Every so often, India’s working population jointly celebrates the liberty, freedom and power that comes with being rewarded for a job well done. This gut-twisting warmth and excitement of achievement comes at different times through different channels for different people, but two things unite all types of earners in India – the feeling of achievement and success, and the slight pang of sadness that comes with noticing the amount isn’t really what you signed on for or expected.
So why isn’t the amount as much as it ought to be? What’s that deduction for?
It’s because of Income Tax, a type of direct tax which is levied by the Government of India on those whose income exceeds certain “slab” amounts.
What is Direct Tax?
Broadly, there are two types of taxes that the Indian government levies on its citizens – direct tax and indirect tax.
Definition or Meaning: Direct taxes are those which are paid directly to the government by the taxpayer. These taxes are not paid deducted and paid on behalf of the taxpayer. It’s imposed on the people and organizations directly by the government. This tax liability has to be paid by the taxpayer in question and cannot be transferred to any other entity for payment.
Examples of Direct Taxes In India:
Key examples of direct taxes are
- Income tax
- Wealth tax
- Corporation tax
The Central Board of Direct Taxes in India:
Direct taxation in India is overseen by the Central Board of Direct Taxes or the CBDT, which was formed as a result of the Central Board of Revenue Act, 1924. The CBDT is a part of the Department of Revenue in the Ministry of Finance and is responsible for the administration of the direct tax laws. It also provides inputs and suggestions for policy and planning of the direct taxes in India.
The CBDT is the hub and nexus of all direct taxation policy and enforcement. It is headed by a CBDT Chairman, and comprises of six members who are also Special Secretary to the Government of India.
The Direct Tax Code:What is Direct Tax Code?
In a move to establish a more efficient, effective and equitable direct tax system, the Direct Taxes Code or DTC has been drafted to replace the existing Indian Income Tax Act of 1961. It aims to consolidate and amend all laws relating to the direct taxes in order to facilitate voluntary compliance and increase the tax-GDP ratio. With its 319 Sections and 22 Schedules, the DTC aims to replace the old Income Tax Act and provide a more stable, efficient and overall better code for taxation incorporating the best taxation principles and proven international practices.
The Direct Tax Code Explained With Examples:
The DTC is explained in this section by delving into its key features. Key examples of DTC are income tax, corporate tax, wealth tax and capital gains tax. These are explained in detail below.
- Single code for direct taxes: By bringing all direct taxes under a single code with unified compliance features, a single unified taxpayer reporting system can be facilitated.
- Eliminates the problem of constant litigation: Special care has been taken to avoid contradictory and ambiguity in the code, to avoid misinterpretation and misuse.
- Flexibility: The statute has been structured in a way that can accommodate the changes and requirement of a growing economy without having to constantly resort to amendments.
- Eliminates regulatory functions: Regulatory functions are to be carried out by other regulatory authorities, keeping it simple.
- Stability: In the current system, the tax rates are formed in the Finance Act of the relevant year. All rates of taxes under the DTC, however, are proposed to be prescribed in the First to Fourth schedule of the DTC itself, and any amendments to the same will be brought before Parliament as an Amendment Bill.
- Political contributions of up to 5% of the gross total income will be eligible for deduction.
- Fringe benefits tax will be charged to the employee rather than the employer.
- Annual investments in approved funds and insurance proposed at Rs.1,50,000, instead of Rs.1,20,000.
What are the Types of Direct Taxes One Pays?
Direct taxes come in many shapes and forms. All of the below mentioned tax headings have two things in common – they are imposed directly and apply to every Indian citizen.
List of Direct Taxes In India:
- Income Tax
- Income tax is the most common and most important tax that an Indian must pay.
- It is charged directly on the income of a person.
- The rate at which it is charged varies, depending on the level of income.
- It’s charged to individuals, co-operative societies, firms, companies, Hindu Undivided Families (HUFs), trusts and any artificial judicial person.
- Income tax is charged on an income known as “taxable income”, which is:
Taxable income = (total income) – (applicable deductions and exemptions).
The different heads of income under which income tax is chargeable are:
- Income from house and property.
- Income from business or profession.
- Income from salaries.
- Income in the form of capital gains.
- Income from other sources.
It is levied differently for different people depending on their residency status.
- Levied on companies who exist as separate entities from their shareholders.
- Foreign companies are taxed on income that arises, or is deemed to arise, in India.
- It is charged on royalties, interest, gains from sale of capital assets located in India, fees for technical services and dividends.
- Includes Minimum Alternative Tax (MAT) which was introduced to bring Zero Tax companies under the income tax net, whose accounts were made in accordance with the Companies Act.
- Includes Fringe Benefit Tax (FBT) which is a tax that companies pay on the fringe benefits provided (or deemed to have been provided) to employees.
- Incudes Dividend Distribution Tax (DDT) which is a tax levied on any amount declared, distributed or paid as dividend by any domestic company. International companies are exempt from this tax.
- Includes Securities Transaction Tax (STT) which is a tax levied on taxable securities transactions. There is not surcharge applicable on this.
- Wealth tax is charged on the benefits derived from property ownership.
- The same property will be taxed every year on its current market value.
- Wealth tax is charged whether the property in earning an income or not.
- The tax is levied on the individuals, HUFs, and companies alike.
- Chargeability depends on residential status.
The following will not be taxed as they are “working assets”:
- Assets held as stock in trade.
- Property held as a commercial complex.
- Gold deposit bonds.
- House property held for business or profession.
- House property let out over 300 days in a year.
- Taxed on the income derived from the sale of assets or investments.
- Capital investments cover homes, farms, businesses, works of art, etc.
- Capital gains = (money received from sale) – (cost of capital investment).
- Categorized as short-term gains (gains on assets sold within 36 months of acquisition) and long-term gains (gains on assets sold after 36 months of acquisition and holding).
- Voluntary tax that is paid by the taxpayer when the asset it sold.
Tax Rates for Different Types Of Direct Taxes:
- Income Tax
- Corporate Tax.
In India, Income Tax is charged according to slabs which outline the details for different tax rates for different levels of income.
For individual residents under 60 years of age:
|Income Slabs||Tax Rates|
|Taxable income under Rs.2,50,000.||NIL.|
|Taxable income between Rs.2,50,000 and Rs.5,00,000.||10% of the amount by which the taxable income exceeds Rs.2,50,000. Less: Tax Credit u/s 87A – 10% of taxable income (up to a maximum of Rs.2,000).|
|Taxable income above Rs.5,00,000 and Rs.10,00,000.||Rs.25,000 plus 20% of the amount by which the taxable income exceeds|
|Taxable income above Rs.10,00,000.||Rs.1,25,000 plus 30% of the amount by which the taxable income exceeds Rs.10,00,000.|
For individual residents between 60 and 80 years of age:
|Income Slabs||Tax Rates||Taxable income under Rs.3,00,000.||NIL.||Taxable income between Rs.3,00,000 and Rs.5,00,000.||10% of the amount by which the taxable income exceeds Rs.3,00,000. Less: Tax Credit u/s 87A – 10% of taxable income (up to a maximum of Rs.2,000).||Taxable income between Rs.5,00,000 and Rs.10,00,000.||Rs.20,000 plus 20% of the amount by which the taxable income exceeds Rs.5,00,000.||Taxable income above Rs.10,00,000.||Rs.1,20,000 plus 30% of the amount by which the taxable income exceeds Rs.10,00,000.|
For Individual residents above 80 years of age:
|Income Slabs||Tax Rates|
|Taxable income under Rs.5,00,000.||NIL.|
|Taxable income between Rs.5,00,000 and Rs.10,00,000.||20% of the amount by which taxable income exceeds Rs.5,00,000.|
|Taxable income above Rs.10,00,000.||Rs.1,00,000 + 30% of the amount by which taxable income exceeds Rs.10,00,000.|
*Amounts invested in certain specific investments like EPF, PPF, NSC, Tax Saving FDs, etc. are eligible for deductions under Section 80C up to Rs.1,50,000 per year.
For domestic companies:
- The Corporate Tax rate for domestic companies is 30%.
- If the company does not have an income of over Rs.1 crore, then it does not have to pay any corporate income tax.
- If the net income of the company is in the range of Rs.10 crore, a surcharge of 5% is applicable on the net income.
- If the net income of the company exceeds Rs.10 crore, a surcharge of 10% is applicable on the net income.
For international companies:
- That are earning less than 1 crore rupees, a corporate tax of 41.2% is applicable – inclusive of 40% basic tax and an education cess of 3%.
- That are earning more than 1 crore rupees, a corporate tax of 42.024% is applicable – inclusive of 40% basic tax, 3% education cess and a 2% surcharge.
- That are earning more than 10 crore rupees, a surcharge of 5% is applicable in addition to basic tax.
Minimum Alternative Tax (MAT) is presently charged at 19.05%.
Dividend Distribution Tax (DDT) is charged at a rate of 16.995% on declared dividends.
- Is charged on the net wealth, which is sum total of all taxable assets clubbed together, minus the amount of debt owed.
- Net wealth = (All assets) – (all debt).
- The valuation date for net wealth is 31st March immediately preceding the assessment year.
- Wealth tax is charged at 1% of the amount by which the net wealth exceeds Rs.15,00,000 (15 lakhs).
- Wealth tax has been abolished (with effect from April 1, 2016 for wealth held as on March 31, 2016)
Capital Gains Tax.
- Short term capital gains are taxed as per the normal income tax slab rates.
- Method of indexation using the cost inflation index will be done to the cost of acquisition and the cost of improvement, and the resultant figures will be used for computation.
- Long term capital gains are taxed at 20% if computed with the benefit of indexation.
- Long term capital gains are taxed at 10% if computed without the benefit of indexation.
Benefits of Direct Taxation:
- Equitable: The burden of direct taxes can’t be shifted, and an equitable sacrifice of income and wealth can be achieved from all sections of society through progressive taxation.
- Economical: Income tax and most other forms of direct taxation are done at source with the help of TDS (Tax Deduction at Source), and are hence not a problem for the government to collect.
- Certainty: There is a sense of certainty from the taxpayer and the government, as each know how much to pay and how much to expect to collect respectively.
- Productivity: Direct taxes are very productive in the sense that as the working population andcommunity grows, so do the returns from direct taxation.
- Consciousness of duty: When people consciously pay their taxes, they can claim the right to know how their money is being spent by the government.
- Creates equal distribution of wealth: The government charges more taxes from those that can afford them, and uses this money to uplift the lower and poorer sections of society.
Frequently asked questions about direct tax.
- How can I save on my taxes?
It is possible to have a portion of your income viewed as or deemed non-taxable – by investing it in certain funds, investments and policies which are income tax deductible.
- What are some of the investments that I can make to save on Income Tax?
Investments under Section 80C, 80CCC and 80D are directly exempt from taxation – like some tax saving fixed deposits, investments in National Savings Certificates (NSCs), insurance policies, EPF and PPF schemes, etc.
- What is TDS?
TDS is Tax Deducted at Source. Before you receive your pay, a certain amount is deducted as tax through the method of TDS.
- What is an assessment year?
An assessment year is a 12 month period that starts on the 1st of April, up to the 31st of March the next year.
- Are all incomes and receipts considered as taxable income?
No, there are two types of receipts – 1. Revenue receipts and 2. Capital receipts. All revenue receipts are taxable unless specifically exempted and all capital receipts are exempted unless specifically taxed.
- What are the rules relating to taxation of gifts?
Gifts exceeding over Rs.50,000 are taxable unless received from:
- A relative.
- On occasion of marriage.
- Under will or by inheritance or in contemplation of the death of the payer.
News About Direct Tax
Direct Tax as well as Indirect Tax collection both jump in the first quarter
The first quarter of this fiscal saw a jump for both direct as well as indirect taxes. While direct taxes were up by 9 per cent indirect taxes saw a huge jump of 26 per cent for the first quarter of financial year 2016-17. Indirect taxes grew on account of a huge jump in excise duty collections. Rs.4.08 lakh crore were collected as indirect tax in the first quarter. The net increase in excise duty collection was 46 per cent. Refunds for direct taxes increased by 27 per cent and as a result of this there was a decrease in net growth of corporate tax.
23rd October, 2016
CBDT Launches 5 Unilateral Advance Pricing Agreements
Last Friday, The Central Board of Direct Taxes (CBDT) made a statement saying that it had implemented five unilateral advance pricing agreements (APAs) with the Indian taxpayers. A roll back provision is included in one of these agreements while these signings being include has lead the number of advance pricing agreements by the CBDT to reach 103, according to a finance ministry statement.
The APA scheme, was launched in the Income Tax Act in 2012. The main target of this provision was to allow taxpayers who are involved in transfer pricing to be able to specify the methods of pricing as well as stating or earlier deciding the prices of international transactions.
27th September 2016
Net Direct Tax collections for FY17 April-Aug rises 15% to Rs. 1.89 lakh crore
Robust income tax collections has led to an increase of 15% in net direct tax collections during the five month period between April and August, for the financial year 2016-17. The tax collected during this interval stands at 1.89 lakh crore.
Direct taxes, which are inclusive of personal income tax and corporate income tax, collected during the first five months is 22.30% of the full fiscal budget estimates. The gross CIT collections grew by 11.55% while PIT collections increased by 31.76%.
However, tax refunds totalling Rs. 77,080 crore have been furnished during this period. This amount is 22.18% higher than the refunds issued for the same period last year. The government forecasts that Rs. 8.47 lakh crore will be collected from direct taxes this fiscal. Indirect taxes will contribute Rs. 7.79 lakh crore, as well.
13th September 2016
CBDT to use Direct Emails to Reduce Turnaround Time for Tax Disputes
In an effort to reduce the vast number of direct tax litigations the Income Tax department has undertaken the endeavour of writing personally to over 2.59 Lakh taxpayers asking them to avail a scheme that will provide a one-time resolution to their tax disputes. To reduce the turnaround time, the CBDT will be using emails to communicate with the aggrieved taxpayers. The CBDT has estimated that each income tax commissioner will have close to 300 to 400 appeals pending before them. They are instructed to email the assesses urging them to take up the scheme and also discuss the benefits of the said scheme. The direct tax resolution scheme will be open till 31st December and since the assesses are known, the publicity drive for the same will be on a much smaller scheme.
28th August 2016
Tax Collections Up Considerably During Q1 2017
There is some pleasing news from the taxman. At the end of Q1 (April-June) in the current financial year, about 14.6% of the tax targets set during the annual budget was achieved during the first three months of the current fiscal.
While the direct tax collection rose by 24.79% from the corresponding quarter last year, the hike in indirect tax collection rose by 30.8% at the end of quarter 1. Tax from direct sources during this quarter was around Rs.1.24 lakh crore while indirect taxes clocked Rs.2 lakh crore. Corporate tax registered a growth of 13.5% and income tax inched up by 29.8% during the first quarter of the current fiscal.
The main reason for increase in collections can be attributed to advance tax payments from individuals made in the previous budget.
20th July 2016
Direct Tax Collection Grows 24.79% At The End Of June
The government has collected 24.79 percent more direct tax and 30.8 percent higher indirect tax from April to June 2016 compared to the same quarter last year, revenue secretary Hasmukh Adhia has said.
However, if the additional resource mobilisation – tax rate hikes imposed for petroleum goods – is taken out of the calculation, the growth of indirect taxes has only been 10.2 percent. Rs. 1.24 lakh crore was received as direct taxes due to higher personal income tax collection after a change in the advance tax payment schedule, while Rs. 2 lakh crore came to the government as indirect taxes, primarily because of a 50 percent rise in excise revenues.
The first quarter of the year has yielded around 14.6 percent of the annual Budget target of direct taxes.
15th July 2016
April-May Witnesses 18 Per Cent Rise In Direct Tax Collection
The first two months of the current fiscal year saw an 18 per cent rise in net direct tax collection. The government today stated that collections increased to Rs 43,391 crore, indicating a massive jump from previous collections. Hasmukh Adhia, Revenue Secretary, also stated that in the case of direct taxes, the growth rate trend can only truly be visible post June, which is when advance tax installments become due. While indirect tax growth rate for the months of April and May for the fiscal year 2017 stands at 36.7 per cent, direct tax collection, which comprises of corporation tax, income tax and wealth tax, is expected to rise by 12.64 per cent to Rs 8,47,097 crore over the course of the year as compared to Rs 7,52,021 crore last year. Adhia also mentioned that the net collection of indirect taxes up to the month of May was Rs 1.31 lakh crore, totalling to almost 16.8 per cent of the Budget Estimate for the current fiscal year.
17th June 2016
Direct Tax Dispute Resolution Scheme Unveiled
A new Direct Tax Dispute Resolution Scheme has kicked in this year’s financial budget. The new scheme will allow settlement of cases pending in different courts, arbitration, tribunals or mediation under the BIPA (Bilateral Investment Protection Agreement). This scheme will provide an opportunity for resolution to companies like Cairn and Vodafone that have been facing retrospective amendment in income tax law.
Finance Minister Arun Jaitley said in his budget speech that companies with past cases can settle by paying only tax arrears, while penalty and interest liability will be waived.
7th June 2016
Data on Direct Taxes Published by CBDT for First Time
The Income Tax Department has published statistics on total number of taxpayers, PAN holders and incomes as mentioned in ITRs (Income Tax Returns) filed by various taxpayer categories. An 84-page data has been released in publicly on IT department’s official website. The department claims that the intent of publicly publishing this data is to inculcate a broader use and analysis of Income tax data by members of the department.
The data was released owing to a demand from many researchers and economists. In the previous financial years of 2000-01 to 2014-15, the ‘time series’ data had revealed the department’s real time collection of direct taxes, ratio of direct tax to GDP, workload and disposal of IT cases, cost of revenue collection for the government and number of genuine assesses.
25th May 2016
Mumbai I-T Department Trying To Expand Tax Base
The Income Tax Department in Mumbai has sent out 12 lakh notices via email, post and SMSes requesting those who have not filed their Income Tax Returns to do so at the earliest.
Between April and December in 2015-16, the department added only 2.48 lakh new taxpayers, which was much below its target of 6 lakh.
As per state-wise distribution of taxpayers, Maharashtra contributes around 40% of direct tax payments in the country, including income tax, corporate tax, wealth tax, securities transaction tax, etc. Just around 2.5% of the 120-crore population of Indian files income tax returns, while a mere 1% pay income tax.
20th May 2016