Tax in India - Everything You Need to Know

There are also minor cess taxes that fall into different sub-categories. Within the Income Tax Act, there are different acts that govern these taxes.

1. Direct Tax

Direct tax is tax that are to be paid directly to the government by the individual or legal entity. Direct taxes are overlooked by the Central Board of Direct Taxes (CBDT). Direct taxes cannot be transferred to any other individual or legal entity.

Sub-categories of Direct Taxes

The following are the sub-categories of direct taxes:

1. Income Tax
   1. This is the tax that is levied on the annual income or the profits which is directly paid to the government.
   2. Everyone who earns any kind of income is liable to pay income tax.
   3. There are different tax slabs for different income amounts. Apart from individuals, legal entities are also liable to pay taxes.
   4. These include all Artificial Judicial Persons, Hindu Undivided Family (HUF), Body of Individuals (BOI), Association of Persons (AOP), companies, local firms, and local authorities.
2. Capital Gains
   1. Capital gains tax is levied on the sale of a property or money received through an investment. It could be from either short-term or long-term capital gains from an investment. This includes all exchanges made in kind that is weighed against its value.
3. Securities Transaction Tax
   1. STT is levied on stock market and securities trading. The tax is levied on the price of the share as well as securities traded on the Indian Stock Exchange (ISE).
4. Prerequisite Tax
   1. These are taxes that are levied on the different benefits and perks that are provided by a company to its employees.

1. Corporate Tax
   The income tax paid by a company is defined as the corporate tax. It is based on the different slabs that the revenue falls under. The sub-categories of corporate taxes are as follows:  
   
   1. Dividend Distribution Tax (DDT)
      1. This tax is levied on the dividends that companies pay to the investors. It applies to the net or gross income that an investor receives from the investment.
   2. Fringe Benefit Tax (FBT)
      1.   This is tax levied on the fringe benefits that an employee receives from the company. This includes expenses related to accommodation, transportation, leave travel allowance, entertainment, retirement fund contribution by the employee, employee welfare, Employee Stock Ownership Plan (ESOP), etc.   
   3. Minimum Alternative Tax (MAT)
      1. Companies pay the IT Department through MAT which is governed by Section 115JA of the IT Act. Companies that are exempt from MAT are those that are in the power and infrastructure sectors.

2. Indirect Tax

Taxes that are levied on services and products are called indirect tax. Indirect taxes are collected by the seller of the service or product. The tax is added to the price of the products and services. It increases the price of the product or service. There is only one indirect tax levied by the government currently. This is called GST or the Goods and Services Tax.

Goods and Services Tax (GST)

This is a consumption tax that is levied on the supply of services and goods in India. Every step of the production process of any goods or value-added services is subject to the imposition of GST. It is supposed to be refunded to the parties that are involved in the production process (and not the final consumer). GST is classified into Central Goods and Services Tax (CGST), State Goods and Services Tax (SGST), and Intergrated Goods and Services Tax (IGST).

1. Customs Duty
   1. In case products have been imported from outside India, customs duty is levied. The amount of tax that will be levied will depend on the product that has been imported. 

1. Excise Duty
   1. The Tax is levied on goods or produced goods in India. The manufacturing company directly collects the tax. 
2. Service Tax
   1. Service tax is charged on the company’s services. It is included in the product’s price and collection of the tax will depend on the type of service. Several paid services such as advertising, financial services, banking, consultancy, maintenance, healthcare, and telephone are covered under the tax. 
3. Sales Tax
   1. The tax that is charged to sell the product is sales tax. The seller of the product is charged the tax. The different levels that are applicable under sales tax are Intra-State Level, Import/Export Sales, and Inter-State Sale.

Other Taxes

Other taxes are minor revenue generators and are small cess taxes. The various sub-categories of other taxes are as follows:

1. Property tax: This is also called Real Estate Tax or Municipal Tax. Residential and commercial property owners are subject to property tax. It is used for the maintenance of some of the fundamental civil services. Property tax is levied by the municipal bodies based in each city.
2. Professional tax: This employment tax is levied on those who practice a profession or earn a salaried income such as lawyers, chartered accountants, doctors, etc. This tax differs from state to state. Not all states levy professional tax.
3. Entertainment tax: This is tax that is levied on television series, movies, exhibitions, etc. The tax is levied on the gross collections from the earnings. Entertainment tax also referred as amusement tax.
4. Registration fees, stamp duty, transfer tax: These are collected in addition to or as a supplement to property tax at the time of purchasing a property.
5. Education cess: Education Cess is levied to fund the educational programs launched and maintained by the government of India.
6. Entry tax: This is tax that is levied on the products or goods that enter a state, specifically through e-commerce establishments, and is applicable in the states of Delhi, Assam, Gujarat, Madhya Pradesh, etc.
7. Road tax and toll tax: Road tax is used for the maintenance of roads and toll infrastructure.

Benefits of Taxes

The purpose of taxes is to provide the government with funds for spending without inflation. Taxes are used by the government for a variety of purposes, some of which are:

1. Funding of public infrastructure
2. Development and welfare projects
3. Defense expenditure
4. Scientific research
5. Public insurance
6. Salaries of state and government employees
7. Operation of the government
8. Public transportation
9. Unemployment benefits
10. Pension schemes
11. Law enforcement
12. Public health
13. Public education
14. Public utilities such as water, energy, and waste management systems

Tax is levied on a wide range of income stemming from salary, profits from business, property rental, etc. There are also wealth taxes, sales taxes, property taxes, payroll taxes, value-added taxes (VAT), service taxes, etc.

Advantages of Paying Taxes

It is compulsory and beneficial for anyone who earns a taxable salary (which is one that exceeds the basic exemption limit) to file their income tax returns. This is the case even if the tax liability is zero after deductions. However, even if your income is less than the basic exemption limit, there are advantages to filing taxes. Here are some of the benefits of paying your taxes on time: 

1. Loan approvals
   1. When applying for a loan, especially home loans, vehicle loans, etc., major banks can request a copy of your income tax returns. This can be ITR from the last two to three years. 
   2. Having ITR can even help to get a higher loan amount or to get your loan application reconsidered in case it was rejected at first. This is because banks calculate your ability to repay the loan based on your income.
   3. Income tax returns provide a clear picture of the income and the taxes that were paid on it in the previous years.

1. Visa applications
   1. Many foreign consulates require you to furnish your income tax returns from the previous years during the visa interview.
   2. While for some the most recent one will be sufficient, others require up to two to three years' worth of returns to be furnished.
   3. This is mandatory for the UK, US, Europe, and Canada, but not so much for South East Asian countries and the Middle East.
   4. This is because income tax returns are a proof that you are not trying to leave the country to evade taxes.
   5. Even when travelling abroad for leisure or business, it is always prudent to carry your ITR receipts as this will come in handy in the case of any emergency when you have to seek the help of a consulate.

1. Self-employed individuals
   1. Freelancers, consultants, entrepreneurs, and partners of firms are not eligible for the Form 16. If their annual income exceeds the basic exemption limit, then ITR receipts can be furnished as proof of income. It is also proof of taxes paid. This will come in handy during any financial or business transaction.
2. Government tenders
   1. This depends on the individual government department with no specific strict rules, yet ITR receipts are sometimes requested to be furnished when applying for any government tenders. This is to ensure that you have sufficient income and can support the payment obligations.
3. Carrying forward of losses
   1. Short-term or long-term capital losses are usually carried forward to be adjusted against the capital gains made in the subsequent years.
   2. For example, the long-term capital loss of one year can be carried forward for up to 8 consecutive years that immediately succeed the year in which the loss had occurred.
   3. However, a long-term capital loss can be adjusted only against a short-term capital gain of that year.
   4. Short-term capital gains, however, can be adjusted against both short-term and long-term gains. However, this can only be availed if income tax returns have been filed.

1. Claiming tax refunds
   1. Any refunds that are due from the IT Department can only be claimed if income tax returns have been filed.
   2. Even if income is below the tax exemption bracket, there could be refunds from different savings instruments that can be claimed if ITRs are filed.
   3. An example is fixed deposits, on which there is tax deducted at source at 10%.

1. High-cover life insurance
   1. Life cover or a Term Policy with sum insured that ranges from Rs.50 lakh to Rs.1 crore can be availed only by furnishing income tax returns which helps in the verification of annual income.
   2. Such a high insurance cover is only given when there is a high income for which income tax return receipts are necessary.

1. Compensation
   1. For self-employed individuals, ITR receipts may have to be furnished in order to claim compensation in the event of a motor vehicle accident that results in a disability or accidental death. This is because, in order to arrive at the appropriate compensation, income of the person is to be established first.

Income Tax Deductions

People who earn more than Rs.3 lakhs in taxable income must pay income tax based on their applicable tax bracket. The amount of income tax that must be paid by the individual can be decreased, nevertheless, through the employment of a few tax-saving strategies.
ELSS, mutual funds, PPF, EPF, tax-saving fixed deposits, post office savings plans, life insurance, health insurance, and other investments are examples of such deductible expenses. Most of these expenses are eligible for deductibility under sections 80C and 80D of the 1961 Income Tax Act. 

Income Tax Refund

Individuals, whether salaried or self-employed, are expected to submit their income tax returns, or ITR, after the end of each financial year. Depending on whether the person filing the ITR is salaried or self-employed, this document offers a snapshot of the taxpayer's annual earnings from various sources, tax savings investments/expenditures, total tax liability, TDS/advance tax paid, and some other data.
Before distributing refunds or asking for justifications from the assessee, the assessing officer verifies the integrity of the ITR filed after the Income Tax Department issues an acknowledgement number.

Income Tax Assessee

An individual who is liable to pay taxes and is categorized in the payable income tax slab is known as an income tax assessee. An individual who earns a regular income is exempted from paying tax if his or her annual income is less than the limit determined by the government from time to time. 

Income Tax Slabs

The tax payable to the government varies from individual to individual. This is because the higher you income is, the higher amount of tax you need to pay. The government utilises income tax slabs to calculate the rate at which each individual tax assesses is obligated to pay income tax in order to guarantee that tax rates and laws are equitable rather than uniform.

Tax Deducted at Source

Tax Deducted at Source, also known as TDS, is one of the most common ways for tax deductions by the government from a salaried person. The provision of interest on fixed deposits is another situation where TDS is present. However, after submitting an Income Tax Return (ITR), the tax assessee is also eligible for a refund in this instance.

How is Tax Calculated?

To know the amount of tax that must be paid (calculate your tax), you will have to add your income from salary, income from capital gains, profits or gains from profession or business, income from house property, and income from other sources, which will give you your gross total income.

In case you opt for the old tax regime, deductions under Section 80C to Section 80U, which will give you your total income, will need to be taken into account. Next, any rebate will need to be deducted. Add surcharge and cess to know the amount of tax that must be paid.

Recent Reforms in Taxes

In 2017, the Goods and Services Tax (GST) was introduced by the Indian government which is known to be the most revolutionary tax reform in the country till date. Before the introduction of GST, both Central and State Governments used to levy central as well as state taxes to avail different services or purchasing different goods.

The main issue with the previous reforms was the taxation process used to be complex. A bigger proportion of assessees were brought under taxation after the implementation of GST, which had a negative impact on tax evaders since it became more difficult to do so.

Tax Evasion Laws and Implications

Different acts based on taxation have been introduced by the Indian government and people need lto abide by these rules. In case an individual fail to pay taxes, they will be charged a penalty. Given below are some of the sections related to the taxation laws and penalties for non-compliance:

1. Section 140A (1): If an assesse fails to pay tax, he or she will be considered as a defaulter. In case of non payment of tax, the assessing officer may levy fine equal to the arrear according to Section 221 (1).
2. Section 271 (C): If an assess does not reveal his or her actual earning, the IT department will impose fine of 100% to 300%.
3. Section 142 (1) and 143 (2): Under Section 142 (1) and 143 (2), the Income Tax department will send a tax notice to the defaulter. In case the defaulting person fails to respond to the tax notice, the assessing officer may ask the assessee to file return.