Introduction to types of taxes:
There are two types of taxes that have been imposed by the Government of India on its citizens.
The taxes that are paid directly to the government are known as direct taxes. These taxes are levied on organizations and the people and have to be paid by the taxpayer in question.
Some examples of Direct Taxes:
Central Board of Direct Taxes or CBDT supervises the Direct Taxation in India, which has been created as per the guidelines of Central Board of Revenue Act, 1924 where CBDT is a part of the Ministry of Finance and regulates the direct tax laws. CBDT consists of six members who are also the special secretary to the Government of India.
Direct Tax Code: To supersede the Income Tax Act, 1961 and bring in an efficient and fair Direct Tax system, Direct Tax Code has been formed with 319 sections and 22 schedules to facilitate voluntary compliance and increase Tax-GDP ratio.
Key Features of Direct Tax Code:
A unified taxpayer reporting system can be formed by bringing together all direct taxes under one code with consolidated agreement.
It eliminates the problem of constant legal actions by taking care of any kind of misinterpretations in the code.
The structure of DTC is very flexible due to which it can accomodate any changes that are required as per the growing economy.
Income tax is the most prominent tax which every Indian must pay as per the percent to be levied on particular income slabs. Income tax is charged to individuals, firms, organizations, trusts and any artificial judicial person. Income tax is charged on taxable income as per this formula:
Taxable Income = Total income - ( applicable deductions + exemptions).
There are different sources of income which are chargeable under Income tax such as:
Income from house and property
Income from business and profession
Income in the form of Capital gains
Income from salaries
Income from other sources
For every tax payer, income tax charges are different depending on source of income, residency status and age.
Corporate tax or Corporation tax is a direct tax levied on the net income of the organization. Both private and public companies who are registered under Companies Act of 1956 are liable to pay Corporate tax.
% of Corporate Tax charged as per the income are:
|Rs 1-10 crore||5 %|
|> 10 crore||10 %|
Education cess of 3% is charged on the sum of Income tax and surcharge, disregarding the level of income.
In case of foreign companies, royalty from sale of capital assets or fees received by them for technical services are subjected to tax at the rate of 50%. Surcharge of 2% is imposed if the income is between ₹ 1 and 10 crore and exceeds to 5% if the income is more than 10 crore.
Marginal relief is provided to both foreign and domestic companies if the net income exceeds Rs 1 crore and Rs 10 crore.
Examples of Corporate Tax:
Minimum Alternative Tax: It was introduced to bring zero tax companies under income tax bracket.
Fringe Benefit Tax: Organizations pay this tax for the benefits paid to an employee, which consists different range of services and facilities such as telephone reimbursements, concessional tickets or equal contribution of employer in PF of an employee.
Dividend Distribution Tax: It is a tax which is imposed on any amount declared, distributed as dividend by the domestic organization. International organizations don’t need to pay this tax.
Securities Transaction Tax: It is a tax which is imposed on transaction of securities. No surcharge is levied on it.
Wealth tax was levied on net wealth owned by the taxpayer. It was to be paid as 1% on the net wealth in excess of Rs 30 lakh. Taxability of an asset would be determined on the basis of residential status and location of the asset. Wealth tax has been abolished by the central government on 31st March,2016.
Reasons of Abolishment:
1.Indian taxes are very complicated and therefore prone to legal actions, as per the experts. So to reduce the complication and increase transparency in the taxation, wealth tax has been abolished by the Government.
Awareness was very low about wealth tax among the assessees, due to which very less population used to pay the wealth tax.
Additional reporting of assets and liabilities was required in filing income tax returns.
Revenue collection has been increased for government after replacing wealth tax with an additional surcharge.
Capital Gains tax:
Capital gains tax is charged on profits earned from the sale of assets like stocks, mutual funds, machinery, jewellery and real estate. Capital gains can’t be applied on assets which are inherited, as there is no sale; but if the property is sold by the inherited person then Capital Gains Tax will be applicable.
Assets which are not considered under Capital Gains Tax are:
1.Agricultural land in village
Personal goods such as clothes and furniture
Stocks,consumables held for business or profession
Gold deposit bonds issued under gold deposit scheme, 1999
Special bearer bonds, 1991
Calculating method: Capital gains = Money received from sale of assets - Cost of Capital Investment.
Long term capital gains and short term capital gains:
The profit earned on asset which has been sold after 36 months of holding is termed as long term capital gain and the profit earned on an asset which has been hold for less than 36 months is termed as short term capital gain.The criteria of 36 months has been reduced to 24 months from the FY 2017-2018 onwards.
Tax on Long term and Short term Capital gain:
Long term capital gain is taxable at 20%in addition to surcharge and education cess.
Short term capital gain is taxable at the rate of 15% if security transaction tax is applicable. If it is not applicable, then short term capital gain will be added to income tax return and taxed as per the income slab.
Indirect taxes are the taxes which are paid indirectly to the government as it is passed on from consumer to retailer or producer in the form of taxes paid for the product and then remitted to the government; whereas in Direct Taxation, the individual immediately pays to Government. For example, Income Tax and any admission fees to national park is a clear example of Direct Tax whereas import duties, taxes on fuel, liquor and consumption tax like VAT (Value added tax) are examples of Indirect Tax. Indirect taxes are levied by the government for revenue generation. These taxes are levied equally upon taxpayers irrespective of income levels, that’s why these taxes are considered regressive as people with lower incomes end up paying the same amount of taxes which higher income people are paying.
Types of Indirect taxes are :
Excise Duty:Excise tax or duty is charged on the goods which are produced in the country. It is levied on sale or manufacturing of goods. The term “excisable goods” refers to the goods which are mentioned in First schedule and Second schedule of the Central Excise Tariff Act, 1985 subjected to duty of excise and includes salt.
The term “manufacture” is inclusive of any process which is mentioned in the First and Second schedule of the Central excise and Tariff act, 1985 or which involves packing or repacking of goods in labelled or re-labelled containers including the price declaration or change of price or adoption of any other methods to make it marketable to the consumer. The Central excise rules states that the person who produces excisable goods or stores them in the warehouse is liable to pay the duty imposed on such goods. No excisable goods can be sold and transferred from one place to another unless duty isn’t paid.
Central Board of Excise and Customs functions under the Union Ministry of Finance’s Department of Revenue, established in 1855 by George Robinson, the then British Governor General of India. CBEC has been formed for the administration and management of custom laws in the country as well as for the collection of land revenue. The responsibilities of CBEC are:
Formulation of policy for imposing and collecting custom and excise duty
Managing Custom, Narcotics and Central excise as per the set standards
Preventing the goods from smuggling
The subsidiary organizations that work under the CBEC are:
Central Excise commission rates
Central revenue control laboratory
There are several products on which excise duty is levied:
Live animal and its products such as meat, fish, crustaceans, molluscs, honey, edible products of animal origin
Vegetable products which includes live trees and other parts of plants such as bulb roots, cut flowers, tubers and edible vegetables
Edible fruits and nuts, tea, coffee, spices, industrial or medicinal plants
Products made from renewable sources such as products created from precious metals and other chemicals
Effect of FY 2017-2018 on Excise Duty:
In the budget of 2017, there were a number of changes made in the Central excise duty rates for different kinds of goods which were enforced from February 2017.
No changes were made for chapter 1-20, Chapter 22 and 23.
Excise duty has been increased for products of tobacco along with duty per machine on monthly basis.
No changes were made for Chapter 25 to 30.
In chapter 31, goods which come under section 3101 of Central Excise tariff are not levied for any central excise duty. In some cases a 1% of concessional tax could be levied.
For catalyst and resin which are used in manufacture of wind operated electricity generator, excise duty is exempted in Chapter 38 and 39.
Solar tempered glass, which is used in the manufacture of solar photovoltaic cells, are exempted from excise duty in Chapter 70.
Excise duty is of three types:
Additional duty of excise
Special Excise duty
Custom duty is levied on all goods which are imported and exported out of the country. Duties imposed on exported goods are termed as export duty while duties imposed on imported goods are referred to as import duty. This duty is levied on goods to raise revenue and protect the domestic companies from International competitors. Custom duty is imposed on the basis of weight, dimensions and other factors. If duties are levied on the value of goods, they are termed as Valorem duties, while weight based duties are termed as specific duties. If duties are levied based on combination of value and other criteria, they are known as compound duties.
In India, Custom duty has been regulated under Customs Act, 1962 and authorize government to impose duty on imports and exports, prohibition of export and import of goods, to look after procedure of importing, exporting and penalise where ever required. CBEC (Central Board of Excise and Customs) takes care of all matters of Custom duty. Any policies related to Custom duty evasion, prevention of smuggling, administrative decisions related to custom formations are formulated by CBEC. CBEC also takes care of the tax management for foreign and inland travel.
Custom duty is imposed on almost every good that is imported to the country,. Export duties are only imposed on few goods as mentioned in Schedule 2. The items which are exempted from custom duty are life-saving drugs, equipments, fertilisers, food grains etc. Import duties can be further classified into:
Basic custom duty: It is applicable on all the imported items which come under the horizon of Section 12 of Custom Act, 1962 and imposed at the rates as suggested in the first schedule of Custom Tariff Act, 1975 under the Section 2 of the act. The rates might be standard or favourable based on the country from where the goods have been imported.
Countervailing duty or Additional Custom Duty: This duty is imposed on items which come under section 3 of Custom Tariff Act, 1975 which is equivalent to Central Excise Duty, imposed on goods manufactured in India. This duty is calculated on total value of goods including basic custom duty and landing charges.
Protective Duty: Protective duty is levied for protecting domestic industry from imported goods at the rate prescribed by the Tariff Commissioner.
Education Cess: Education cess is imposed at 2% where as higher education cess is levied at 1% of the total of all custom duties applied.
Anti-dumping Duty: Dumping is the process where an organization exports a product at a lesser price from the one at which it’s getting sold in home market. For example, the government recently imposed an anti-dumping duty on aluminium foil getting imported from China Market to protect domestic industry. So, anti-dumping duty is a protectionist tariff which a domestic government puts on imports which they think are priced below the fair market price.
Safeguard duty: This duty is imposed on import of goods which are manufactured in India but their cost is high as compared to imported goods.This has been levied by the government to protect the domestic manufacturers from getting harmed.
Custom Duty Calculator: Custom duty calculator can be found on ICEGATE (Indian Custom Electronic E-commerce) portal. After logging in to the portal, fill the HS or CTH code of the importing good, write the description of the good in maximum 30 characters and finally country of origin needs to selected to search for the item that matches the criteria of goods you are searching for, then the information regarding the custom duty will be accessible.
Online Custom Duty Payment:
Visit the ICEGATE e-payment portal.
Fill the import or export code as required or the login details given by ICEGATE.
All the unpaid challans under your name will appear. Select the challan and payment method.
Make the payment after getting directed to payment gateway.
Save the copy by clicking on the print option.
Sales tax is an indirect consumption tax paid to the governing body for the sale of goods and services at retail, which is charged at certain percentage of the value of the product from the consumer, collected by the retailer and passed on to the government. Sales tax is an additional amount of money which is paid on purchase of goods and services.
Sales Tax can be calculated as : Total sales tax = cost of items x Sales tax rate
Types of Sales Tax:
Retail Sales Tax: It is charged on the retail goods and directly paid by the consumer.
Manufacturer’s sales tax: This tax is imposed on the manufacture of certain goods.
Wholesale sales tax: This tax is imposed on the sale or manufacture of wholesale goods.
Use tax: This tax is imposed on certain goods which are purchased without sales tax.
VAT: VAT or Value Added Tax is imposed when the commodity is sold to the consumer. It is a prominent part of GDP of any country. VAT is a multi stage tax as it is imposed at every every stage of production of goods and services which are sold to the consumer. VAT is applicable on both local as well as imported products. A person who is earning more than 5 lakhs per annum from the supply of goods and services is liable to register for VAT payment.
Importance of VAT in India:
In VAT, the same kind of goods are taxed equally. For example a double door fridge from any company will be taxed the same.
It reduces the chances of false compliance and tax evasion.
It made the taxation process transparent and easier as tax is levied at each stage of the production process.
VAT is helping India to participate in global trade practices as it is a globally accepted taxation system.
VAT is a significant instrument for consolidating tax of the country which also helps in solving fiscal deficit issue to an extent.
Calculation: VAT can be easily calculated by deducting Input tax from output tax. VAT= Output tax - Input tax
How is VAT implemented in different parts of India??
VAT enforcement comes under state governments, so different states have different rules and guidelines of implementation.
VAT is divided into four sub-heads:
NIL VAT rate: In some states, the items which are sold by the unorganized sector in natural form get exempted from VAT such as salt, khadi.
1% VAT Rate: For items which are quite expensive, 1% VAT rate is applied on the price so that the VAT amount doesn’t get high for such items. Mostly items such as gold, silver and precious stones fall under this VAT rate.
4-5% VAT: Daily consumptions goods like tea, coffee fall under this category.
General VAT rate: This rate applies to those goods which can’t be put under any of the above three categories. For example, goods like liquor, cigarettes are charged at a higher rate of 12.5% or 14 to 15%.
DIfference between VAT and Sales Tax:
Both the taxes work differently as sales tax calculation is simple while VAT is a multi stage form of tax and it is quite complicated.
Key differentiating points:
VAT is imposed on both producer as well as consumer of goods and services while sales tax is taken entirely from consumer.
VAT is a multi stage process and is imposed at every step of production while sales tax is levied from customer during final purchase of goods and services.
VAT is more transparent and well organized and hence generates more revenue for the government.
Collection of VAT increase burden on producers which ultimately gets charged from consumers.
Central Sales Tax:
It is an indirect tax that is required to be paid for the goods that are sold via interstate trade and is payable in the state where the product is sold.
To formulate policies for determining the occurrence of sales and purchase of goods with remission to interstate commerce.
To categorize goods as essential for trade and commerce.
For establishing an authority to settle interstate trade disputes.
Provision of collection and distribution of the taxes accumulated via interstate sales of goods and products.
Central Sales Act,1956:
The role of CST is to eliminate any sort of confusion regarding inter-trade tax in all states of India collectively. This tax came into existence by the act of parliament and was approved in the year 1956 for the regulation of sales of commodities and taxes. Though CST is imposed by the Central Government and falls under union list of seventh schedule, yet it is administered by the state where sale occurs. So here a trader who is dealing in inter-state trade of goods is required to pay sales tax to both the states as well as central sales tax for such transactions.
Sales tax falls under the extent of Central Sales Tax Act, 1956, which covers the whole of India and specifies the rules and regulations guiding sales tax. CST was established in the sixth constitutional amendment and it introduced the taxes on sale and purchase of goods in interstate trade under the ambit of legislative administration of parliament. This act became the cornerstone of Central Sales Act and came into effect in 1957. It completely defines inter-state trade, penalties involved in it, goods significant for inter-state trade, and other information which are related to CST.
Rules of Central State Tax:
Even if an applicant has multiple business in a state, only one application will be entertained.
Registration certificate should be placed at the main site of business, rest all copies of registration can be kept at other locations of business.
An applicant needs to make payment for court fee stamps in case he or she has lost the certificate of registration for getting duplicate copy.
The dealer needs to submit Form A for getting registered under section 7 where the application needs to be signed by the proprietor and should be verified by an experienced authority.
Process of registration of CST:
For CST registration, acquiring TIN registration number is the first step, after which the applicant needs to fill the forms and pay registration fees.
Following are the documents which are required for the process of CST registration:
Address proof of the company.
Exemptions on CST:
If the goods have been returned within 180 days, no CST needs to be paid.
CST is exempted if the sale in a particular state is exempted.
If the outward freight has been charged separately and outward insurance of the goods get passed on to the buyer, CST is excluded in such cases.
The tax on total income which has been earned in a year from different sources such as salary, business, profession, rent etc is known as advance tax and it needs to be paid before the end of the financial year.
Some of the income sources which are liable to pay for advance tax:
Shares income received through capital gains.
Interest earned via Fixed deposits.
Earnings from Lottery
Rent earned from the property.
Benefits of Advance Tax:
Tax collection process takes less time due to this.
It helps government in increasing their funds.
Businesses can manage their finances well through this form of tax and it will also help them to know about their earnings in the year.
If the income tax department finds that the person has paid more tax than required, then excess amount will be refunded to them.
Senior citizens of 60 years and above who don’t own any business.
People whose business turnover is more than two crores.
Doctors, architects who could provide annual receipt of maximum 50 lakh, came under this scheme in 2016-17.
Advance tax online payment:
The advance tax can be paid online on official government website (www.incometaxindia.gov.in) by selecting the right challan and filling all required details over there.
Self Assessment Tax:
Self assessment tax is required to be paid when the individual has left out any source of income while doing final payment of Income tax in the form of advance tax or if TDS has not been deducted or if deducted at a lesser rate against the higher rate which is applicable for income tax filing. For example, if an employee has missed out on earnings from any bonds which have not been mentioned to the employer thinking that it doesn’t come under tax deduction ambit, this is where self assessment tax comes into picture. It is paid for a particular financial end.This tax can be paid online on official website (www.incometaxindia.gov.in) by choosing the option “e-pay taxes”.
Depending on the tax rate and tax base and the method of taxation, there are four major types of taxations, namely, proportional taxes, progressive taxes, regressive taxes and digressive taxes.
The tax system is said to levy proportional taxes when the rate of tax remains constant while the tax base keeps changing. Here, the tax base may refer to income, wealth, money value of the property owned etc. Income tax is considered to be the primary tax base since it can be used to determine the absolute taxable capacity of an individual. Under the proportional tax system, the taxes alter in a directly proportional manner which implies that if the income is doubled then the tax amount is also doubled.
A taxation system is considered to be progressive if the tax rate keeps increasing. Under the progressive taxation system, the tax amount increases at a higher rate than the increase in the tax base. An increase in the progressive tax can happen when there's an increase in the tax base as well as the tax rate. Since the progressive tax is calculated by multiplying the tax base with tax rate. A progressive tax rate increases with an increase in the income.
A regressive tax system suggests that with the increase in tax rate, the tax base must increase. Under regressive taxation, the absolute tax levied on higher income increases. However, in relative terms, the tax rate declines on the higher levels of income and the tax burden is relatively higher on the poor than the rich. This type of taxes reduces the burden on people with a higher ability to pay and shifts it to people with a lower ability to pay. Examples of such taxes include the tax levied on tobacco. The poor pay around 583% more taxes than the wealthy. Due to the nature of this form of taxation, it is considered to be unjust and causes the polarization of wealth in the society.
Under the digressive tax system, the tax rate declines with an increase in the absolute amount of tax chargeable. The tax rate increases initially with an increase in income but with a further increase in income, the tax rate remains constant. Tax payable increases at a diminishing rate.