Difference Between Tax and Levy

The Government of every country has to collect taxes to administer the country efficiently. Taxes are paid to the local, State, and Central authorities. Levy is a term very frequently used in the taxation process. These two terms may appear to be interconnected, sometimes used interchangeably; however, they are distinct.

What is Tax?

The state levies taxes on the citizens to generate revenue for undertaking projects to enhance the economy and raise the standard of living of its citizens.

Types of Taxes in India

Generally, two main types of taxes exist in taxation, and they have been further categorized.

1. Direct Tax

It is the tax that is directly paid to the state by the individual or legal entity. Central Board of Direct Taxes, a government body working under the Ministry of Finance, Government of India, oversees the matters related to direct taxation. Direct taxes are non-transferrable to an individual or legal entity. Further classification of direct taxes include:

• Income Tax
  • It is the tax imposed on the annual income or the profits directly paid to the government.
  • Everyone who earns some income has to pay the income tax to the government
  • Different tax slabs exist for different income accounts. Legal entities are mandated to pay taxes along with individuals.
  • It includes Associations of persons, Hindu Undivided Family (HUF), Artificial Judicial Persons, Bodies of Companies, corporations, local firms, and local authorities.
• Capital Gains Tax
  • Capital gains are imposed on the sale of property, purchase, or money gained through investment. They could be classified as Short-Term Capital Gains Tax or long-term capital gains from an investment. It extends to all exchanges made in kind, which are evaluated based on their monetary value.
• Securities Transaction Tax
  • It is a tax that is imposed on the securities trading or stock market. The tax is imposed upon the prices of shares along with securities tradeable on the Indian Stock Exchange.
• Corporate Tax
  • The income tax given by the corporations is termed corporate tax. It has been created based on the different slabs that revenues come under. Further classification of the Corporate Tax includes:
  • Dividend Distribution Tax: This tax is imposed on the dividends that the company gives back to its investors. It applies to the gross or net income that investors get back from the investment.
  • Fringe Benefits Tax: This tax is imposed on the fringe benefits that employees may get from the company. It may cover things like transportation, accommodation, leave travel allowance, Employee stock ownership plan (ESOP), etc.
  • Minimum Alternative Tax: As corporates tend to try to get maximum relief using all possible tax rebates, therefore, Minimum Alternative Tax is introduced. MAT provision in the IT act to stop the exemptions and rebates availed by corporates. So, by enforcing MAT, corporations mandatorily have to pay a minimum tax amount to the government.

2. Indirect Tax

Indirect taxes are taxes that the government levies on services and products. They are collected from the retailer of the service or product and included in the price of the products or services.

• Goods and Service Tax
  The Goods and Service Tax (GST) is a tax that is charged upon the supply of goods or services or both, barring taxes on the sale of alcoholic liquor meant for Human Consumption. It is a very elaborate tax structure and comes under indirect tax regimes. The GST applies to both goods and services. The pre-GST regime had multiple taxes like Excise Duty, Service Tax, etc. However, with the introduction of GST, these multiple taxes have been subsumed into one tax regime. The GST has been conceptualized based on the idea of having One Nation, One Tax.
• Customs Duty
  Custom Duty is imposed on the items that have been imported from a foreign country. The amount of tax imposed upon the type of imported product that has been entered from the foreign country.
• Service Tax
  Service tax is imposed on the company's delivered services. It is added to the product's price, and tax collection will be subject to the type of service. Some of the paid services covered under the service tax include banking services, financial services, healthcare, advertising, consultancy telephone, etc.
• Sales Tax
  A sales tax is a consumption tax charged on the sale of goods and services. It is generally a percentage of the selling price and is included in the final cost of the product or service. Sales taxes are a crucial source of revenue for State and local government authorities.
• Excise Duty
  It is an indirect tax charged on the sale or use of particular products like tobacco, alcohol, and energy. The revenue generated from these excise duties solely goes to the country to which they are paid.
• Other Tax
  There are miscellaneous tax generates minor revenue for the state. The local authorities generally impose it at the local level. Several sub-categories exist for other types of taxes, including:
  • Property Tax: It is also known as Municipal Tax or Real Estate Tax. It is charged to Residential and commercial property owners and used to maintain crucial civil services.
  • Entertainment Tax: This tax is imposed on the gross revenue of movies, television series, exhibitions, etc. It is also sometimes called an amusement tax.
  • When buying a property, transfer tax, Registration Fees, and Stamp Duty are levied in addition to property tax.
  • Education Cess: It is charged to fund the educational courses maintained by the Central Government
  • Entry Tax: This tax is imposed upon products that enter a state, particularly via an e-commerce mechanism, and is enforced in the states of Madhya Pradesh, Assam, Gujarat, and Delhi.

Why does the Government Impose Taxes?

The main objective of the taxes is to offer the state money for spending without disturbing inflation. Taxes collected at different points are used for multiple purposes, such as:

• Defence Expenditure
• Paying Salaries to its Employees
• Functioning of the Government
• Funding Public Projects
• Public Health
• Boosting Urban Mobility
• Welfare Programs
• Research and Development Program

Advantages of Taxes

It is mandatory for those who earn a taxable salary to file their income tax. Here is the list of benefits that you get if you file your tax returns regularly:

Visa Applications

• Several foreign consulates demand to show the income tax returns from the previous years during the visa process.
• It is compulsory for countries like Europe, the United Kingdom, the United States, and Canada but not necessary for the South East Asian Nations and West Asia.
• They demand income tax returns because they act as evidence that the individual is not leaving the country to evade the taxes from the authority.
• When traveling abroad for leisure or business purposes, it is advised to keep receipts of ITR because they become handy in times of emergency when you seek aid from the consulates.

Loan Approvals

• When you seek a loan from a bank, particularly a home loan or vehicle loan, the bank may ask for a copy of the ITR. It could be the ITR of the last 2-3 years.
• Possessing an ITR becomes a positive point that can help you get a high loan or may prompt a financial institution to reconsider your loan request if it was dismissed at first.
• It would be helpful for the bank to measure your ability to repay the loan.
• Income Tax gives a crystal-clear picture of the income and taxes that were filed in the previous year.

Tax Refunds Claims

• Any refunds pending with the Income Tax department can only be claimed after the due filing of the Income Tax returns.
• Even if the income falls under the exemption slab, refunds can be claimed under various savings instruments if the ITR is filed.
• Fixed deposit is a textbook example in which TDS is deducted at 10%

What is Levy?

It is a lawful process where a debtor's property is confiscated when the debtor defaults on the outstanding debts. It is distinct from the lien as the lien is only claimed against the property to receive the payment, and the levy is an original confiscation of the property to meet the debt. Thus, it also has legal validation as it confiscates the property against the borrower who has taken the loan in case of default. Before enforcing the rule, a notice is sent to the borrower and then action is followed for recovery of the loan amount.

Levy Explained

A levy is a legal act initiated by a bank or taxing entity. It minutely differs from the lien as a lien means it is only a claim against the property, on the other, the levy is an actual confiscation of the property to meet the outstanding debt. In this case, the bank or a taxing entity has been given the right to confiscate the property (tangible as well as intangible property) of the debtor. Tangible assets include car, cash, and home, and tangible assets include potential wages in the case of levy.

Levy on Property Works

• Warning: Levy functions in case the creditor is not able to get its money after the effort. Therefore, the creditor issues a warning against the debtor, and legal action will be initiated against the debtor. In such a scenario, further warnings are not issued by the taxation entity or the bank.
• Option to Dispute: The debtor has the opportunity to dispute the levy. By taking these steps, debtors can minimize the amount of money that creditors can seize or potentially avoid such actions altogether.

Process

We shall look at the process adopted in case of levy and several rules that are followed during the process:

• The IRS (Internal Revenue Service), a taxing authority, must initially determine whether any financial obligation remains on the debtor's side. If so, the extent and duration of the obligation, as well as the type of obligation, will dictate the penalties imposed on the offender.
• The IRS scrutinizes the tax, and the payable tax bill is communicated to the debtor as a demand for debt payment.
• If the debtor pays the tax bill, no action is initiated; however, if non-payment occurs, which may be due to financial problems, action is followed.
• The IRS will send a notice about the levy's objective 30 days before the process. The notice may be received vial or sent to the debtor's house.
• The IRS may inform the debtor that it is involving a third party to collect the debtor's tax liability by sending notice.
• After completing the steps mentioned above, if the borrower still has outstanding obligations and the notice period is over, the credit agency or lender may begin legal action. This action typically involves receiving a court order or judgment, allowing the lender the relevant authority to enforce the levy.
• The next move is confiscating the asset, which may include a bank account, wage, or property, whichever fulfills the obligations and meets the loan amount that has to be given back, as well as the levy cost. After obtaining legal permission, the agency can move ahead with the procedure.
• Finally, the borrower is informed about the confiscation of the asset. Depending on the area of jurisdiction or the law, they may be given a period within which they may seek appeal or relief from the judiciary.

The above-cited procedures are for offender levy, and they are the usual process followed. However, if the confiscated assets fulfill the loan amount, then procedures end there. If they do not compensate the amount, then other areas are explored to meet the remaining amount.

Example of Levy

A levy is initiated by the taxing authority or bank, such as the Internal Revenue Service. They might confiscate the borrower's property to meet the debt.

Suppose Mr. Shawn took $1,000 from Mr. Ram, but after the repayment date has expired, Mr. Shawn is unable to return the debt amount. Mr. Ram gave up on it and decided to complain to the IRS with legal documents. The IRS took up the matter, started proceedings against Mr. Shawn, confiscated the property, and carried out legal actions to meet the debt. So, in this way, by enforcing the levy law, the amount of $1,000 was given back to Mr. Ram.

How to Prohibit A levy?

• Agreement of Payment with a Creditor: When the debtor convinces the creditor to come for an agreement of payment, the levy can be prohibited.
• Payment of Debt: If the debtor makes the debt payment before the property is confiscated, it can be prohibited.
• When Mistakes are Found on the Creditor's Side: When mistakes are found on the creditor's part, it can be prohibited.
• When Debtor Funds are Protected, Creditors Can't Touch Them: Some funds parked in the debtor's account may be protected and cannot be used for levy, such as the Social Security Fund, child support fund, etc. Such funds have been given protection from the process of levy.

When will the IRS Issue a Levy?

When the debtor cannot return the debt after being served with several notices, then it is the last option. Then, it is the only option left with the IRS to get the debt money and the IRS will issue a notice of levy to the debtor 30 days before it and after satisfying the four main conditions. The IRS will proceed to levy the borrower's property and it can extend to levying the intangible assets that include retirement accounts, wages, dividends, life insurance, account receivables, etc.

Conclusion

Tax and levy are two terms frequently used in the taxation domain. Tax is a crucial instrument for the state to raise resources for its spending, whereas levy is used to meet the tax liability. Their purposes are entirely different, and hence, they operate differently.