Taxes are the government’s way of earning an income which can then be used for various projects that the government needs to indulge in to help boost the country’s economy or its people. Taxes in India are decided on by the central and state governments with local governments, such as municipalities, also deciding on smaller taxes that can be levied within their jurisdiction. It must, however, be remembered that the government cannot impose any tax that it wishes to. All the taxes imposed by the government must be laws.
Types of Taxes:
Taxes are of two distinct types, direct and indirect taxes. The difference comes in the way these taxes are implemented. Some are paid directly by you, such as the dreaded income tax, wealth tax, corporate tax etc. while others are indirect taxes, such as the value added tax, service tax, sales tax, etc.
- Direct Taxes
- Indirect Taxes
But, besides these two conventional taxes, there are also other taxes that have been brought into effect by the Central Government to serve a particular agenda. ‘Other taxes’ are levied on both direct and indirect taxes such as the recently introduced Swachh Bharat Cess tax, Krishi Kalyan Cess tax, and infrastructure Cess tax among others.
1) Direct Tax:
Direct tax, as stated earlier, are taxes that are paid directly by you. These taxes are levied directly on an entity or an individual and cannot be transferred onto anyone else. One of the bodies that overlooks these direct taxes is the Central Board of Direct Taxes (CBDT) which is a part of the Department of Revenue. It has, to help it with its duties, the support of various acts that govern various aspects of direct taxes.
Some of these acts are:
- Income Tax Act:
This is also known as the IT Act of 1961 and sets the rules that govern income tax in India. The income, which this act taxes, can come from any source like a business, owning a house or property, gains received from investments and salaries, etc. This is the act that defines how much the tax benefit on a fixed deposit or a life insurance premium will be. It is also the act that decides how much of your income can you save through investments and what the slab for the income tax will be.
- Wealth Tax Act:
The Wealth Tax Act was enacted in 1951 and is responsible for the taxation related to the net wealth of an individual, a company or a Hindu Unified Family. The simplest calculation of wealth tax was that if the net wealth exceeded Rs. 30 lakhs, then 1% of the amount that exceeded Rs. 30 lakhs was payable as tax. It was abolished in the budget announced in 2015. It has since been replaced with a surcharge of 12% on individuals that earn more than Rs. 1 crore per annum. It is also applicable to companies that have a revenue of over Rs. 10 crores per annum. The new guidelines drastically increased the amount the government would collect in taxes as opposed the amount they would collect through the wealth tax.
- Gift Tax Act:
The Gift Tax Act came into existence in 1958 and stated that if an individual received gifts, monetary or valuables, as gifts, a tax was to be to be paid on such gifts. The tax on such gifts was maintained at 30% but it was abolished in 1998. Initially if a gift was given, and it was something like property, jewellery, shares etc. it was taxable. According to the new rules gifts given by family members like brothers, sister, parents, spouse, aunts and uncles are not taxable. Even gifts given to you by the local authorities is exempt from this tax. How the tax works now is that if someone, other than the exempt entities, gifts you anything that exceeds a value of Rs. 50,000 then the entire gift amount is taxable.
- Expenditure Tax Act:
This is an act that came into existence in 1987 and deals with the expenses you, as an individual, may incur while availing the services of a hotel or a restaurant. It is applicable to all of India except Jammu and Kashmir. It states that certain expenses are chargeable under this act if they exceed Rs. 3,000 in the case of a hotel and all expenses incurred in a restaurant.
- Interest Tax Act:
The Interest Tax Act of 1974 deals with the tax that was payable on interest earned in certain specific situations. In the last amendment to the act it was stated that the act does not apply to interest that was earned after March 2000.
Below are some examples for all the different types of direct taxes:
Examples of Direct Taxes:
These are some of the direct taxes that you pay
- Income Tax:
This is one of the most well-known and least understood taxes. It is the tax that is levied on your earning in a financial year. There are many facets to income tax, such as the tax slabs, taxable income, tax deducted at source (TDS), reduction of taxable income, etc. The tax is applicable to both individuals and companies. For individuals, the tax that they have to pay depends on which tax bracket they fall in. This bracket or slab determines the tax to be paid based on the annual income of the assessee and ranges from no tax to 30% tax for the high income groups.
The government has fixed different taxes slabs for varied groups of individuals, namely general taxpayers, senior citizens (people aged between 60 to 80, and very senior citizens (people aged above 80).
Below, you will find a few tables that list out the tax rates for different age groups.
For General Taxpayers:
Income Tax Slab Rates (Rs.) Tax (In %) 0 - 2,50,000 No TAX 2,50,001 - 5,00,000 10% tax 5,00,001 - 10,00, 000 20% tax Above 10,00,000 30% tax
For Senior Citizens (Ages between 60 to 80 years):
Income Tax Slab Rates (Rs.) Tax (In %) 0 - 3,00,000 No tax 3,00,001 - 5,00,000 10% tax 5,00,001 - 10,00, 000 20% tax Above 10,00,000 30% tax
For Senior Citizens: (80 Years and above):
Income Tax Slab Rates (Rs.) Tax (In %) 0 - 5,00,000 Nil 5,00,001 - 10,00, 000 20% tax Above 10,00,000 30% tax
- Capital Gains Tax:
This is a tax that is payable whenever you receive a sizable amount of money. It could be from an investment or from the sale of a property. It is usually of two types, short term capital gains from investments held for less than 36 months and long term capital gains from investments held for longer than 36 months. The tax applicable for each is also very different since the tax on short term gains is calculated based in the income bracket that you fall in and the tax on long term gains is 20%. The interest thing about this tax is that the gain doesn’t always have to be in the form of money. It could 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 secret that if you know how to trade properly on the stock market, and trade in securities, you stand to make a substantial amount of money. This too is a source of income but it has its own tax which is known as the Securities Transaction Tax . How this tax is levied is by adding the tax to the price of the share. This means that every time you buy or sell shares, you pay this tax. All securities traded on the Indian stock exchange have this tax attached to them.
- Perquisite Tax:
Perquisites are all the perks or privileges that employers may extend to employees. These privileges may include a house provided by the company or a car for your use, given to you by the company. These perks are not just limited to big compensation like cars and houses, they can even include things like compensation for fuel or phone bills. How this tax is levied is by figuring out how that perk has been acquired by the company or used by the employee. In the case of cars, it may be so that a car provided by the company and used for both personal and official purposes is eligible for tax whereas a car used only for official purposes is not.
- Corporate Tax:
Corporate tax is the income tax that is paid by companies from the revenue they earn. This tax also comes with a slab of its own that decides how much tax the company has to pay. For example a domestic company, which has a revenue of less than Rs. 1 crore per annum, won’t have to pay this tax but one that has a revenue of more than Rs. 1 crore per annum will have to pay this tax. It is also referred to as a surcharge and is different for different revenue brackets. It is also different for international companies where the corporate tax may be 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 basically a way for the Income Tax Department to get companies to pay a minimum tax, which currently stands at 18.5%. This form of tax was brought into effect through the introduction of Section 115JA of the Income Tax Act. However, companies involved in infrastructure and power sectors are exempt from paying MAT.
Once a company pays the MAT, it can carry the payment forward and set-off (adjust) against regular tax payable during the subsequent five-year period subject to certain conditions.
Fringe Benefit Tax:
Fringe Benefit Tax, or FBT, was a tax which applied to almost every fringe benefit an employer provided to their employees. In this tax, a number of aspects were covered. Some of them include:
- Employer’s expense on travel (LTA), employee welfare, accommodation, and entertainment.
- Any regular commute or commute related expense provided by an employer.
- Employer’s contribution to a certified retirement fund.
- Employer Stock Option Plans (ESOPs).
FBT was started under the Indian government’s stewardship from April 1, 2005. However, the tax was later scrapped in 2009 by the-then Finance Minister Pranab Mukherjee during the 2009 Union Budget session.
Dividend Distribution Tax:
Dividend Distribution Tax was introduced after the end of 2007’s Union Budget. It is basically a tax levied on companies based on the dividend they pay to their investors. This tax is applicable on the gross or net income an investor receives from their investment. Currently, the DDT rate stands at 15%.
Banking Cash Transaction Tax:
Banking Cash Transaction Tax is yet another form of tax that has been abandoned by the Indian government. This form of taxation was operation from 2005-2009 until the then FM Pranab Mukherjee nullified the tax. This tax suggested that every bank transaction (debit or credit) would be taxed at a rate of 0.1%.
By definition, indirect taxes are those taxes that are levied on goods or services. They differ from direct taxes because they are not levied on a person who pays them directly to the government, they are instead levied on products and are collected by an intermediary, the person selling the product. The most common examples of indirect tax can be VAT (Value Added Tax), Taxes on Imported Goods, Sales Tax, etc. These taxes are levied by adding them to the price of the service or product which tends to push the cost of the product up.
Examples of Indirect Taxes:
These are some of the common indirect taxes that you pay.
As the name suggests, sales tax is a tax that is levied on the sale of a product. This product can be something that was produced in India or imported and can even cover services rendered. This tax is levied on the seller of the product who then transfers it onto the person who buys said product with the sales tax added to the price of the product. The limitation of this tax is that it can be levied only ones for a particular product, which means that if the product is sold a second time, sales tax cannot be applied to it.
Basically, all the states in the country follow their own Sales Tax Act and charge a percentage indigenous to themselves. Besides this, a few states also levy other additional charges like turnover tax, purchase tax, works transaction tax, and the like. This is also the reason why sales tax is one of the largest revenue generators for various state governments. Also, this tax is levied under both central and state legislations.
Like sales tax is added to the price of goods sold in India, so is service tax added to services provided in India. In the reading of the budget 2015, it was announced that the service tax will be raised from 12.36% to 14%. It is not applicable on goods but on companies that provide services and is collected every month or once every quarter based on how the services are provided. If the establishment is an individual service provider then the service tax is paid only once the customer pays the bills however, for companies the service tax is payable the moment the invoice is raised, irrespective of the customer paying the bill.
An important thing to remember is that since the service at a restaurant is a combination of the food, the waiter and the premises themselves, it is difficult to pin point what qualifies for service tax. To remove any ambiguity, in this regard, it has been announced that the service tax in restaurants will be levied only on 40% of the total bill.
Value Added Tax:
VAT, also known as commercial tax is not applicable on commodities that are zero rated (eg. food and essential drugs) or those that fall under exports. This tax is levied at all the stages of the supply chain, right from the manufacturers, dealers and distributors to the end user.
The value added tax is a tax that is levied at the discretion of the state government and not all states implemented it when it was first announced. The tax is levied on various goods sold in the state and the amount of the tax is decided by the state itself. For example in Gujrat the government split all the good into various categories called schedules. There are 3 schedules and each schedule has its own VAT percentage. For Schedule 3 the VAT is 1%, for schedule 2 the VAT is 5% and so on. Goods that have not been classified into any category have a VAT of 15%.
Custom duty & Octroi:
When you purchase anything that needs to be imported from another country, a charge is applied on it and that is the customs duty. It applies to all the products that come in via land, sea or air. Even if you bring in products bought in another country to India, a customs duty can be levied on it. The purpose of the customs duty is to ensure that all the goods entering the country are taxed and paid for. Just as customs duty ensures that goods for other countries are taxed, octroi is meant to ensure that goods crossing state borders within India are taxed appropriately. It is levied by the state government and functions in much the same way as customs duty does.
This is a tax that is levied on all the goods manufactured or produced in India. It is different from customs duty because it is applicable only on things produced in India and is also known as the Central Value Added Tax or CENVAT. This tax is collected by the government from the manufacturer of the goods. It can also be collected from those entities that receive manufactured goods and employ people to transport the goods from the manufacturer to themselves.
The Central Excise Rule set by the central government provide suggest that every person that produces or manufactures any 'excisable goods', or who stores such goods in a warehouse, will have to pay the duty applicable on such goods in. Under this rule no excisable goods, on which any duty is payable, will be allowed to move without payment of duty from any place, where they are produced or manufactured.
While direct and indirect taxes are the two main types of taxes, there are also these small cess taxes that are also seen in the country. Although, they aren’t major revenue generators and are not considered to be as such, these taxes help the government fund several initiatives that concentrate on the improving the basic infrastructure and maintain general well being of the country. The taxes in this category are primarily referred to as a cess, which are taxes levied by the government and the funds generated through this are used for specific purposes as per the Finance Minister’s discretions.
Examples of Other taxes:
Below are some of the examples of other taxes that are seen most commonly in India.
Professional Tax, or employment tax, is another form of tax levied only by state governments in India. According to professional tax norms, individuals earning income or practicing a profession such as a doctor, lawyer, chartered accountant, or company secretary etc. are required to pay this tax. However, not all states levy professional tax and the rate differs across all the states that levy the tax.
Property Tax - Municipal Tax:
Also known as Property Tax or Real Estate Tax, this is one of the taxes levied by local municipal bodies of every city. These taxes are levied in order to provide and maintain the for basic civic services. All owners of residential or commercial properties are subject to Municipal Tax.
Entertainment Tax is yet another type of tax commonly seen in India. It is levied by the government on feature films, television series, exhibitions, amusement, and recreational parlours. This tax is collected taking into account a business entity’s gross collection collected from earnings based on commercial shows, film festival earnings, and audience participation.
Stamp Duty, Registration Fees, Transfer Tax:
Stamp duty, registration fees, and transfer taxes are collect as a supplement of property tax. For instance, when an individual purchases a property, they also have to pay for the cost of stamps (stamp duty), registration fees (fee charged by local registrar to legalize a property transaction), and transfer tax (tax paid to transfer the ownership of a commodity.
Education cess is a tax in India primarily introduced to help cover the cost of government-sponsored educational programs. This tax is collected independently of other taxes and is applicable to all Indian citizens, corporations, and other people living in the country. The effective rate of education cess currently stands at 2% of an individual’s income.
When an individual receives a gift from another person. It is considered to be a part of their income generated through “other sources” and the relevant tax is levied. This tax is applicable if the gift amount is more than Rs. 50,000 in a year.
Wealth Tax was another tax levied by the government, which was charged based on the net wealth of the assessee. Wealth tax is chargeable with respect to the net wealth of a property. Net wealth is equal to all the assets an individual owns minus the cost of acquiring them (any loan taken to acquire them). Wealth tax is no longer operational as it was abolished during the Union Budget of 2015.
The wealth tax, governed by the Wealth Tax Act, allows the government to impose a tax on the net wealth of a person, an HUF or a company. This tax is set to be abolished in 2016 but until then the tax levied on the net wealth is about 1% of the wealth that exceeds Rs. 30 lakhs. There are exceptions to this tax which are organisations that don’t have to pay wealth tax. These organisations could be trusts, partnership firms, social clubs, political parties, etc.
Toll tax is a tax you often pay to use any form of infrastructure developed by the government, example roads and bridges. The tax amount levied is rather negligible which is used for maintenance and basic upkeep of a particular project.
Swachh Bharat Cess:
This is a cess imposed by the government of India and was started from 15 November 2015. This tax is applicable on all taxable services and the cess currently stands at 0.5%. Swachh Bharat cess is levied over and above the 14% service tax that is prevalent in the present times. One thing worth noting here is that this cess is not applicable on services that are fully exempt of service tax or those services covered under the negative list of services. It is collected by the Consolidate Fund of India and will be used to funding and promoting any government campaigns concerning the Swachh Bharat initiatives. This tax, however, is independent of service tax and is charged as a separate line item in invoices.
Krishi Kalyan Cess:
This is yet another cess brought about by the government of India since the June of 2016. It is basically introduced in order to extend welfare to all the farmers and to the improvement of agricultural facilities in the country. Like Swachh Bharat cess, this tax is also applicable on all taxable services with an effective rate of 0.5% and is charged over and above the service tax and Swachh Bharat cess.
Infrastructure cess is another tax brought into effect from the 1st of June 2016. Under this tax, a cess of 1% is applicable on petrol/LPG/CNG-driven motor vehicles which are 4 meters or less in length and 1200cc or less in engine capacity. In case the diesel motor vehicles which don’t exceed the 4 metre length and have engines with capacities less than 1500cc, a tax of 2.5% is to be paid. For big sedans and SUVs, the cess stands at 4% of the overall cost of the vehicle.
Entry tax is a tax levied in select states across the country like Uttarakhand, Madhya Pradesh, Gujarat, Assam, and Delhi. Under this, all items entering the state ordered via e-commerce establishments are taxed. The rate for this tax varies between 5.5% to 10%.
These are all the types and kinds of taxes that are present in India’s current economic scenario. The funds collected from these methods don’t just fuel the country’s revenues but also provides the much-needed impetus to help the lower classes prosper.
Benefits of Taxes:
Even though most people are always at odds with the idea of taxation, there are some advantages to taxes, the least of which is that it provides the government the resources it needs for economic development. Some of the other benefits of taxes are:
- It encourages savings and investments because if a person invests in certain instruments, then the amount invested is reduced from their taxable income thus bringing down the tax they have to pay. This investment is subject to certain limits that are detailed in the IT Act.
- Paying taxes means that you have to file your tax returns which in turn means that when you apply for a home loan for that home loan, it’s easier to get it because one of the things many banks require is proof that you have been filing taxes regularly.
Penalty for Not Paying Taxes:
Each type of tax has its own penalties associated with it. These penalties can range from fines to imprisonment depending on the severity of the crime. In some cases the penalty could be that you will have to pay what is owed in taxes along with additional sums as fine, which are decided upon by government officials.
It is always advisable to pay taxes on time and always be aware of the taxes that you, as a consumer, are liable to pay so that no-one can take you for a ride.
Cyprus to pay tax on investment from April 2017
A revised tax treaty has been signed between India and Cyprus and a revised protocol for taxes has also been set up between the two countries. This step has been take to close the gap which allows investments routed through Cyprus to escape taxes in India. The new protocol will come into effect in India for incomes derived on or after April 1st, 2017. Capital gains arising from alienation of shares will be taxed at source, therefore, investment in shares of Indian companies will be taxed in India. Other investments made prior to April 1st, 2017 will continue to be taxed in the country of residence. These steps have been taken by India to move towards a more source-based taxation system. The amended tax policy expands the scope of permanent establishments and has reduced taxes on royalty from 15% to 10% to align it with the domestic tax rates.
22nd November 2016
Demonetized Rs.500 and Rs.1,000 currency notes result in sharp increase of tax revenues
The Greater Hyderabad Municipal Corporation (GHMC) has collected the highest amounts in taxes among 22 Indian cities. GHMC has collected Rs.190 crore in property tax and utility payments with the demonetized Rs.500 and Rs.1,000 currency notes. An analysis by the Ministry of Urban Development on 22 corporations revealed a 312.04% increase in tax revenues received by them for the month of November, 2016 in comparison to November, 2015. November, 2015 saw a property tax collection of Rs.274 crore, on 19th November, 2016 that amount stood at Rs.855 crore. GHMC saw a 2,350% increase in its revenues. GMHC’s revenues in November, 2015 were Rs.8 crore, in the corresponding month of November, 2016 that figure jumped to Rs.188 crore.
22nd November 2016
India discusses Totalisation Agreement with US at delegation-level meeting
India has urged the US to enter into talks on the Social Security pact or Totalisation Agreement, as the absence of this protocol is adversely impacting Indian IT professionals in the US. The issue was discussed at a meeting attended by delegates from both countries.
Nirmala Sitharaman, Minister for Commerce and Industry, stated that the US delegation has heard the concerns raised by India and she hopes that there will be a positive response from their end. The US has signed the Social Security pact with various nations for the elimination of double taxation of income, based on social security taxes. As per the agreement, professionals of both nations would not be levied social security taxes when they are deputed to the other country for the purpose of work.
Sitharaman mentioned that the government has been making efforts to dissipate misconceptions that the US had on India’s Intellectual Property Rights (IPR) regime. Also, the US had earlier raised concerns over India’s issuance of compulsory licensing (CL). At the meeting, the government reminded the US delegates that they have issued only one CL following the approved process.
24th October 2016
Mauritius seeks line of credit, investments from India after revision of tax treaty
Mauritius has expressed its desire to receive credits and additional investments from India to create employment opportunities and subsequently boost their economy. Finance and Economic Development Minister of Mauritius, Pravind Kumar Jugnauth had a discussion with Finance Minister Arun Jaitley to strengthen economic ties and cooperation between the two nations.
After negotiations that stretched on for 10 years, India modified their tax agreement with the island nation to prevent investors in seeking the shelter of Mauritius for tax avoidance. The Double Taxation Avoidance Convention treaty was signed in 1983 by the two countries to encourage mutual trade through elimination of double taxation on capital gains and income. The treaty was revised on May 10, 2016 to levy a half-rate short-term capital gains tax from April 1, 2017 for two years.
Mauritius is looking to leverage its current economic situation to gain more investments and rebrand itself as a provider of financial services.
20th September 2016
Honest Taxpayers To Be Honoured By The Income Tax Department
The Indian Income Tax Department has reported revived one of its novel initiatives to honour honest tax payers across the country.
Reportedly, the Central Board For DIrect Taxes (CBDT) has decided to felicitate “honest and compliant” taxpayers who have been paying their taxes diligently.
CBDT, the top tax body has created four broad categories - Large, Regular, Compliant, and Diligent groups, who will all receive commendation certificates signed by the chairperson.
While there are already plenty of initiatives are in place to find tax evaders and the like, this move was decided upon when the measures to praise honest taxpayers was found lacking.
Under this scheme, a select few taxpayers will receive physical certificates from Union Minister Arun Jaitley, while the rest will receive emails directly from the CBDT office.
Apart from saying ‘Thank you’, this certificate will commend taxpayers for contributing to the progress of the country.
20th September, 2016
India To Obtain Trade Banking And Tax-related Information With Seychelles
In a bid to reduce the extent of tax evasion and avoidance, the Indian government has operationalised the Tax Information Exchange Agreement (TIEA) with Seychelles government.
Seychelles happens to be one of the largest offshore countries that brings massive investment into mainland India and this treaty would help catch wrongdoers.
This agreement will enable the governments of both nations to exchange banking and tax details, which can be used to track the funds flowing in from the African nation.
Although, the foreign investments from Seychelles only amounts to about USD 187.3 million, it has long been used as an alternative to route funds to the Indian markets.
Notified on September 8, 2016, the TIEA will help exchange any and all banking and tax-related information from both the countries.
Besides this, the deal will also help the countries seek information on legal and beneficial ownership of companies and partnerships.
The deal also suggests that any and all information gathered will be kept confidential and only concerned authorities and persons are privy to them.
19th September, 2016
Mercedes Offers To Pay 1% Green Tax On Diesel Cars
Global car brand Mercedes Benz said it is ready to pay a “green tax” of 1% on sale of diesel vehicles if the Supreme Court would withdraw the ban on diesel vehicles with an engine capacity of more than 2cL in Delhi and the National Capital Region (NCR).
The sales of the high-end German car manufacturer were hit by the Apex Court’s decision to extend the 3-month ban started in December 2015 on large diesel cars in the region. Many of Mercedes Benz car models fall under the banned category.
The Environment Pollution Prevention and Control Authority for the NCR suggested an environmental tax of 20-22 percent. By this standard, the offer made by Mercedes is “too small”. The case will come up for hearing in the Supreme Court on August 12.
12th August 2016
Indian Tax Rates ‘Moderate’, Says Jaitley
Finance Minister Arun Jaitley has said that the Indian tax system on personal income is quite mild compared with many other countries. He was speaking in Bangalore at an event on Income Declaration Scheme (IDS), 2016.
He said tax rates in India were moderate compared to both developed and developing nations of the world. “Even in the US, tax rates are very high… Whichever country I go to, I keep asking them what is their highest slab in personal taxation. I routinely get answers like 45%. Then there are state taxes, city taxes,” he said.
Jaitley added that the tax base of the country was not very high – around 5.5. crore persons in India pay taxes, which is less than 4.3% of the total population.
28th July 2016