The
tax on incomes, customs duties, central excise and service tax are levied by
the Central Government. The state Government levies agricultural income tax
(income from plantations only), Value Added Tax (VAT)/ Sales Tax, Stamp Duty,
State Excise, Land Revenue, Luxury Tax and Tax On Professions. The local bodies
have the authority to levy tax on properties, octroi/entry tax and tax for
utilities like water supply, drainage etc.
DIRECT
TAXES
Individual
Income Tax & Corporate Tax
The
provisions relating to income tax are contained in the Income Tax Act 1961 and
the Income Tax Rules 1962. The Income Tax Department is governed by the Central
Board for Direct Taxes (CBDT) which is part of the Department of Revenue under
the Ministry of Finance. In terms of the Income Tax Act, 1961, a tax on income
is levied on individuals, corporations and body of persons. Tax rates are
prescribed by the government in the Finance Act, popularly known as Budget,
every year. The Government of India has recently taken initiatives to reform
and simplify the language and structure of the direct tax laws into a single
legislation – the Direct Taxes Code (DTC). After public consultation the Direct
Taxes Code 2010 was placed before the Indian Parliament on 30 August 2010, when
passed DTC will replace the Income Tax Act of 1961. The DTC consolidates the
provisions for Direct Tax namely the income tax and wealth tax. When it comes
into effect, probably April 2012, it is likely to have significant impact on
the tax payers especially the business community.
In
the case of Individuals, incomes from salary, house and property, business
& profession, capital gains and other sources are subject to tax. Women and
Senior citizens are extended some special privileges. Individuals’ incomes are
subjected to a progressive rate system. Tax treatment differs depending on the
residence status. Income of the company is computed and assessed separately in
the hands of the company. Income of company is subjected to a flat rate plus a
surcharge. In addition to these, an education cess is also charged on the tax
amount. Dividends distributed are subjected to special tax and the distributed
income is not treated as expenditure but as appropriation of profits by the
company. Tax treatment differs depending on the residence status. A company is
liable to pay tax on the income computed in accordance with the provisions of
the Income Tax Act. Although many companies have huge profits, and declare
substantial dividends, they are relieved from tax liabilities because their
income when computed as per provisions of the Income Tax Act is either nil or
negative or insignificant. Therefore a provision called Minimum Alternative Tax
(MAT) was introduced by an amendment in 1997. As per the MAT provision such
companies are required to pay a fixed percentage (presently 18% for 2011-2012)
of book profit as minimum alternate tax.
Additionally,
by an amendment in 2005 companies are required to pay Fringe Benefit Tax (FBT)
on value of fringe benefits provided or deemed to have been provided to the
employees. In addition to income tax chargeable in respect of total income, any
amount declared, distributed or paid by a domestic company by way of dividend
shall be subjected to dividend tax. Only a domestic company is liable for the
tax.
Wealth
Tax
Wealth
tax, in India, is levied under Wealth-tax Act, 1957. Wealth tax is a tax on the
benefits derived from property ownership. The tax is to be paid year after year
on the same property on its market value, whether or not such property yields
any income. Similar to income tax the liability to pay wealth tax also depends
upon the residential status of the assesses. The assets chargeable to wealth
tax are Guest house, residential house, commercial building, Motor car,
Jewelry, bullion, utensils of gold, silver, Yachts, boats and aircrafts, urban
land, cash in hand (in excess of INR 50,000 for Individual & HUF only),etc.
But in reality majority of the potential tax payers do not pay this tax as most
of the movable items such as jewelry, bullion etc are stashed away from
accounting. Invariably they just pay tax for the immovable wealth such as real
estate.
Capital
Gains Tax
The
central government also charges tax on the capital gains that is derived from
the sale of the assets. The capital gain is the difference between the money
received from selling the asset and the price paid for it. To restrict the
misuse of this provision, the definition of capital asset is being widened to
include personal effects such as archaeological collections, drawings,
paintings, sculptures or any work of art.Capital gain also includes gain that
arises on “transfer” (includes sale, exchange) of a capital asset and is
categorized into short-term gains and long-term gains. The Long-term Capital
Gains Tax is charged if the capital assets are kept for more than three years
or 12 months in the case of securities and shares that are listed under any
recognized Indian stock exchange or mutual fund. Short-term Capital Gains Tax
is applicable if the assets are held for less than the aforesaid period. In
case of the long term capital gains, they are taxed at a concession rate.
Normal corporate income tax rates are applicable for short term capital gains.
In case of the short term and long term capital losses, they are allowed to be
carried forward for 8 consecutive years.
INDIRECT
TAXES
Excise
Duty
The
central government levies excise duty under the Central Excise act of 1944 and
the Central Excise Tariff Act of 1985. Central Excise duty is an indirect tax
levied on goods manufactured in India and meant for domestic consumption. The
Central Board of Excise and Customs under the Ministry of Finance, administers
the excise duty. Central Excise Duty arises as soon as the goods are
manufactured. It is paid by a manufacturer, who passes on its incidence to the
customers. Excisable goods have been defined as those, which have been
specified in the Central Excise Tariff Act as being subjected to the duty of
excise.
There
are three main types of excise duty -
•
Basic Excise Duty is charged on all excisable goods other than salt at the
rates mentioned in the said schedule
•
Additional Duties of Excise is charged on goods of special importance, in lieu
of sales Tax and shared between Central and State Governments
•
Special Excise Duty is charged on all excisable goods on which there is a levy
of Basic excise Duty. Every year the annual Budget specifies if Special Excise
Duty shall be or shall not be levied and collected during the relevant
financial year.
Customs
Duty
Customs
duty in India falls under the Customs Act 1962 and Customs Tariff Act of 1975.
Customs duty is the tax levied on goods imported into India as well as on goods
exported from India. Taxable event is import into or export from India.
Additionally educational cess is also charged. The customs duty is evaluated on
the value of the transaction of the goods. The Central Board of Excise and
Customs under the Ministry of Finance manages the customs duty process in the
country. The rate at which customs duty is applicable on the goods depends on
the classification of the goods determined under the Customs Tariff. The
Customs Tariff is generally aligned with the Harmonized System of Nomenclature
(HSL). It should be noted that preferential/concessional rates of duty are also
available under the various Trade Agreements.
Service
Tax
Service
tax was introduced in India way back in 1994 and started with mere 3 basic
services viz. general insurance, stock broking and telephone. Subsequent
Budgets have expanded the scope of the service tax as well as the rate of
service tax. More than 100 services are subjected to tax under this provision.
An education cess is also charged on the tax amount. The Central Board of
Excise and Customs under the Ministry of Finance manages the administration of
service tax.
Every
service provider of a taxable service is required to register with the Central
Excise Office in the concerned jurisdiction. Exemptions are available for
services that are exported, small service providers whose revenue fall below
the prescribed level, services provided to UN and International Agencies and
supplies to SEZ(Special Economic Zones). Subject to conditions, service tax is
not payable on value of goods and material supplied while providing services.
Securities
Transaction Tax (STT)
Transactions
in equity shares, derivatives and units of equity-oriented funds entered in a
recognized stock exchange attract Securities Transaction Tax. Service Tax,
Surcharge and Education Cess are not applicable on STT. Taxation of profit or
loss from securities transactions depends on whether the activity of purchasing
and selling of shares / derivatives is classified as investment activity or
business activity. Treatment of STT also depends upon whether the income from
these securities transactions are included under the head “Income from Capital
Gains” or under the head ‘Profits and Gains of Business or Profession’.
STATE
TAXES
Apart
from the central taxes, the states also levy taxes on various good and
services. Main state taxes consist of:
Value
Added Tax (VAT)
Sales
tax charged on the sales of movable goods has been replaced with VAT in most of
the Indian states since 2005. This was introduced to counter the rampant double
taxation issues and resultant cascading tax burden that occurred due to the
flaws inherent in the previous sales tax system.
VAT,
chargeable only on goods and does not include services, is a multi-stage system
of taxation, whereby tax is levied on value addition at each stage of
transaction in the supply chain. The term ‘value addition’ implies the increase
in value of goods and services at each stage of production or transfer of goods
and services. VAT is a tax on the final consumption of goods or services and is
ultimately borne by the consumer. VAT comes under the state list. Tax payers
can claim credit for the taxes paid at earlier stages and purchases known as
Input Tax Credit, by producing relevant tax invoices. The credit can be used to
setoff any VAT tax liability.
Different
rates of VAT are charged depending on the category to which the goods belong.
Rates vary for essential commodities, bullion and valuable stones, industrial
inputs and capital goods of mass consumption, and others. Petroleum tobacco,
liquor and so on are subjected to higher rate and differ from state to state. Notably,
there is no VAT on imports and export sales are not subjected to VAT. Therefore
VAT charged on inputs purchased and used in the manufacture of export goods or
goods purchased for export, is available as a refund.
Stamp
Duty
It
is a tax that is levied on the transaction performed by means of a document or
instrument as per the regulations of Indian Stamp Act, 1899. It is collected by
the government of the state where the transaction is carried out. Stamp duty
rates vary between the states.
Stamp
duty is paid on instruments, which are essentially a document to create,
transfer, limit, extend, extinguish or record a right or liability. Document acquires legality once it is stamped
properly after the payment of the requisite stamp duty charges. Stamp duty is
payable for transfer of shares, share certificate, partnership deed, bill of
exchange, shares, share transfer, leave and license agreement, debentures, gift
deed, bank guarantee, bonds, demat shares, development agreement, demerger,
power of attorney, home loans, houses & house purchase, lease deed, loan
agreement and lease agreement.
State
Excise
Power
to impose excise on alcoholic liquors, opium and narcotics is granted to States
under the Constitution and it is called ‘State Excise’. The Act, Rules and
rates for excise on liquor are different for each State. In
addition to the above taxes by the Central and State Governments the local
bodies have the authority to levy tax on properties, octroi/entry tax and tax
onutilities
OTHER
KEY NOTES
Filing
of VAT, CENVAT, Service Tax returns
Periodic
returns must be submitted by companies registered for CENVAT or VAT/CST or
Service Tax in India.
•
CENVAT filings are monthly, on the 10th day following the period end.
•
VAT reporting is either monthly or quarterly, depending on the particular
State’s rules.
•
Service Tax filings are bi-annual.
Permanent
Account Number (PAN)
PAN
is an all India, unique ten-digit alphanumeric number, issued in the form of a
laminated card by the Income Tax Department.
Every
person,—
•
if his total income or the total income of any other person in respect of which
he is assessable, during any previous year, exceeded the maximum amount which
is not chargeable to income-tax; or
•
carrying on any business or profession whose total sales, turnover or gross
receipts are or is likely to exceed INR 500,000 in any previous year; or
•
Who is required to furnish a return of income or
•
being an employer, who is required to furnish a return of fringe benefits
PAN
is increasingly being recognized as a valid Identity Proof across India and a
mandatory document for important transactions such as purchase of property,
motor vehicles, share transactions, opening of bank accounts, obtaining loans,
maintaining deposits etc., therefore any person not fulfilling the above
conditions may also apply for allotment of PAN.
Tax
Deduction at Source (TDS)
The
Income-tax Act enjoins on the payer of specific types of income, to deduct a
stipulated percentage of such income by way of Income-tax and pay only the
balance amount to the recipient of such income. Some of such incomes subjected
to T.D.S. are salary, interest, dividend, interest on securities, winnings from
lottery, horse races, commission and brokerage, rent, fees for professional and
technical services, payments to non-residents etc.
Tax
Collection at Source (TCS)
Tax
is collected at the point of sale. It is to be collected at source from the
buyer, by the seller at the point of sale. Such tax collection is to be made by
the seller, at the time of debiting the amount payable to the account of the
buyer or at the time of receipt of such amount from the buyer, whichever is
earlier. The goods to be subjected to TCS are clearly specified and the type of
buyers, sellers and purpose are clearly defined in the Act. Tax rates vary
depending on the goods.
Double
Taxation Relief
India
has entered into Avoidance of Double Taxation Agreement (DTAA) with 65
countries including countries like U.S.A., U.K., Japan, France, Germany, etc.
The agreement provides relief from the double taxation in respect of incomes by
providing exemption and also by providing credits for taxes paid in one of the
countries. These treaties are based on the general principles laid down in the
model draft of the Organisation for Economic Cooperation and Development (OECD)
with suitable modifications as agreed to by the other contracting countries. In
case of countries with which India has double taxation avoidance agreements,
the tax rates are determined by such agreements and vary between countries.
Unilateral
Relief
The
Indian government provides relief from double taxation irrespective of whether
there is a DTAA between India and the other country concerned, if
1.
The person or company has been a resident of India in the previous year.
2.
The same income must be accrued to and received by the tax payer outside India
in the previous year.
3.
The income should have been taxed in India and in another country with which
there is no tax treaty.
4.
The person or company has paid tax under the laws of the foreign country
concerned.
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