Overview of India Taxation – All You Need to Know About the Taxation in India
Taxes are imposed by governments on its residents to produce revenue for activities undertaken to improve the development of the nation and to increase the quality of living of its people. The government’s authority to levy taxes in India is derived from the Constitution of India, which gives the central and state governments the power to levy taxes. Taxes levied in India must be backed by an accompanying law passed by the Parliament or the State Legislature. Here is a comprehensive overview of India’s taxation.
The Indian tax system is well developed. The authority to levy taxes is clearly divided into the following tiers-
- Union Government
- State Government
- Local Bodies
Types of Taxes
Taxes are of two different forms, direct and indirect. There is a variation in the manner these taxes are applied. Some of which are paid by citizens like you and these are dreaded income tax, wealth tax, corporate tax, etc., while others are indirect taxes, such as value-added tax, service tax, sales tax, etc.
- Direct Taxes
- Indirect Taxes
However, in addition to these two traditional taxes, many certain taxes have been placed into force by the Central Government to fulfil a clear purpose. ‘Other taxes’ are imposed on both primary and indirect taxation, such as the newly implemented Swachh Bharat Cess Tax, Krishi Kalyan Cess Tax, and Cess Tax on Roads, among others.
1. Direct Taxes
Direct tax is the tax that is charged directly by you. Such fees are imposed solely on an agency or person and cannot be passed to someone else. Some of the institutions that oversee these direct taxes are the Central Board of Direct Taxes (CBDT), which is part of the Department of Revenue. To assist it with its duties, it must support the various acts which govern the different aspects of direct action.
Some of these acts are:
- Income Tax Act:
It is also known as the IT Act of 1961 and lays down rules governing income tax in India. The income taxed by this Act may come from any source, such as a business, owning a house or property, earnings received from investments and salaries, etc. It is the Act that determines how high the tax gain should be on a fixed fund or a life insurance policy. It is also the Act that decides how much of your income you can save through investment and what the tax burden will be.
- Wealth Tax Act:
The Wealth Tax Act was passed in 1951 and is responsible for the taxation of the net worth of a person, a corporation or a Hindu United Family. The most accessible definition of wealth tax was that if net wealth surpassed Rs. 30 lakhs, then 1% of the total that surpassed Rs. 30 lakhs was payable as a levy. This was eliminated in the 2015 bill. It has since been replaced by a surcharge of 12 per cent for individuals earning more than Rs . 1 crore per year. This is also available to businesses with sales of more than Rs. 10 crores a year. The new rules significantly raised the sum that the government should raise through taxation, as opposed to the amount that it would receive from wealth tax.
- Gift Tax Act:
The Gift Tax Act came into force in 1958 and stated that if an individual received gifts, money or valuables as gifts, a tax would have to be paid on such gifts. The tax on such gifts was maintained at 30% but was abolished in 1998. Initially, if a donation was offered because it was anything like land, jewels, bonds, etc., it was taxable. Within the current laws, presents provided by family members such as brothers, sisters, friends, husbands, aunts and uncles are not chargeable. Only donations given to you from municipal councils are excluded from this levy. What the tax system operates is that if anyone, other than the prohibited person, gifts you something that reaches the worth of Rs. 50,000, then the entire cost of the donation is taxable.
- Expenditure Tax Act:
It is an act that came into being in 1987 and deals with the expenditures that you, as a person, incur when utilizing the services of a hotel or restaurant. It refers to all of India except Jammu and Kashmir. This notes that all charges are payable under this Act if they surpass Rs. 3,000 in the case of a hotel for other expenditures incurred in a restaurant.
- Interest Tax Act:
The Interest Tax Act of 1974 deals with the tax that needs to be paid on interest earned in depending on specific situations. In the last amendment to the Act, it was stated that the Act is not applicable to any interest earned after March 2000
Examples of Direct Taxes
Here are some of the direct taxes that you need to pay:
- Income Tax:
It is one of the most well-known and least-understood fees. It is the tax that is imposed on your profits in the financial year. There are many types of income tax, which are the following: tax levies, taxable income, tax deducted at source (TDS), reduction of taxable income, etc. The tax is payable by companies and individuals. For individuals, the charge that they have to pay depends on which tax bracket they fall in. The tax to be paid is determined by this bracket or slab basing on the annual income of the assessed and ranges from no tax to 30% tax for the high-income groups.
The government has fixed specific tax thresholds for various groups of people, namely general taxpayers, senior citizens (60-80 years of age, and really senior citizens (80 years of age and above).
- Capital Gains Tax:
It is a tax that is payable if you earn a significant sum of income. It may be from an acquisition or a selling of a house. This is typically in two types: short-term capital gains from investments kept for fewer than 36 months and long-term capital gains from investments retained for longer than 36 months. The tax applicable for each differs from one another since the tax on short term gains is calculated based on the income bracket that you fall in, and the tax on long term gains is 20%. What is interesting about this tax is that the gain is not always in the form of money. Because is can also be an exchange in kind in which case the value of the exchange will be considered for taxation.
- Securities Transaction Tax:
It’s no wonder that if you learn how to work on the capital exchange and deal in shares correctly, you’re likely to earn a lot of money. This, too, is a source of profit, but it has its own levy, defined as the Securities Transaction Tax. How this tax is levied is by adding the tax to the share price. This ensures that you pay this tax any time you purchase or sell shares. All shares exchanged on the Indian stock exchange are subject to this levy.
- Perquisite Tax:
Perquisites are all the perks or advantages employers can afford to give to workers. Such benefits can include a house given to you by the company or a vehicle for your use by the business. Such incentives are not restricted to large-scale rewards such as vehicles and residences; they can also cover items like petrol insurance or phone bills. The manner in which this tax is levied is to determine how that benefit has been acquired by the company or used by the employee. In the case of cars, a car provided by the company and used for both personal and official purposes may be eligible for tax whereas a car used for official purposes only is not eligible.
- Corporate Tax:
Corporate tax is the income tax which businesses pay from the profits they receive. This tax also comes with a slab of its own, which decides how much tax the company has to pay. For instance, a domestic company with revenues of less than Rs . 1 crore per year will not have to pay this tax, but one with revenues of more than Rs . 1 crore per year will have to pay this tax. It is also known as a surcharge and is different depending on the different revenue brackets. It is also different for international companies where the corporate tax maybe 41.2% if the company has a revenue of less than Rs. 10 million and so on.
There are four different types of corporate tax. They are:
- Minimum Alternative Tax:
Minimum Alternative Tax, or MAT, is a way for the Income Tax Department to get companies to pay a minimum tax of 18.5 per cent. This form of tax was introduced with the implementation of Section 115JA of the Income Tax Act. Nonetheless, businesses operating in the energy and electricity industries are excluded from charging MAT.
If the corporation pays the MAT, it will, according to some circumstances, bring the expenditure forward and set-off (adjustment) against the regular tax due during the following five-year term.
- Fringe Benefits Tax:
The Fringe Benefits Tax, or FBT, was a levy that applies on virtually any fringe benefit the company has given to its workers. A variety of facets of this tax have been addressed. Many of them involve the following:
- Employer’s expense on travel or the LTA, welfare of the employee, accommodation, and entertainment.
- Any type of commute related expense which is provided by an employer.
- Employer’s contribution to a certified retirement fund.
- Employer Stock Option Plans (ESOPs).
FBT was launched under the control of the Indian government on 1 April 2005. Nevertheless, the tax was eventually repealed in 2009 by then Finance Minister Pranab Mukherjee during the 2009 Union Budget meeting.
- Dividend Distribution Tax:
Dividend Distribution Tax was introduced at the end of the 2007 Union budget. This is a levy imposed on businesses based on the interest they offer to their creditors. The levy refers to the total or net profit the buyer gets from his purchase. The DDT average reportedly stands at 15%.
- Banking Cash Transaction Tax:
Banking Cash Transaction Tax is another type of tax which is not used by India. This form of taxation was in operation from 2005-2009 until the cancellation of the tax by the then FM Pranab Mukherjee. In this type of tax, every bank transaction, regardless of whether it is debit or credit should be taxed at tax rate of 0.1%.
2. Indirect Taxes
Indirect taxes are by definition those taxes which are levied on goods or services. They vary from direct taxes as they are not imposed on an individual who personally charges them to the government, but they are assessed on goods and obtained by an agent, the individual who purchases the commodity. The most common examples of Indirect Tax can be VAT (Value Added Tax), Imported Goods Tax, Sales Tax, etc. These taxes are levied by adding them to the service or product price, which tends to push the product’s cost upwards.
Examples of Indirect Taxes
These are some of the standard indirect taxes that you pay.
- Sales Tax:
Sales tax, as the name implies, is a tax imposed on the selling of a commodity. This product may be something that has been manufactured or imported in India, and may even cover rendered services. This tax is levied on the product’s seller who then passes it on to the person who buys said product with the sales tax added to the product’s price. The limitation of this tax is that it can only be levied for a particular product, meaning that sales tax cannot be applied to it if the product is sold a second time.
All nations obey their Income Tax Act and charge themselves a proportion of indigenous to themselves. A few jurisdictions even impose extra taxes such as turnover fee, sales tax, sale tax works etc. This is one of the reasons why this kind of tax is considered to be one of the most significant revenue generators for various state governments. In addition to that, this tax is under both central and state legislations.
- Service Tax:
Even as the tax on purchase is applied to the price of products produced in India, so is the tax on service attached to services rendered in India. This was revealed in the reading of the 2015 budget that the utility tax would be increased from 12.36% to 14%. It does not refer to products but to businesses that offer facilities that are received monthly or once a quarter depending on whether the facilities are rendered. If the establishment is an individual service provider, then the service tax is only paid once the customer pays the bills. Still, for companies, the service tax is payable at the time the invoice is raised, regardless of the customer who pays the bill.
A significant point to note is that because a restaurant’s service is a mixture of the product, the waiter and the premises themselves, it’s hard to determine what applies for service charge. In this respect, it was reported to eliminate all confusion that the service tax in restaurants would only be charged on 40 per cent of the overall bill.
- GST – Goods and Service Tax:
The Goods and Services Tax (GST) is India’s most significant indirect tax system overhaul since the economy began to expand some 25 years ago. The GST is a tax based on consumption since it is applicable where consumption occurs. At every point of sale in the supply chain, GST is applied to value-added products and services. The GST payable on the purchase of goods and services will be balanced against the GST payable on the delivery of goods and services, the retailer must pay the correct GST amount but will demand it back via the process for tax crediting.
- Value Added Tax:
VAT, commonly defined as a commercial tax, does not refer to zero-rated goods ( e.g. produce and basic drugs), or items that come under exports. This tax is imposed at all levels of the supply chain, starting from the end customer to the suppliers, retailers and distributors.
The value-added tax is a tax imposed at the discretion of the state government, and when it was first introduced, it was not enforced by all states. The tax is imposed on different items distributed in the territory, and the area itself determines on the sum of the levy. In Gujrat, for example, the government split all the positives into various divisions, called schedules. There are three schedules, and each schedule has its own VAT percentage. VAT is 1 per cent for Schedule 3; VAT is 5 per cent for Schedule 2 and so on. Goods that are not under the classification of any category have a VAT of 15%.
- Customs Duty and Octroi:
When you buy anything that needs to be imported from another country, you will be charged a fee, and that is the customs duty. This refers to all products coming in through ground, sea or air. Also, if you bring goods imported from another nation to India, you will be charged a customs duty on it. The customs duty aims to ensure the taxation and payment of all products entering the country. Much as customs duty guarantees taxation of products for individual nations, grants are intended to provide proper taxation of products that come State boundaries within India.
- Excise Duty:
This is a tax imposed on any of the products produced or processed in India. It is different from customs duty since it only applies to things produced in India and is also known as the Central Value Added Tax or CENVAT. The Treasury receives this fee from the producer of the products. This is also collected from those entities that receive manufactured goods and hire people to transfer the goods from the manufacturer to themselves.
The Central Excise Rule set by the focal government recommends that each individual that produces or fabricates any ‘excisable merchandise’, or who stores such products in a distribution centre, should pay the obligation appropriate on those products. Under this standard, no excisable products, on which any obligation is payable, will be permitted to move without instalment of obligation from wherever, where they are delivered or fabricated.
While the two main types of taxes are direct and indirect taxes, there are also those small cess taxes which are also seen in the country. However, if they are not significant sources of income and are not regarded as such, these taxes help the government finance many programs that concentrate on upgrading the national infrastructure and preserving the country’s general well-being. The taxes in this group are specifically referred to as a cessation; these are government-imposed taxes and the funds produced from this are used for particular purposes in compliance with the discretion of the Finance Minister.
Examples of Other Taxes
Below are some of the examples of other fees that are seen most commonly in India.
- Professional Tax:
Professional tax, or job tax, is another type of charge imposed in India only by governments of the states. Individuals earning profit while pursuing a career such as a doctor, lawyer, chartered accountant, while secretary of business etc. are expected to pay this tax according to appropriate tax requirements. However, not all states levy technical tax and the amount ranges in all the countries paying the tax.
- Property Tax – Municipal Tax:
Often known as Property Tax or Real Estate Tax, this is one of the taxes levied on each area by the government authorities. Such taxes are charged for the development and preservation of vital public facilities. Municipal tax is applied to the owners of residential or industrial property.
- Entertainment Tax:
Entertainment tax is yet another widely seen form of tax in India. The government levies it on feature films, tv shows, exhibits, sports, and leisure parlours. This tax is collected, taking into account the gross collection collected from earnings by a business entity based on commercial shows, profits from the film festival and participation by the audience.
- Stamp Duty, Registration Fees, Transfer Tax:
Stamp duties, licensing fees, and sale taxes are obtained as a land tax substitute. For example, when a person buys a house, they do have to pay the cost of stamps (stamp duty), registry fees (fee paid by the local registrar to approve a land transaction), and transfer payment (tax payable to pass possession of a commodity).
- Education Cess/Surcharge:
Cess of education is a tax mainly levied in India to help offset the expense of government-sponsored educational programs. Such tax is levied irrespective of other taxes and extends to all Indian residents, companies and those residing in the region. The effective rate of cessation of education currently stands at 2 per cent of the income of an adult.
- Toll Tax & Road Tax:
Toll tax is a tax that you often pay to utilize any form of government-developed infrastructures, such as roads and bridges. The tax levied is rather negligible, which is used for the maintenance and basic maintenance of a given project.
- Swachh Bharat Cess:
This is a cess forced by the legislature of India since November 15 2015. This expense is pertinent on every available help, and the cess as of now remains at 0.5%. Swachh Bharat cess is demanded far beyond the 14% assistance charge that is predominant in the current occasions. One thing important here is that this cess isn’t material on administrations that are completely excluded of administration charge or those administrations secured under the negative rundown of administrations. It is gathered by the Consolidated Fund of India and will be utilized to finance and advance any administration crusades concerning the Swachh Bharat activities. This assessment, notwithstanding, is autonomous of administration charge and is charged as a different detail in solicitations.
- Krishi Kalyan Cess:
This is yet another tax brought on by India’s policy since June 2016. It is basically implemented to expand the well-being of all the farmers and develop the country’s agricultural facilities. Including Swachh Bharat cessation, this levy often extends on all taxable facilities at an average rate of 0.5% and is paid over and below the sales tax and Swachh Bharat tax.
- Infrastructure Cess:
Infrastructure cessation is another tax that has come into effect as of 1 June 2016. Under this levy, a cessation of 1% applies to petrol / LPG / CNG-driven motor vehicles with a length of 4 meters or less and the size of 1200cc or less. In the case of diesel motor vehicles which do not exceed 4 meters in length and have engines with a capacity of less than 1500cc, a tax of 2.5% is payable.
- Entry Tax:
Entry tax is a tax levied in selected states across the country, such as Uttarakhand, Madhya Pradesh, Gujarat, Assam and Delhi. Accordingly, all products which reach the state purchased through e-commerce establishments are taxed. The threshold for this tax ranges from 5.5% to 10%.
These are for the most part the sorts and sorts of duties that are available in India’s present monetary situation. The assets gathered from these techniques don’t simply fuel the nation’s incomes yet additionally gives the genuinely necessary stimulus to help the lower classes thrive. We are here to help you. For more information on India’s Taxation, contact us today.