Taxes in India
Taxes in India are levied by the Central Government and the state governments. Some minor taxes are also levied by the local authorities such as the Municipality. According to Article 265 each tax levied or collected has to be backed by an accompanying law, passed either by the Parliament or the State Legislature.
| S. No. | Parliament of India |
| 1 | Taxes on income other than agricultural income (List I(Union List), Entry 82) |
| 2 | Duties of customs including export duties (List I(Union List), Entry 83) |
| 3 | Duties of excise on tobacco and other goods manufactured or produced in India except (i) alcoholic liquor for human consumption, and (ii)opium, Indian hemp and other narcotic drugs and narcotics, but including medicinal and toilet preparations containing alcohol or any substance included in (ii). (List I(Union List), Entry 84) |
| 4 | Corporation Tax (List I(Union List), Entry 85) |
| 5 | Taxes on capital value of assets, exclusive of agricultural land, of individuals and companies, taxes on capital of companies (List I(Union List), Entry 86) |
| 6 | Estate duty in respect of property other than agricultural land (List I(Union List), Entry 87) |
| 7 | Duties in respect of succession to property other than agricultural land (List I(Union List), Entry 88) |
| 8 | Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares and freight (List I(Union List), Entry 89) |
| 9 | Taxes other than stamp duties on transactions in stock exchanges and futures markets |
| 10 | Taxes on the sale or purchase of newspapers and on advertisements published therein |
| 11 | Taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce |
| 12 | Taxes on the consignment of goods in the course of inter-State trade or commerce |
| 13 | All residuary types of taxes not listed in any of the three lists of Seventh Schedule of Indian Constitution |
Taxes in India
| S. No. | State Legislate |
| 1 | Land revenue, including the assessment and collection of revenue, the maintenance of land records, survey for revenue purposes and records of rights, and alienation of revenues (List II, Entry 45) |
| 2 | Taxes on agricultural income (List II, Entry 46) |
| 3 | Duties in respect of succession to agricultural land (List II, Entry 47) |
| 4 | Estate Duty in respect of agricultural land (List II, Entry 48) |
| 5 | Taxes on lands and buildings (List II, Entry 49) |
| 6 | Taxes on mineral rights (List II, Entry 50) |
| 7 | Duties of excise for following goods manufactured or produced within the State (i) alcoholic liquors for human consumption, and (ii) opium, Indian hemp and other narcotic drugs and narcotics (List II, Entry 51) |
| 8 | Taxes on entry of goods into a local area for consumption, use or sale therein (see Value added tax) (List II, Entry 52) |
| 9 | Taxes on the consumption or sale of electricity (List II, Entry 53) |
| 10 | Taxes on the sale or purchase of goods other than newspapers (List II, Entry 54) |
| 11 | Taxes on advertisements other than advertisements published in newspapers and advertisements broadcast by radio or television (List II, Entry 55) |
| 12 | Taxes on goods and passengers carried by roads or on inland waterways (List II, Entry 56) |
| 13 | Taxes on vehicles suitable for use on roads (List II, Entry 57) |
| 14 | Taxes on animals and boats (List II, Entry 58) |
| 15 | Tolls (List II, Entry 59) |
| 16 | Taxes on profession, trades, callings and employments (List II, Entry 60) |
| 17 | Capitation taxes (List II, Entry 61) |
| 18 | Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling (List II, Entry 62) |
| 19 | Stamp duty (List II, Entry 63) |
Taxes in India: CBDT and CBEC
The Central Board of Revenue or Department of Revenue is the apex body charged with the administration of taxes. It is a part of Ministry of Finance. When the administration of taxes became too unwieldy for one Board to handle, the Board was split up into two:
- Central Board of Direct Taxes (CBDT): Deals with direct taxation (In-charge of Income Tax Department): The CBDT Chairman and Members of CBDT are selected from Indian Revenue Service (IRS), a premier civil service of India, whose members constitute the top management of Income Tax Department
- Central Board of Excise and Customs (CBEC): Central Board of Excise and Customs (CBEC) deals with indirect taxation (central) in India.
- Service Tax
- Excise Duty
- Custom Duty
Direct Taxes in India were governed by two major legislations, Income Tax Act, 1961 and Wealth Tax Act, 1957. A new legislation, Direct Taxes Code (DTC), was proposed to replace the two acts. However, the Wealth Tax Act was repealed in 2015 and the idea of DTC was dropped.
As of 2015, Income Tax is the major source of direct tax in India
In terms of the Income Tax Act, 1961, a person includes
- Individual
- Hindu Undivided Family (HUF)
- Association of Persons (AOP)
- Body of Individuals (BOI)
- Company
- Firm
- Local authority
- Artificial Judicial person not falling in any of the preceding categories
Taxes in India: Indirect Taxes
- Service tax
- Excise and Customs
Taxes in India: SERVICE TAX
It is a tax levied on services provided in India, except the State of Jammu and Kashmir. From 2012, service tax is imposed on all services, except those which are specifically exempted under law (e.g. Exempt under Negative List). In budget presented for 2008-2009, it was announced that all small service providers whose turnover does not exceed 10 lakh need not pay service tax.
Dr. Raja Chelliah Committee on tax reforms recommended the introduction of service tax. Service tax had been first levied at:
- 5% flat from 1994 till 2003
- 8% flat plus an education cess (EC) of 2% from 2004 to 2006
- Increased to 12% by Finance Act, 2006
- Finance Act, 2007 imposed a new secondary and higher education cess (SHEC) increasing the total education cess to three percent and a total levy of 12.36 percent.
- Service tax at a rate of 14 percent (Inclusive of EC & SHEC) will be imposed on all applicable services from 1 June 2015.
Taxes in India:EXCISE TAX
The law of Central Excise duties is governed by the following:
- Central Excise Act 1994: This is the basic law related to the levy and collection of duties of central excise. However this Act does not contain the rate at which duties are imposed
- Central Excise tariff Act 1985: This Act classifies various goods on which central excise duties are levied and prescribes the rates at which the duty is payable
- Central Excise Rules, 1944: All manufacturers of excisable goods are required to register under these rules .The registration is valid as long as production activity continues and no renewals are necessary
Central Excise Act imposes a duty of excise on goods manufactured or produced in India (Excluding those produced in SEZs). For an item to be considered it must be Movable(In situ plant and machinery not charged) ,Marketable and Excisable(In the 1985 Act list)
The duty of central excise is charged on four bases:
- Specific duty (Basis of some physical feature of the product(eg. length, weight, box of 100)
- Tariff duty (Charged on the value-Set by the govt.)
- Maximum retail price (Eg: Television sets, DVD players ,Cosmetics)
- Ad -valorem basis (The first three bases of valuation are applied for only a few goods. In a large majority of cases the duty of central excise is payable on the basis of the value of the goods, called the assessable value)
Some commodities like pan masala and cars have special excise duties levied on them .These items are covered under in schedule II to the Central Excise Tariff. There is an education cess as well. 100 per cent Export oriented units are expected to export all their production .However, if they clear their final product in the domestic tariff area, the rate of excise duty will be equal to that of the customs duty on like article imported in India
Excises are typically imposed in addition to another indirect tax such as a sales tax or value added tax (VAT). An excise is typically heavier, accounting for a higher fraction of the retail price of the targeted products and is typically a per unit tax, costing a specific amount for a volume or unit of the item purchased, whereas a sales tax or VAT is an ad valorem tax and proportional to the price of the good. Additionally taxable event excise is the manufacturer or production of goods whereas for sales tax it is the act of sale.
Taxes in India: CASCADING EFFECT OF TAX
The CENVAT credit scheme (earlier known as MODVAT) was also a welcome move by trade and industry where credit of excise duty paid at the input stages was allowed to be set-off against the liability of excise on removal of goods. With effect from 2004, this system was extended to Service Tax also. Moreover, cross utilisation of credit between excise duty and service tax was also permitted. To a huge extent, the problem of cascading effect of taxes is resolved by these measures.
Taxes in India: CUSTOMS TAX
Two main laws govern customs
- Customs Act 1962
- Customs Tariff Act 1975
Taxes in India: Types of Duties
Basic Duty: As a % of value (Called Ad Valorem duty). The rates vary from 8% to 16%. It is higher for some goods like agricultural goods)
Countervailing Duty: If you import liquor and for example the excise duty on liquor is 40% then 40% will be charged as countervailing duty to protect domestic industry
Protective Duty: On the recommendation of the tariff commission the government may impose protective duty on some goods to protect certain industries
Anti-Dumping Duty: If any country is exporting goods to India at the price less than the cost- then an anti dumping duty is imposed.
Pilfered Duty: Pilfered goods mean goods that have been pilfered/stolen after unloading but before proper levy of duty
The rate of exchange is as determined by the board (CBEC). Determination of price of goods is done by Customs Valuation Rules in conformation with WTO which imposes duties of customs, countervailing duties, and anti-dumping duties on goods imported in India.
Taxes in India: SALES TAX
Sales tax is levied on the sale of a commodity, which is produced or imported and sold for the first time. If the product is sold subsequently without being processed further, it is exempt from sales tax. Sales Tax is a levy on purchase and sale of goods in India and is levied under the authority of both Central Legislation (Central Sales Tax) and State Governments Legislations (Sales Tax). The government levies Sales Tax principally on intra-state sale of goods. States also levy tax on transactions which are “deemed sales” like works contracts and leases.
Taxes in India: CENTRAL SALES TAX
Central Sales Tax, 1956, which imposes sales tax on goods sold in inter-state trade or commerce in India. According to the Constitution of India, no State can levy sales tax on any sales or purchase of goods that takes place in the course of interstate trade or commerce. Only parliament can levy tax on such transaction. Though CST is a central levy, however it is administered by the concerned State in which the sale originates. CST is levied on basis of origin and collected by the exporting state; the consumers of the importing state bear its incidence. The seller or a dealer of goods in a State has to collect State Sales Tax on the sale of goods within the State as well as central Sales Tax on sales that takes place in the course interstate trade or commerce.
Taxes in India:VAT
VAT was introduced in 2005. The existing General Sales Tax Laws were replaced with the Value Added Tax Act (2005) and associated VAT Rules. Haryana became the first State to adopt it in 2003. As of 2014, VAT has been implemented in all the states & union territories of India, except in Andaman and Nicobar Islands and in Lakshadweep island. The value added tax system requires an effective accounting. The primary advantage of VAT is that it takes care of the cascading effects of taxation
Say A sells goods to B after charging sales tax, and then B re-sells those goods to C after charging sales tax. While B was computing his sales tax liability, he also included the sales tax paid on previous purchase, which is how it becomes a tax on tax. Under the VAT system at every next stage dealer gets credit of the tax paid at earlier stage against his tax liability. This reduced an overall liability of many traders and also helped to reduce inflationary impact this had on the prices.
Taxes in India: GST
Taxes in India: Need for GST
The credit of Input VAT is available against Output VAT. In the same manner, the credit of input excise/service tax is available for set-off against output liability of excise/service tax. However, the credit of VAT is not available against excise and vice versa. We all know that VAT is computed on a value which includes excise duty. In the same manner, CENVAT credit is allowed only for the Excise duty paid on inputs, and not on the VAT paid on the input raw material. This shows that there is a tax on tax. Excise duty and service tax are levied by the Central Government, while the VAT is levied by the State Government, which is one of the reasons why such a cross-utilisation of credits was not allowed. However, this does not constitute a valid reason that justifies the cascading effect of taxes. For the people, it makes no difference if a tax is levied by the Centre or the State – a tax is a tax, and there is a tax on tax. The GST is introduced to combat this problem, among many others.
Let’s look at all the indirect taxes GST aims to remove:
(* CVD – Countervailing Duty; SAD – Special Additional Duty)
The GST shall subsume all the above taxes, except the Basic Customs Duty that will continue to be charged even after the introduction of GST. Other indirect taxes, such as stamp duties etc shall also continue. India shall adopt a Dual GST model, meaning that the GST would be administered both by the Central and the State Governments. This makes it the first tax of its kind in India.
Taxes in India:The Dual GST Model
- SGST – State GST, collected by the State Govt.
- CGST – Central GST, collected by the Central Govt.
- IGST – Integrated GST, collected by the Central Govt.
Taxes in India:CAPITAL GAINS TAX
Tax is payable on capital gains on sale of assets.
Long-term Capital Gains Tax is charged if
- Capital assets are held for more than three years and
- In case of shares, securities listed on a recognized stock exchange in India, units of specified mutual funds, the period for holding is one year.
- Long-term capital gains are taxed at a basic rate of 20%. However, long-term capital gain from sale of equity shares or units of mutual funds is exempt from tax.
- Short-term capital gains are taxed at the normal corporate income tax rates. Short-term capital gains arising on the transfer of equity shares or units of mutual funds are taxed at a rate of 10%.
Long-term and short-term capital losses are allowed to be carried forward for eight consecutive years. Long-term capital losses may be offset against taxable long-term capital gains and short-term capital losses may be offset against both long term and short-term taxable capital gains.
Taxes in India: DOUBLE TAX AVOIDANCE TREATY
India has entered into DTAA with 65 countries including the US. In case of countries with which India has Double tax Avoidance Agreement, the tax rates are determined by such agreements. Domestic corporations are granted credit on foreign tax paid by them, while calculating tax liability in India. In the case of the US, dividends are taxed at 20%, interest income at 15% and royalties at 15%.
Taxes in India:TAXES ON CORPORATE INCOME
Companies residents in India are taxed on their worldwide income arising from all sources in accordance with the provisions of the Income Tax Act. Non-resident corporations are essentially taxed on the income earned from a business connection in India or from other Indian sources. A corporation is deemed to be resident in India if it is incorporated in India or if it’s control and management is situated entirely in India.
Domestic corporations are subject to tax at a basic rate of 35% and a 2.5% surcharge. Foreign corporations have a basic tax rate of 40% and a 2.5% surcharge. In addition, an education cess at the rate of 2% on the tax payable is also charged. Corporates are subject to wealth tax at the rate of 1%, if the net wealth exceeds Rs.1.5 mn ( appox. $ 33333). Domestic corporations have to pay dividend distribution tax at the rate of 12.5%, however, such dividends received are exempt in the hands of recipients.
Corporations also have to pay for Minimum Alternative Tax at 7.5% (plus surcharge and education cess) of book profit as tax, if the tax payable as per regular tax provisions is less than 7.5% of its book profits
Taxes in India:OCTROI TAX: Octroi is a local tax collected on various articles brought into a district for consumption Cities in the Indian state of Maharashtra briefly abolished octroi in 2013 and replaced it with local body tax. However, octroi was reestablished there in 2014, due to decreased revenues from the local body tax.
Taking note of the deficiencies in the Indian logistical system and the resultant increase in the countries transaction cost in the international trade the government of India has come up with a scheme of free trading and warehousing zones in the Foreign Trade Policy of 2004-2009, The scheme has been subsequently updated and revised under the Special Economic Zones Act 2005 and the Special Economic Zones Rules 2006. Historically policy makers in India have focussed their attention to provide adequate warehousing facilities in the country. Accordingly the Agricultural Finance Sub Committee (1948) and the rural banking inquiry committee (1950) had emphasized
Taxes in India: MINIMUM ALTERNATIVE TAX
Normally, a company is liable to pay tax on the income computed in accordance with the provisions of the Income-Tax Act, but the profit and loss account of the company is prepared as per provisions of the Companies Act. In the past, a large number of companies showed book profits on their profit and loss account and at the same time distributed huge dividends. However, these companies didn’t pay any tax to the government as they reported either nil or negative income under provisions of the Income-Tax Act. The Indian Income-Tax Act allows a large number of exemptions from total income. Besides exemptions, there are several deductions permitted from the gross total income. Further, depreciation allowable under the Income-Tax Act, is not the same as required under the Companies Act. The latter provides a lower rate viz-a-viz the I-T Act which computes a higher rate of depreciation.
MAT is a way of making companies pay minimum amount of tax. It is applicable to all companies except those engaged in infrastructure and power sectors. Income arising from free trade zones, charitable activities, investments by venture capital companies is also excluded from the purview of MAT. However, foreign companies with income sources in India are liable under MAT.
For example, book profit before depreciation of a company is Rs. 7 lakh. After claiming depreciation and other exemptions, gross taxable income comes to Rs. 4 lakh. The income tax applicable Rs. 1.2 lakh at a rate of 30%. However, MAT would be Rs. 1.29 lakh (Rs. 7 lakh at 18.5%).