TAX Last Updated : 15 Oct 2019

Table of Contents


  1. Benefits of taxes
  2. Advantages of Paying Taxes
  3. Types of Taxes
  4. Penalty for not Paying Taxes

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.

What is Tax?

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.

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.
          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.

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.

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.

  1. Prerequisite: 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.
  2. 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: 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: 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.
    3. 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.
  3. Securities transaction: 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).
  4. 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.

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.

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.

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.

Tax FAQs

1. How do I know how much income tax I should pay?

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.

2. What should be kept in mind when filling up the ITR form or challan?

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.)
3. What is the difference between taxable income and exempt income?

Taxable income is that which is chargeable for tax. Exempt income is income which is granted exemption from tax by the Income Tax Department.

4. Should a record of all earnings made be maintained?

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.

5. What is the meaning of ‘Profession’ as defined under the Income Tax Act?

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
6. For how long should the books of accounts of a business be maintained?

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.

7. What is the difference between assessment year and financial year?

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.

8. What are the different ways in which income tax returns can be filed?

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
9. How should returns be filed electronically?

Returns can be filed electronically on the website of the Income Tax Department at www.incometaxindiaefiling.gov.in.

10. How are excess taxes refunded?

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.

11. What are the different heads under which taxpayers are taxed?

Income tax payers are taxed on 5 heads under Section 14 of the Income 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
12. What differentiates gross total income from total taxable income?

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.

13. How much income should I earn to pay tax?

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.

14. How do I calculate my taxes?

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.

15. Who can claim rebate under Section 87A?

Individuals who are residents of India and earn a total income (after deductions under Section 80C to Section 80U of the Income Tax Act) under Rs.3.5 lakh can claim a rebate up to Rs.2,500.

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  • Tax Cuts for Auto Sector May Not Be Backed by GST Council

    The Goods and Services Tax Council, is reportedly unlikely to give its approval to the reduction in taxes on auto and allied sectors. A government official with adequate knowledge on the matter said that there could be two major revenue losses. The government of India had conducted a study according to which the overall revenue loss for the year could be as high as Rs.50,000 crore in case the tax rates for the auto sector were to be reduced to 18% from 28%. State officials in West Bengal, Punjab and Kerala, meanwhile, said that they also do not want to see a tax cut in the auto sector or even in the FMCG sector due to below-par GST collections in 2019. In the period between April and July this year, the overall tax revenues of 20 states declined by 7% to Rs.4.9 trillion in comparison with the corresponding period last year. Certain states were hit harder than others, as the data revealed that tax collections in the states of Punjab, Rajasthan and Andhra Pradesh fell by 12.5%, 35.5% and 59% respectively. Thomas Isaac, the finance minister of Kerala said that he was also opposed to the idea of rate cuts in the auto sector, citing the lack of revenue neutrality as the reason for his decision. The auto sector has been recuperating from the worst slump it has faced in the past 20 years or so, and is now pushing for a reduction in tax rates at the GST Council meeting scheduled to take place on 20 September.

    19 September 2019

  • Income Tax department asks individuals for detailed salary break up in ITR2 form

    The department of Income Tax (IT) has revealed the software utility for filing ITR2 for the financial year 2018-19 in excel format. After Form 16, the ITR2 is the most used form by individuals to file IT returns (ITR). The form can be used by only those individuals who receive capital gains or possess more than one residential property. Individuals who earn income from their profession or business cannot use the ITR2. The ITR2 requires individuals to fill their salary details in a format which is in sync with the salary heads given in Form 16 which contains information about the source of salary. However, in the ITR2, individuals are asked to provide a detailed break up of the salary which was not the case earlier and in Form 16. There is, however, no clarity on whether the new format of Form 16 will offer such a detailed break up. If the break-up is not provided in Form 16, individuals will need to a lot of number crunching and collect figures from various sources, for example, salary slips, etc. Salaried individuals will then need to file the allowances separately.

    6 May 2019

  • Indian Finance Ministry asked DTC to revise the existing I-T slabs

    The Indian Finance Ministry has requested the Direct Tax Code (DTC) panel to review the current income-tax (I-T) slabs, specifically the lower slabs which are in the 20% bracket. The Ministry has given this suggestion when the task force responsible for re-writing direct tax legislation had a discussion with the Indian Finance Minister, Arun Jaitley on Wednesday 27 February 2018, just one day before the DTC draft report submission. The DTC panel has asked for a time period of 3 months to implement the suggestions of the Ministry.

    According to the officials, the existing income tax rates, particularly those in the 20% bracket are unclear in nature and this is why the Ministry has suggested the DTC panel to work towards making them more consistent. The portal is also inviting expert suggestions, best practices, and international trends opted for by the developed nations to successfully implement the suggestions received from the Finance Ministry.

    28 February 2019

  • Has demonetisation really helped in increasing tax collection?

    After the government’s demonetisation exercise, income tax returns (ITRs) filed have seen an increase. The implementation of the GST regime is also responsible for the increase in tax compliance in the country. However, some analysts are of the opinion that the rise in ITRs may be due to other reasons.

    Post GST implementation and demonetisation, the increase in the number of ITRs filed may not be necessarily due to tax compliance. It is possible that taxpayers had not filed the income tax returns at the time of payment, and decided to file the returns at a later point of time, said Devendra Kumar Pant - Chief Economist at India Ratings and Research.

    Overall, the narrative has been optimistic. After demonetisation, there has been a significant increase in the number of new income tax payers. There was also additional revenue flowing in from a wider base of taxpayers.

    Experts are of the opinion that the tax-to-GDP ratio will give a clear indication of the growth. When this is used in tandem with tax buoyancy and ITRs, it will indicate the actual state of affairs.

    Tax-to-GDP ratio takes into account the total tax revenue that is collected by the government in a year. When this figure was analysed for the past few years, it was seen that the hike in tax collection is really not up to the mark.

    26 September 2018

  • Withdrawal of tax appeals to affect a fraction of disputed amount: Finance Minister

    The Union Finance Minister Piyush Goyal recently said that the government’s decision to reduce the litigation through the withdrawal of about 41% of the direct tax disputes and about 18% of the indirect tax disputes will affect only a fraction of the total value pertaining to the disputed amount. He added that the tax disputes that are pending in various appeal tribunals, high courts, and the Supreme Court are worth more than Rs.7.6 lakh crore. While addressing the press, Goyal said that 66% of the cases amount to just 1.8% value of the litigation value of Rs.7.6 lakh crore. Cost of litigation is often greater than the amount to be recovered and in order to minimise the litigation, the government has come up with the decision to not file any appeal in the appellate tribunals, High Courts, and the Supreme Court for cases where the amount involved is less than Rs. 20 lakh, Rs.50 lakh, and Rs.1 crore respectively. Previously, these limits were set at Rs.10 lakh, Rs.20 lakh, and Rs.25 lakh respectively.

    The Minister of Finance concluded that this decision would lead to the withdrawal of 41% of the existing cases which are related to direct taxes and 18% of the cases which are related to indirect taxes. Records also show that in case of income tax, 34% of the total number of cases filed by the department in Income Tax Appellate Tribunal (ITAT) will be withdrawn. 48% of the cases will be withdrawn in case of high courts, and 54% of the total number of cases will be withdrawn in case of Supreme Courts. However, he also added 41% of the withdrawal will affect only 0.82% of the total litigation amount.

    16 August 2018

  • Income tax demand is not justified, Cognizant tells High Court

    US-based IT firm, Cognizant Technology Solutions has recently made a submission in the Madras High Court quoting that the tax demand made by the Income Tax Department (ITD) is not justified and is without jurisdiction. The court had granted interim stay on the Income Tax Department’s proceedings against Cognizant Technology Solutions in the month of April. The proceedings were in relation to the demand placed by the Income Tax department subject to the firm depositing 15% of Rs.2,800 crore dividend distribution tax (DDT).

    Cognizant has paid all applicable taxes earlier which were related to its buyback transaction in 2016. As the Income Tax Department (ITD) has freezed certain banks account of the firm in relation to the non-payment of dividend distribution tax (DDT), the IT firm said that the Income Tax Department’s position is “contrary to law and without merit”.

    The tax issue was raised as there were allegations that the firm had made remittances of about Rs.19,415 crore to its non-resident shareholders in May 2016 without paying the dividend distribution tax (DDT).

    11 June 2018

  • Government Targets Rs.12 Trillion Worth of GST Revenue for FY 2018-19

    The target for GST tax collections for FY 208-19 has been set at Rs.12 trillion by the GST Council. In the previous financial year, the average monthly receipts amounted to Rs.89,885 crore, which was just slightly lower than the Rs.91,000 crore target despite a number of disruptions considering it was the first year of GST implementation. According to an official of the finance ministry, GST receipts in the previous financial year weren’t bad by any means, adding that the revised monthly revenue target for the current financial year has taken into consideration a 14% rise in states’ revenue growth projection for compensation.

    16 May 2018

  • Income Tax Rules Amended, Transgenders Will Be Identified Independently

    Income tax rules have been amended by the government of India, and transgenders will now be able to identify transgenders independently. The policies for the Income Tax Department are framed by the Central Board of Direct Taxes, and it sent out a notification which provides for a new option in the form where transgenders can identify themselves as an independent gender. The notification was sent under Section 139A of the Income Tax Act and Section 295 of the Income Tax Act, 1961, and transgenders can now obtain a Permanent Identification Number thanks to this notification. Up until recently, male and female were the only two genders that could be selected on the PAN application form. As there were plenty of hassles for the transgender community due to this, the notification has effectively put an end to such issues.

    11 April 2018

  • Telangana Commercial Taxes Department targets revenue growth of 20%

    The revenue collected by the Commercial Taxes Department in Telangana was about Rs.4,000 crore during the month of February 2018. The department estimates that the collections for the current financial year will show a growth of 20%. The department has announced that despite the glitches at the time of GST implementation, the revenue collected has increased from the previous year.

    The revenue collection for February is much more than the normal revenue of Rs.3,000 crore collected each month. The focus of the department on the recovery of existing long-term dues could be one of the reasons for the improvement in collections.

    The department has also said that it has identified defaulters of big amounts and has a strategy in place to deal with them. The next meeting of the GST Council will be on March 10, where the GST norms are expected to be further simplified.

    13 March 2018

  • Telangana, Centre to Come Down Hard On GST Defaulters

    Following the implementation of the Goods and Services Tax on July 1, 2017, state governments and the Centre are becoming increasingly strict on GST defaulters. In the first eight months after the new tax regime came into force, there were no raids or strict action against those who defaulted as the government believed that people needed time to make the transition from Value Added Tax to the Goods and Services Tax. However, IRS and IAS officers have now commenced raiding defaulters under the provisions of the Goods and Services Tax Act.

    6 March 2018

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