|How To File||What is||How to Calculate|
No matter where you live in the world, the one thing that you can always count on is that you will be paying taxes to the local government. Taxes come in various forms such as state taxes, central government taxes, direct taxes, indirect taxes and so on. For simplicity’s sake, we will be dividing the types of taxes payable in India into two categories – direct taxes and indirect taxes. This differentiation is based on how the tax is being paid to the government. In the following sections, we will discuss in brief the common taxes that an Indian citizen is liable to pay.
What is Tax?
The word tax comes from a Latin word “taxo”. A tax is a compulsory fee or financial charge levied by a government on an individual or an organisation to raise revenue for public works. The collected amount is then used to fund different public expenditure programmes. Failure in payment of taxes or resisting to contribute towards it invites punishment under the pre-defined law.
Types of Taxes
An entity has to pay taxes in various forms. Depending on the manner in which they are paid to the taxation authorities, these taxes are classified into direct and indirect taxes. Let us discuss about both taxes in detail :
- Direct Tax
- The simplest definition of direct tax can be derived from its name which implies that this tax is paid directly by the taxpayer to the government.
- The most common examples of this type of tax in India are Income Tax and Wealth Tax.
- From the government’s perspective, estimating tax earnings from direct taxes is relatively easy as it bears a direct correlation to the income or wealth of the registered taxpayers.
- Indirect Tax
- Indirect taxes are collected a bit differently from direct taxes and these are consumption-based taxes that are applied to goods or services when they are bought and sold.
- The government receives indirect tax payments from the seller of the good/service.
- The seller, in turn, passes the tax on to the end user i.e. buyer of the good/service.
- Thus the name indirect tax as the end user of the good/service does not pay the tax directly to the government.
- Common examples of indirect tax include sales tax, Goods and Services Tax (GST), Value Added Tax (VAT), etc.
Benefits of Paying Tax
Taxes are basically the fuel on which a government runs and provide public services to its citizen. Below-mentioned are the benefits of paying taxes:
- Your payment of taxes ensures that the services provided by the government for all citizens will keep on running without any hassles
- You can use the Income Tax Return documents to apply for a loan or credit card
- The government can fund better civic amenities and utilities for its citizen which in turn helps in improving the standard of living of its people
- The government has to manage a lot of tasks and it needs funds for that. Your funds are also utilised for military funding, infrastructure development, ensuring safety of citizen, administrative services, etc.
Recent Changes in Taxes
The government introduced Goods and Services Tax (GST) in 2017 which is the most important tax reform in independent India till date. Earlier, governments levied various state and central taxes for availing various services or buying different goods. The taxation was complex and contradicting rules enabled some people to evade taxes through loopholes in the system. After the introduction of GST, higher percentage of assessees was brought in the taxation umbrella and it made tougher for evaders to escape from paying taxes.
The Government of India has made various Acts related to taxation and every citizen is liable to comply with the rules mentioned in them failing which strict actions may be taken on them. Below-mentioned are some sections of the taxation laws and penalties imposed for non-compliance:
- As per section 140A (1), if an assessee fails to pay taxes, partially or wholly, on principle amount or interest, he will be considered as a defaulter.
- The assessing officer can impose a penalty amount equal to the arrear as per section 221 (1)
- In case an assessee conceals the income or earning, a fine of 100% to 300% can be imposed on the defaulter under section 271 (C)
- If a defaulter does not respond to a tax notice under section 142 (1) or 143 (2), the assessing officer can ask the assessee to file the return or furnish all details of assets and liabilities in written.
This is the most common type of tax that an individual citizen pays to the government. The concept is pretty simple – a portion of your income is paid to the government every year and this money is used by the government to fund its growth and development activities across the country. In 2015-16, the total income tax collected by the government was more than Rs. 2.86 lakh crores, which accounted for approximately 39% of the total tax collected by the government from all available routes i.e. direct and indirect.
Any individual who is liable to file taxes as a result of having an income is an income tax assessee. However, not all individuals who have an income are actually required to pay taxes. Common reasons for not having to pay taxes include annual income below a threshold level determined by the government from time to time or income from exempted sources such as agriculture. Additionally, an income tax assessee may be responsible for filing tax returns for himself/herself or on behalf of another person depending on specific situations.
Not all individuals are liable to pay the same amount of tax, the rule of thumb is the higher your income, the higher amount of tax you have to pay. In order to ensure that taxation rates and rules are fair rather than uniform, the government uses income tax slabs to determine the rate at which each individual tax assessee is liable to pay income tax. The following is the current (FY 2017-18) tax slab rates for Indian residents aged less than 60 years.
Table1. Tax Slab applicable to the individual tax payers below 60 years of age for FY 2018-2019*
|Total Annual Income (Taxable)||Applicable Rate of Income Tax|
|Rs. ₹ 2.5 lakhs or less||Tax Exempt|
|Rs. ₹ 2.5 lakhs to Rs. ₹ 5 lakhs||5% on amount exceeding Rs. ₹ 2.5 lakhs|
|Rs. ₹ 5 lakhs to Rs. ₹ 10 lakhs||Rs. ₹ 12500 + (10% on amount exceeding Rs. ₹ 5 lakhs)|
|Over Rs. ₹ 10 lakhs||Rs. ₹ 12500 + Rs. ₹ 50000 + (30% on amount exceeding Rs. ₹ 10 lakhs)|
*The above table is for illustrative purposes only.
Apart for the applicable tax level, surcharge and cess are applicable in case certain threshold income levels are exceeded.
Those who have taxable income in excess of Rs. ₹ 2.5 lakhs are liable to pay income tax as per their applicable slab. However, there are a few tax savings options that can be used to reduce the income tax payable by the individual. Examples of such deductible expenditures include ELSS, Mutual Funds, PPF, EPF, tax saver fixed deposits, post office saving schemes, life insurance, health insurance and others. A majority of these deductible expenditures are available under sections 80C and 80D of the Income Tax Act, 1961.
Tax Deducted at Source or TDS is considered to be one of the most common ways a salaried individual’s tax is paid by the employer to the government. In this case, investment declarations provided during the current/previous year, are used to determine the tax liability of the individual and this amount is equitably distributed and deducted from the salary payable every month. In case further deductions are availed by the individual at a later date, the excess TDS with interest (if applicable) is refunded to the employee. Other cases of TDS can occur in the case of interest paid on fixed deposits. In this case also, the tax assessee can get a refund after filing the Income Tax Return (ITR).
In case a taxpayer has overpaid his/her income tax as a result of excess TDS deducted by the employer or incorrect advance tax calculation, he/she is liable to receive an income tax refund from the Income Tax Department. However, this refund can be claimed only in case the taxpayer has filed the ITR. Such refunds may include interest payable to the individual based on the amount refunded to the individual taxpayer.
After the end of each financial year, individuals whether salaried or self-employed, are required to submit their income tax returns or ITR. This document provides a snapshot of the taxpayer’s annual earnings from various sources, tax saving investments/expenditure, total tax liability, TDS/advance tax paid and some other data depending on whether the person filing the ITR is salaried or self-employed. After submission of ITR, the Income Tax Department issues an acknowledgment number and the assessing officer checks accuracy of the ITR filed before issuing refunds or seeking explanations if any from the assessee.
As with any type of notice sent out by the government, an Income Tax Notice is often believed to be a bad sign. Where in fact, all it might be is a clarification request regarding some aspect of your ITR. Earlier such notices were sent out using the postal system, but over the years, this has changed and with the advent of e-Filing, the Income Tax Department sends out emails that ask you to log on to your e-Filing account and view the notice you have received. No matter what, such a notice must never be ignored and responded to in the prescribed manner. If the IT Department does not get a response from you subsequent to sending out multiple notices, they can initiate criminal proceedings against you or fine you depending on the severity of your situation.
Considered to be the greatest tax reform that India has undergone since its independence, the Goods and Services Tax or GST is all set to be implemented from July 2017. This indirect tax is designed to provide uniformity to taxes levied on products and services across India. To that effect, the GST will replace all other taxes levied by the state and central governments. As per currently available data, goods and services will be taxed according to specific rates of 0%, 5%, 12%, 18% or 28%, while a few other goods/services have been classified as exempt.
This was one of the leading indirect taxes of the pre-GST era in India and this is pretty common all over the world. VAT is applied whenever there is a value-addition to the inputs/raw materials used in order to produce the final product for sale. If a certain product is bought and sold multiple times as raw material or semi-finished product till it is available as the final product, the VAT will be applicable in each downstream step provided there is a value-addition activity involved.
This is an indirect tax levied on the sale of goods or services and is an integral tax during the pre-GST period. As opposed to VAT, sales tax is considered to be an ad -valorem tax as it is computed based on the gross value of the sale even if there is no value addition. Sales tax is often considered to be a tax on tax or double taxation situation as it is levied every time a good or service is sold irrespective of whether there has been an increase in value or not.
Introduced in India as part of the Finance Act, 1994, the service tax is best defined as an indirect tax payable to the government by a pre-determined group of service providers. These service providers subsequently pass this tax on to their customers. Some of the common examples of establishments that charge customers service tax include hotels, restaurants, mobile connection providers, etc.
- Entry tax is the tax implemented on the movement of goods from one state to another by the recipient state.
- This tax is implemented on dealers, companies, clubs, firms, societies, industrial or commercial undertaking, etc.
- Entry tax has now been subsumed into GST as per the current arrangement.
- Infrastructure cess is levied by the central government on goods specified in the Eleventh Schedule.
- Vehicles such as small petrol, LPG, CNG cars attract a cess of 1% whereas small diesel cars attract a cess of 2.5% and SUVs and high engine capacity vehicles attract a cess of 4%.
- This cess was introduced in March 2016 to finance infrastructure products in the country.
- The cess has been subsumed into GST as of now.
Krishi Kalyan Cess
- Krishi Kalyan Cess (KKC) was introduced in 2016 in accordance with the provisions of Chapter VI of the Finance Act, 2015.
- The cess is applicable on all taxable services at a rate of 0.5% of the amount.
- The fund accumulated through KKC would be solely utilized to improve the condition of farmers and provide infrastructure and other services related to agriculture.
- KKC has now been subsumed into GST.
Swachh Bharat Cess
- The Swachh Bharat Cess is levied at a rate of 0.5% on all taxable services.
- The fund is collected directly in the Consolidated Fund of India and is aimed to be used for financing activities related to Swachh Bharat initiative and promote cleanliness in the country.
- This cess has now been subsumed into the GST and is not levied separately.
- The road tax is imposed on all wheeled vehicles for use on public roads.
- It is levied by the state government where the vehicle is bought.
- The tax is one time for private vehicle whereas the tax has to be paid annually for commercial vehicles.
- The tax is calculated considering a number of factors such as engine capacity, cost price, unladen weight, seating capacity, etc.
- The government charges 28% GST and an additional cess depending on the engine capacity ranging from 1% to 15%.
- However, electric cars have a lower tax of 12%.
- Toll tax is the tax imposed by authorities for travelling on a specific stretch of highway.
- The rates are, however, different at different toll plazas as a specific toll plaza maintains a certain part of the highway only.
- Toll rates for all toll plazas are revised every year as per the policies mentioned in the National Highways Fee (Determination of Rates and Collection Rules, 2008).
- The toll tax is exempted for VIPs and dignitaries mentioned in the exemption list.
- Education cess is a type of levy imposed on basic tax amount of the assessee.
- The cess is collected to improve the educational infrastructure in the country.
- Both individual as well as corporate income is subjected to an additional education cess of 2%.
- In 2008, the then government had levied an additional tax of 1% in order to finance secondary and higher secondary education.
- The government has imposed a total cess of 4% on income tax in the name of Health and Education Cess for the assessment year 2019-20.
- Stamp duty is a kind of tax collected by the government under section 3 of the Indian Stamp Act, 1899.
- It has to be paid on time as any delay in the payment invites penalty.
- A document is considered as a legal document and can be considered as evidence when required in case the stamp duty is paid for it.
- A delay in the payment of the stamp duty attracts a penalty ranging from 2% to 200% of the deficit amount.
- Generally, the purchaser has to pay the stamp duty.
- However, in case of property documents, the stamp duty amount is divided between both parties.
- Any tax levied on entertainment activities such as movies, theatres, amusement parks, private festivals, etc. is clubbed under entertainment tax.
- It is levied by state governments and the rate is different for different states.
- Entertainment is covered under list 2 of the Seventh Schedule of the Constitution of India that gives a state to have full authority over such tax.
- It has now been subsumed under GST and a tax of 28% is levied on movies, amusement parks, etc. whereas 18% tax is levied on theatre, drama, circus and Indian classical shows.
- The tax collected on real estate projects along with the land levied by the government is known as the property tax.
- The local government imposes the tax on the present owner of the house.
- The tax is different for different states and the municipal body at the local level is given the authority to collect the tax.
- The liability to pay taxes is completely on the owner of the property.
- The rate also depend on the use of the property whether it is used for industrial purpose or domestic purpose.
- Professional tax is levied on all professions, employment and trades on employees, freelancers, professionals, etc. in case the income exceeds a prescribed limit.
- It is levied by state government and is different in different states.
- As per the Income Tax Act, 1961, it can be deducted from the taxable income.
- The commercial tax department collects this tax and the amount is then transferred to the account of local municipal body.
- This tax is applicable even after the implementation of GST but the maximum cap is limited to ₹ 2,500.
- The tax levied on interests accrued as per the Interest Tax Act, 1974 is known as the interest tax.
- This act was applicable for all scheduled banks whereas co-operative societies were kept out of the ambit of this tax.
- The Act was discontinued regarding the chargeable interest earned after March 31st, 2000.
- The expenditure tax is levied on charges incurred by an individual in case it is a chargeable expenditure.
- It was implemented as per the Expenditure Tax Act, 1987.
- It is applicable in all states and union territories except Jammu and Kashmir.
- The tax applicable is 10 – 15% of the total charges incurred.
- Gifts received by a person are taxed for the recipient under “income from other sources”.
- Gift Tax is mentioned under Section 56(2) (x) of the Income Tax Act, 1961.
- Gifts amounting to less than ₹ 50,000 in a year are exempted from taxation.
- Gifts and money received in marriages are exempted from tax
- Entire sum of money received in addition to ₹ 50,000 without consideration is taxed at 100%.
- Central Excise Duty is a form of indirect tax levied under Central Excise Tariff Act, 1985
- It is levied on goods manufactured in India for domestic consumption
- The manufacturer pays the tax after production of goods when it is sent to the market
- After the implementation of GST, the tax has been subsumed under Goods and Services Tax
- Tax levied on import and export of goods is called customs duty
- It is primarily aimed at controlling and regulating entry and exit of goods
- Customs duty vary from product to product and from time to time in order to protect the domestic industry
- Custom duty depends on various international agreements under WTO, FTA, etc.
- It is the tax levied on income of both domestic and foreign companies and is levied under the Income Tax Act, 1961
- Corporate Tax is imposed on “net income” of a company registered under Companies Act, 1956
- Only the income earned in India is taxed under corporate tax
- Corporate tax rate for domestic companies is 30% and foreign companies is 40%
- A surcharge is also levied on companies depending on their earnings and revenues
Securities Transaction Tax
- Tax levied on value of securities transacted through recognized stock exchanges is called Securities Transaction Tax
- This direct tax is levied and collected by the Central Government
- The tax is levied on products such as stocks, share, bonds, debentures, derivatives, equity oriented mutual funds, etc.
- STT is not imposed on off-market transactions
- STT applicable on redemption of mutual funds or ETFs is 0.025%
- STT charged on sale of MFs or ETFs is 0.001% and is levied only on the seller
Q – Does everyone have to pay tax?
Ans – Yes everyone pays tax to some extent. While some taxes such as income tax come with a minimum exemption limit i.e. no tax is payable if you earn less than a certain amount annually, the same does not apply to indirect taxes such as GST which is applicable at the same rate to all who avail a particular product or service. So in effect everyone has to pay a tax in one way or another.
Q – Who decides the rate of tax in India?
Ans – The final decision of fixing tax rates lies with the Government of India. However, there are several departments and bodies that suggest and implement tax rates and taxes to the government. Some of the major ones are CBDT (Central Board of Direct Taxes) and the GST (Goods and Services Tax) Council.
Q – Name some of the key tax incentives in India?
Ans – The following are some of the key tax incentives available in India:
Start-up India Scheme
Investment-linked tax incentives
R&D expenditure-linked tax benefits
Capital gains tax concessions, concessions on minimum alternate tax, etc.
Q – What is a progressive tax and which tax in India is progressive?
Ans – A progressive tax is best defined as a tax system where the rate of applicable tax increases with an increase in the taxable amount. This is true in case of income tax in India as the rate of taxation termed as the income tax slab rate increases as the income of the tax assessee increases.
Q – Why do governments impose tax?
Ans – The primary goal of imposing taxes such as income tax and goods and services tax (GST) is the generation revenue. This revenue is subsequently channelled into other areas such as maintaining roads and public utilities, national defence funding public welfare initiatives and more.