage change in tax revenue in response to the change in tax rate and the extension of coverage.
Contrast: Tax buoyancy reflects revenue growth purely from economic growth.

Tax Stability

Refers to consistency and predictability in tax policy over time.
Promotes better planning for both government budgets and businesses.

The GST Council is one of the most significant innovations in India’s fiscal federalism. It reflects the collaborative spirit between the Centre and States, ensuring that GST implementation remains uniform, transparent, and inclusive. However, to remain effective, the Council must continue to evolve by resolving disputes amicably, simplifying the rate structure, and balancing fiscal autonomy with national economic goals.

FAQs on Tax-Related Terms

Q1. What is withholding tax?

Withholding tax is the tax deducted at the time of payment, such as salaries, interest, or contractor fees. In India, this is commonly known as Tax Deducted at Source (TDS).

Q2.What is the difference between tax avoidance and tax evasion?

Tax avoidance uses legal provisions to reduce tax liability, while tax evasion involves illegal methods like underreporting income.

Q3. What is the difference between excise duty and customs duty?

Excise duty is levied on goods manufactured within the country, while customs duty is imposed on imported or exported goods.

Q4. What are ad valorem taxes?

Ad valorem taxes are levied as a percentage of the value of goods, such as VAT or GST on many items.

Q5. What is tax buoyancy?

Tax buoyancy measures how tax revenue increases in response to economic growth, even when tax rates remain unchanged.

Q6. What is tax incidence?

Tax incidence shows who ultimately bears the burden of a tax—like consumers in the case of indirect taxes.

Q7. What is a negative income tax?

Negative income tax refers to subsidies or payments made to individuals earning below a certain threshold, similar to Universal Basic Income.

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