Taxation in India: An Overview
Tax System in India
India has a well-developed tax structure with clearly demarcated authority between Central and State Governments and local bodies. Central Government levies some direct and Indirect taxes on individual and commodities respectively. Direct taxes are, Personal Income Tax, Wealth Tax, and Corporation Tax while indirect tax includes; Sales Tax, Excise Duty, Custom Duty and Service Tax.
Value Added Tax (VAT), stamp duty, state excise, land revenue and profession tax are levied by the State Governments. Local bodies are empowered to levy tax on properties, octroi and for utilities like water supply, drainage etc.
Indian taxation system has undergone tremendous reforms during the last decade. The tax rates have been rationalized and tax laws have been simplified resulting in better compliance, ease of tax payment and better enforcement. The process of rationalization of tax administration is ongoing in India.
Source: Ministry of Finance
In case of direct taxes (Income Tax, Wealth Tax, Corporation tax etc.), the burden directly falls on the taxpayer. These are those taxes which can’t be transferred on the others by the tax payers.
• Income Tax: According to Income Tax Act 1961, every person, who are an assessee and whose total income exceeds the maximum exemption limit, shall be chargeable to the income tax at the rate or rates prescribed in the Finance Act. Such income tax shall be paid on the total income of the previous year in the relevant assessment year.
• Corporate Tax: it is a tax imposed on the net income of the company. Description: Companies, both private and public which are registered in India under the Companies Act 1956, are liable to pay corporate tax. For the assessment year 2014-15, domestic companies are taxed at the rate of 30%.
Definition of a company
A company has been defined as a juristic person having an independent and separate legal entity from its shareholders. Income of the company is computed and assessed separately in the hands of the company. However the income of the company, which is distributed to its shareholders as dividend, is assessed in their individual hands. Such distribution of income is not treated as expenditure in the hands of company; the income so distributed is an appropriation of the profits of the company.
Different kinds of taxes relating to a company
I. Minimum Alternative Tax (MAT)
II. Fringe Benefit Tax (FBT)
III. Dividend Distribution Tax (DDT)
IV. Banking Cash Transaction Tax (BCTT)
V. Securities Transaction Tax (STT)
1. Wealth Tax
Wealth tax, in India, is levied under Wealth-tax Act, 1957. Wealth tax is a tax on the benefits derived from property ownership. The tax is to be paid year after year on the same property on its market value, whether or not such property yields any income. Under the Act, the tax is charged in respect of the wealth held during the assessment year by the following persons: -
• Hindu Undivided Family (HUF)
Source: Ministry of Finance
Indirect taxes are those taxes which can be transferred on the others by the tax payers. As if the central government increases the rate of service tax on different services then sellers pass on this increment on the final consumers of the services.
1. Sales tax (imposed on the sale of goods. It can be of two types; central sales tax and states sales tax)
2. Central Sales Tax (CST): It is generally payable on the sale of all goods by a dealer in the course of inter-state trade or commerce or, outside a state or, in the course of import into or, export from India.
• Value Added Tax (VAT)
VAT is a multi-stage tax on goods that is levied across various stages of production and supply with credit given for tax paid at each stage of Value addition. Introduction of state level VAT is the most significant tax reform measure at state level. The state level VAT has replaced the existing State Sales Tax. It was introduced from April 1, 2005 in the country.
3. Excise Duty
Central Excise duty is an indirect tax levied on goods manufactured in India. Excisable goods have been defined as those, which have been specified in the Central Excise Tariff Act as being subjected to the duty of excise.
There are three types of Central Excise duties collected in India namely
Basic Excise Duty
This is the duty charged under section 3 of the Central Excises and Salt Act,1944 on all excisable goods other than salt which are produced or manufactured in India at the rates set forth in the schedule to the Central Excise tariff Act,1985.
Additional Duty of Excise
Section 3 of the Additional duties of Excise (goods of special importance) Act, 1957 authorizes the levy and collection in respect of the goods described in the Schedule to this Act. This is levied in lieu of sales Tax and shared between Central and State Governments. These are levied under different enactments like medicinal and toilet preparations, sugar etc. and other industries development etc.
Special Excise Duty
As per the Section 37 of the Finance Act, 1978 Special excise Duty was attracted on all excisable goods on which there is a levy of Basic excise Duty under the Central Excises and Salt Act, 1944. Since then each year the relevant provisions of the Finance Act specifies that the Special Excise Duty shall be or shall not be levied and collected during the relevant financial year.
4. Customs Duty
Custom or import duties are levied by the Central Government of India on the goods imported into India. The rate at which customs duty is leviable on the goods depends on the classification of the goods determined under the Customs Tariff. The Customs Tariff is generally aligned with the Harmonised System of Nomenclature (HSL).
In line with aligning the customs duty and bringing it at par with the ASEAN level, government has reduced the peak customs duty from 12.5 per cent to 10 per cent for all goods other than agriculture products. However, the Central Government has the power to generally exempt goods of any specified description from the whole or any part of duties of customs leviable thereon. In addition, preferential/concessional rates of duty are also available under the various Trade Agreements.
5. Service Tax
Service tax was introduced in India way back in 1994 and started with mere 3 basic services viz. general insurance, stock broking and telephone. Today the counter services subject to tax have reached over 120. There has been a steady increase in the rate of service tax. Currently India receives near about 60% of its GDP from it. The current rate of service tax is 14% in India.