TAX Last Updated : 05 Aug 2020

The payment of tax is beneficial on multiple levels including the development of nation, betterment of infrastructure, the upliftment of the society, and even for welfare activities for the nation.

Taxes are levied by governments on their citizens to generate income for undertaking projects to boost the economy of the country and to raise the standard of living of its citizens. The authority of the government to levy tax in India is derived from the Constitution of India, which allocates the power to levy taxes to the Central and State governments. All taxes levied within India need to be backed by an accompanying law passed by the Parliament or the State Legislature.

Types of Taxes
Types of Taxes in India

Types of Taxes

There are two main categories of taxes, which are further sub-divided into other categories. The two major categories are direct tax and indirect tax. 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: This is the tax that is levied on the annual income or the profits which is directly paid to the government. Everyone who earns any kind of income is liable to pay income tax. For individuals below 60 years of age, the tax exemption limit is Rs.2.5 lakh per annum. For individuals between the age of 60 and 80, the tax exemption limit is Rs.3 lakh. For individuals above the age of 80, the tax exemption limit is Rs.5 lakh. There are different tax slabs for different income amounts.
  2. Apart from individuals, legal entities are also liable to pay taxes. These include all Artificial Judicial Persons, Hindu Undivided Family (HUF), Body of Individuals (BOI), Association of Persons (AOP), companies, local firms, and local authorities.

  3. Capital gains: 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.
  4. Securities transaction Tax: This tax 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 ISE (Indian Stock Exchange).
  5. Prerequisite Tax: These are taxes that are levied on the different benefits and perks that are provided by a company to its employees. The purpose of the benefits and perks, whether it is official or personal, is to be defined.
  6. 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:
    • Dividend distribution tax: 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.
    • Fringe benefit tax: This is tax levied on the fringe benefits that an employee receives from the company. This include expenses related to accommodation, transportation, leave travel allowance, entertainment, retirement fund contribution by the employee, employee welfare, Employee Stock Ownership Plan (ESOP), etc.
    • Minimum Alternative Tax (MAT): 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.

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 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 resulted in the elimination of other kinds of taxes and charges such as Value Added Tax (VAT), octroi, customs duty, Central Value Added Tax (CENVAT), as well as customs and excise taxes. The products or services that are not taxed under GST are electricity, alcoholic drinks, and petroleum products. These are taxed as per the previous tax regime by the individual state governments.

3. Other taxes

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

  • 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.
  • 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.
  • 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.
  • 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.
  • Education cess: This is levied to fund the educational programs launched and maintained by the government of India.
  • 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.
  • Road tax and toll tax: This 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:

  • Funding of public infrastructure
  • Development and welfare projects
  • Defense expenditure
  • Scientific research
  • Public insurance
  • Salaries of state and government employees
  • Operation of the government
  • Public transportation
  • Unemployment benefits
  • Pension schemes
  • Law enforcement
  • Public health
  • Public education
  • 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, 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:

  • Loan approvals: 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 2 to 3 years. 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. Income tax returns provide a clear picture of the income and the taxes that were paid on it in the previous years.
  • Visa applications: Many foreign consulates require you to furnish your income tax returns of the previous years during the visa interview. While for some the most recent one will be sufficient, others require up to 2-3 years’ worth of returns to be furnished. This is mandatory for the UK, US, Europe, and Canada, but not so much for South East Asian countries and the Middle East. This is because income tax returns are a proof that you are not trying to leave the country to evade taxes. Even when traveling 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.
  • Self-employed individuals: 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.
  • Government tenders: 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.
  • Carrying forward of losses: Short-term or long-term capital losses are usually carried forward to be adjusted against the capital gains made in the subsequent years. 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. However, a long-term capital loss can be adjusted only against a short-term capital gain of that year. 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.
  • Claiming tax refunds: Any refunds that are due from the IT Department can only be claimed if income tax returns have been filed. 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. An example is fixed deposits, on which there is tax deducted at source at 10%.
  • High-cover life insurance: 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. Such a high insurance cover is only given when there is a high income for which income tax return receipts are necessary.
  • Compensation: 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.

Penalty for not Paying Taxes

The government can impose penalties of varying degrees on any individual or legal entity who evades taxes. The penalty is dependent on the category of the tax that has not been paid. This means that the amount that is owed as taxes should be paid and in addition to that, the fine as well as its interest is to be paid as the penalty.

FAQs On Tax

  1. How do I know how much income tax I should pay?
  2. The various income tax slabs are mentioned here. You can also visit the website of the Income Tax Department, www.incometaxindia.gov.in., to know more about your income tax liability.

  3. What should be kept in mind when filling up the ITR form or challan?
  4. The following details are to be clearly mentioned:

    1. Amount of tax
    2. Mode of payment of tax
    3. Head of payment (other than for companies), ie., whether it is corporation tax or income tax
    4. Assessment year
    5. Permanent Account Number (PAN)
    6. Type of payment (whether it is self-assessment tax, advance tax, tax on dividend, tax on regular assessment, surtax, tax on distributed income to the unit holders, etc.)
  5. What is the difference between taxable income and exempt income?
  6. Taxable income is that which is chargeable for tax. Exempt income is income which is granted exemption from tax by the Income Tax Department.

  7. Should a record of all earnings made be maintained?
  8. You are required to maintain records and proof of earning for all the income earned by you as prescribed by the Income Tax Act. In case there are no records prescribed, then you should maintain any kind of reasonable record that can support your income claims.

  9. What is the meaning of ‘Profession’ as defined under the Income Tax Act?
  10. Profession refers to vocation or the use of one’s technical knowledge and skills on an independent basis. Some examples of professional fields are as given below:

    • Engineering
    • Medical
    • Legal
    • Accountancy
    • Architecture
    • Interior decoration
    • Technical consultancy
    • Writers
    • Artists
  11. For how long should the books of accounts of a business be maintained?
  12. From the end of the relevant year, the books of accounts should be maintained for a maximum of 7 financial years or a minimum of 6 years from the end of the Assessment Year.

  13. What is the difference between assessment year and financial year?
  14. The year in which you earn an income is the assessment year. The year following the assessment year, in which the income is evaluated, is called the financial year.

  15. What are the different ways in which income tax returns can be filed?
  16. There are basically four different ways in which you can file your income tax returns. These are:

    • Electronic transmission of data under the electronic verification code
    • Electronic transmission of data and afterwards submission of verification in Return Form ITR-V
    • Paper form
    • Electronic returns with digital signature
  17. How should returns be filed electronically?
  18. Returns can be filed electronically on the website of the Income Tax Department at www.incometaxindiaefiling.gov.in.

  19. How are excess taxes refunded?
  20. To claim refunds on excess taxes paid, you will first have to file your income tax returns. They will be credited to your bank account through the Electronic Clearing System (ECS) facility.

  21. What are the different heads under which taxpayers are taxed?
  22. Income tax payers are taxed on 5 heads under Section 14 of theIncome Tax Act, 1961:

    • Income from salary
    • Income from profits and gains of profession or business
    • Income from house property
    • Income from capital gains
    • Income from other sources
  23. What differentiates gross total income from total taxable income?
  24. Gross total income is basically the sum of your income from salary, income from capital gains, profits or gains from profession or business, income from house property and income from other sources. It is the amount of money you have earned totally from all your sources of income. Your total income is basically your gross total income minus deductions under Section 80C to Section 80U.

  25. How much income should I earn to pay tax?
  26. Individuals who are under 60 years of age will be subject to income tax if they earn an income in excess of Rs.2.5 lakh. Indian residents who are above 60 years of age but under 80 will be taxed if they earn more than Rs.3 lakh per annum, while those who are above 80 years of age will have to pay tax if they earn in excess of Rs.5 lakh per year.

  27. How do I calculate my taxes?
  28. To calculate your tax liability, 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. Then, you will have to take into account your deductions under Section 80C to Section 80U, which will give you your total income. From your total income, allow for rebate under Section 87A and subtract it to arrive at your tax liability after rebate. Then, add surcharge, which will give you your tax liability after surcharge. Then, add the applicable cess. You will then know your tax liability.

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  • SC says purchase tax to be levied on glass bottles

    Manufacturers are liable to pay purchase tax on empty bottles bought from unregistered dealers for packaging or refilling products such as beer and juices. This was stated by the apex court of the country and comes as a huge setback to manufacturers.

    A bench of Supreme Court led by justices AM Khanwilkar and Dinesh Maheshwari held that the purchase turnover, with respect to the purchase of empty bottles for the manufacture and sale of beer and Indian-made foreign liquor (IMFL) from unregistered dealers under a bought note is exigible to purchase tax under Section 7-A of the Tamil Nadu General Sales Tax Act. The bench was hearing a batch of cross-appeals led by Commercial Tax Officer vs Mohan Breweries and Distilleries.

    Speaking on the judgement, a senior SC advocate stated that it will have significant ramifications in entry tax cases where the concept of manufacture, sale or use is relevant.

  • Marginal increase in tax revenue recorded by Andhra Pradesh

    The Commercial Taxes Department in Andhra Pradesh has collected Rs.43,332 crore against the target of Rs.55,243 that was set for the financial year 2019-2020. However, the amount is more than what was collected in the financial year 2018-2019.

    Rs.232.37 crore, Rs.10,403.84, Rs.10,265.85, and Rs.22,430.38 was collected for professional tax, liquor, petroleum products, and GST revenue in 2019-2020, respectively. According to a statement issued on 22 June 2020, the Deputy Chief Minister said that Rs.43,332.45 crore was collected in 2019-2020 when compared to the Rs.43,053.92 crore that was collected in 2018-2019, seeing an increase by 0.65%. While other states such as Maharashtra and various Southern States saw a fall in revenue by up to 10% due to the financial crisis because of the coronavirus outbreak, Andhra Pradesh’s commercial taxes department saw better results. The flooding of rivers over the last six months has caused a scarcity in sand, which has had an impact on the construction sector. This has caused a negative impact on commercial taxes. The reduction In the tax collected on liquor was due to the various steps that have been taken by the government in order to impose complete prohibition.

  • Puducherry govt. decides to levy 50 percent extra tax on alcohol

    On Monday, Puducherry government decided to levy 50 percent extra tax on liquor when the Indian Made Foreign Liquor (IMFL) outlets resume functioning from Wednesday. The Chief Minister made the announcement after a cabinet meeting and stated it as ‘special corona fee’. The government has also decided to impose additional tax on petroleum products.

    On Centre’s decision to privatise power distribution in the Union Territories (UTs), the Chief Minister said his government will oppose the plan as it would adversely affect free supply provided to farmers. He added that he has written to the prime minister requesting him to reconsider the move.

  • Likely tax and duty relief package to be released amidst coronavirus

    India is now very close to actually finalising the second economic relief package that might even include a few tax concessions for industry sectors that have been hit pretty badly by the coronavirus. All small, micro and medium enterprises services and exports have also been affected. The government has started a few talks with the World Bank for a package for speeding up the launch of healthcare infrastructure. A few steps that are now being taken into consideration are a reduction in import and export duties, moratorium on select tax payments for some sectors, additional interest subvention for exports and relaxation in payment of dues and fees.

    The RBI (Reserve Bank of India) has released many measures like a cut in repo rate cut by 75bps (basis points), and a reduction of 100 bps in the cash reserve ratio. This was a move made for freeing up liquidity. It had also announced a three-month moratorium for all loan repayments.

  • Tax relief provided by the government due to coronavirus may cost them up to 3% on GDP

    According to various tax experts who have welcomed the tax reliefs offered by the government, the move will address several issues such as deferment of payments and liquidity even though they add between 2% and 3% to the GDP.

    On 24 March 2020, several tax measures were introduced by the government such as extending the deadline and reducing the penalty for corporates and the public. One of the key features includes the extension of filing tax returns for any tax payments due between 20 March 2020 and 29 June 2020 to 30 June 2020. The new dates apply for all compliance documents, appeal filings, and return filings across GST and income tax. In the case of delayed payments, the interest rates have been reduced to 9% for both GST and income tax. According to Deloitte, the new measures will provide relief to businesses and individuals who have been under pressure because of the coronavirus outbreak. According to many analysts, the lockdown due to the coronavirus will reduce the GDP by up to Rs.9 crore. The tax relief measures and extension of the deadlines will allow businesses to sustain themselves during the period and have a positive impact on the economy.

  • India may amend tax rules amidst coronavirus

    The outbreak of the coronavirus will continue to affect industries, supply chains, and business operations all across India. As the nation now braces itself for the fallout of this virus, the country has been thinking of offering a lot of tax breaks for SMEs. As of now, the Indian government has not made any official announcement about policy or relief changes.

    If this move is made, the Indian government would be following on the footsteps of many other countries across the world like Australia, Germany, and also, Indonesia. These countries had taken similar steps in order to absorb the impact of the coronavirus on their economies.

    The government is looking at removing the goods and services tax (GST) for those firms and companies that operate in the and tourism and hospitality sector, rescheduling loan payments, relaxing bad-terms norms for small businesses, and also changing the loan repayment rules for all commercial vehicle aggregators.

    Like a lot of economies, India wants to ease relaxations to try and keep households, small micro, and medium enterprises afloat.

    A report that was rolled out in 2018 by the International Labor Organization had said that 81% of the Indian population is now employed in the informal sector. Official estimates have shown that there around 0.33 million small, 63.05 million micro industries, and 5,000 medium enterprises are currently established in India.

    Other than bailout for MSMEs, the finance ministry is trying to create a rescue package for the aviation sector. Media reports have said that this will be worth US$1.6 billion. This will include some temporary suspension of many taxes that are levied on this sector.

  • Impact of Yes Bank crisis on tax savings

    Whether people have accounts in Yes Bank or not, chances are that the Yes Bank crisis will impact several financial transactions and even tax savings for this financial year. Those who have accounts in Yes Bank, and who have insurance premiums or Systematic Investment Plans (SIPs) auto-debited from their accounts will find that the debits have not taken place after the moratorium was placed on the bank, which means they have to make alternate arrangements. Life Insurance Corporation of India, which is the country’s largest insurer, had listed Yes Bank as the nodal bank for all NACH debits. This means that premium debits through NACH will be delayed on LIC policies. Even though LIC had intimated customers through an SMS that alternate arrangements are being made for this, if premiums on insurance policies or SIP instalments are not paid by 31 March, then tax breaks cannot be claimed for it. The tax savings would be reduced to the extent of the shortfall in the SIP investment or premium payments. So it is important to ensure that these premiums and SIP instalments are paid on time before 31 March in order to ensure that tax savings are maintained as planned.

  • Rs.1.95 lakh will have to be paid in tax in case income is Rs.15 lakh

    As per the new proposals made under Budget 2020, in case an individual’s annual gross income is Rs.15 lakh, a tax of Rs.1.95 lakh will have to be paid. However, the taxpayer will have to give up on various exemptions, including Section 80C.

    The new tax slabs that have been proposed are optional and are subject to certain conditions. According to the Finance Minister Nirmala Sitharaman, individuals who are earning Rs.15 lakh and are not claiming any deductions will have to pay Rs.1.95 lakh as tax. Earlier, the amount that had to be paid was Rs.2.73 lakh. Therefore, under the new tax regime, the tax burden has been reduced Rs.78,000. According to the Finance Minister, the Budget proposal aims to remove around 70 out of over 100 exemptions in order the simplify the Income Tax Act.

  • Individuals with salary of over Rs.13 lakh p.a. salary can save under new tax system

    Under the new tax system announced by the government, individuals with a salary of Rs.13 lakh p.a., who also avail Rs.2 lakh of tax deductions, will be able to save more on tax if they choose the new tax regime, stated government sources. However, they state that for individuals who earn below Rs.12 lakh p.a. and taking up to Rs.2 lakh in deductions, choosing the old tax regime would result in more savings. Statistics show that 90% of taxpayers claim Rs.2 lakh or less as deductions. This is 5.3 crore out of 5.78 crore taxpayers. These deductions would include provident fund, standard deductions, interest rate on home loans, medical insurance premiums, life insurance premiums, national pension scheme contribution, etc. Those with salaries above Rs.13 lakh p.a. will have to pay tax of Rs.1.43 lakh under the new tax structure whereas under the old one they would have paid Rs.1.48 lakh. Those earning a salary of Rs.14 lakh p.a. would save Rs.10,400 while those who earn Rs.15 lakh and above p.a. would save Rs.15,600, provided they claimed up to Rs. 2 lakh as deductions.

  • USISPF to launch the US-India Tax Forum on 25 February 2020

    In a move to facilitate government agencies and industry players to engage in local and global tax policies, the US-India Tax Forum will be launched by the US-India Strategic Partnership Forum (USISPF) on 25 February 2020.

    According to a statement made by USISPF on 23 February 2020, more than 50 tax experts from different Fortune 500 companies along with senior officials from the Central Board of Indirect Taxes and Customs (CBIC), the GST Council, the Central Board of Direct Taxes (CBDT), and the Ministry of Finance will be brought under the forum. As per the statement, the forum will meet regularly with the government and share details on tax policy efficiency and transparency. The USISPF, along with the Observer Research Foundation (ORF) and the Federation of Indian Chambers of Commerce and Industry (FICCI) will convene the US-India Forum. The US President Donald Trump arrived in India on 24 February 2020 on a two-day visit. According to the President and CEO of USISPF, Mukesh Aghi, the US President’s visit to India will strengthen the commercial and strategic partnership between the largest and oldest democracy. He further added that the increase in the bilateral trade by 12% has indicated strength in the commercial partnership. According to Aghi, the USISPF is looking forward to celebrating the multifaceted partnership between India and the United States.

  • 80% of the taxpayers expected to move to the new regime by the Finance Ministry

    According to Ajay Bhushan Pandey, the Revenue Secretary, 80% of the taxpayers are expected to move to the new income tax regime by the Finance Ministry.

    Under the new income tax slabs, higher limits and more tax slabs are provided in case individuals forego any existing deductions and exemptions such as tax savings instruments and home loan interest. According to the Revenue Secretary, an analysis was done by the government before the budget on 5.78 crore taxpayers and found that 11% would favour the old regime while 69% would favour the new system. He further added that the remaining 20% may wish to switch to the new system to avoid the hassle of paperwork. According to Pandey, a large number of people will find advantages in the new system. Corporates were also given a similar option in September, and around 90% of them shifted to the new system that is exemption free. New tax slabs were introduced by the government with a reduction in interest rates for individuals who make an income of up to Rs.15 lakh in case they wish to forego any deductions and exemptions. However, the new tax system is optional. Individuals who are earning up to Rs.5 lakh need not pay any tax under the old or new regime.

  • Budget 2020: Fiscal deficit pegged at 3.8% for FY20

    Union Finance Minister Nirmala Sitharaman in her budget speech informed that the country’s fiscal deficit for FY20 is now pegged at 3.8%. This is a significant loosening from 3.3%, which the government targeted.

    It must be noted here that the gap between expenditure and revenue touched 114.8% of 2019-20 budget estimate at Rs.8.07 lakh crore by the end of November 2019.

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