Difference Between Tax and Duty

The government generates revenue from various sources, with tax and duty being among its primary sources of income. These funds enable the government to offer essential public services to the citizens, such as healthcare, transportation, education, banking, food security, infrastructure, and more. Tax is a financial charge imposed by the government on income, activities, or commodities. It is broadly categorized into two types: Direct Tax and Indirect Tax. Direct tax encompasses taxes like income tax and wealth tax.

On the other hand, Indirect Tax also has two divisions: taxes and duty. Taxes comprise the Goods and Services Tax, while duty encompass customs duty or excise duty. The primary difference between tax and duty is that the scope of tax is broader compared to duty; the latter is a subtype of the former.

Definition of Tax

Tax is a mandatory financial charge imposed by the government on income, goods, and activities. It serves as a fundamental source of government revenue, utilized for providing various services to the public. The power to levy taxes rests with both the Central and State Governments. There are two primary types of taxes:

Direct Tax: Direct tax is levied on the income or wealth of an individual and is known as such. In this type of tax, the burden falls directly on the taxpayer, meaning the person who pays the tax is the same individual who bears its cost. Direct taxes involve the direct transfer of money from an individual's pocket to the government's coffers. The types of direct taxes include:

• Income Tax: tax levied on a person's income
• Wealth Tax: tax based on a person's wealth.
• Others: It includes interest taxes as well as entertainment taxes.

Indirect Tax: Indirect taxes are charges on things you buy or services you use. They're called indirect because the burden of paying them gets passed on to someone else. In this case, the taxpayer and the person who bears the tax are different. It's a tax where money goes from one person to another and then finally to the government. The different types of indirect taxes are:

On goods:

• VAT (Value Added Tax): Intrastate sales tax.
• CST (Central Sales Tax): Intrastate sales tax.
• Customs Duty: tax paid on the manufacturing of goods.
• Excise Duty: tax on products' export or import.
• Others: Octroi, Entry Tax, etc.

On Services:

• Service Tax

Definition of Duty

A duty is a type of tax that individuals pay to the government, typically imposed on goods and financial transactions. It falls under the umbrella of indirect taxes, and it is the Central Government that has the authority to impose duties. Duties contribute to the government's overall revenue. Here are the various types of duties:

Excise Duty: The tax imposed on the production of goods within the country is called Excise Duty. It's also referred to as Central Value Added Tax (CENVAT). The Excise Duty in India is governed by two key statutes: the Central Excise Tariff Act of 1985 as well as the Central Excise Act of 1944. Currently, the rate of excise duty in the country is set at 12%.

Customs Duty: When goods are traded outside India, the tax imposed by the Government of India is called Customs Duty. It is applied to the import and export of commodities. Customs Duty is regulated by the Customs Act of 1962 and the Customs Tariff Act of 1975. The tax levied on imports is referred to as Import Duty, while the tax on exports is called Export Duty.

Key Differences Between Tax and Duty

The major differences between duty and tax are as follows:

1. Tax is a mandatory financial payment that individuals or entities must make to the government. Duty, on the other hand, is a fee imposed by the government on the manufacturing, importing, or exporting of goods.
2. The duty is a kind of tax.
3. Taxes are imposed on various entities, such as individuals and their wealth, services, and sales. Conversely, duties are specifically levied on goods.
4. The two main categories of taxes are indirect taxes and direct taxes. On the other hand, excise and customs duties are the two main categories of duties.
5. Both the Central Government and State Government have the power to impose taxes, but only the Central Government is authorized to levy duties.

Difference Between Tax and Duty

Conclusion

In India, the Department of Revenue, operating under the Ministry of Finance, oversees the administration of taxes and duties. Two boards, the Central Board of Direct Taxes (CBDT) and the Central Board of Excise and Customs (CBEC), are responsible for managing direct and indirect taxes, respectively. These boards were established under the Central Board of Revenue Act of 1963.