Taxation Laws of India – An Overview
India is one of the fastest developing countries belonging to the continent of Asia. And is holding the potential to becomes one of the leading markets of the world as per the experts reports and predictions.
Taxes are the government’s most significant and greatest source of revenue. The money received through taxes is used by the government for a variety of programmers aimed towards the nation’s growth. India’s tax system is well-organized, with a three-tier federal framework.
The central government, coupled with the state governments, and the local authorities and municipal bodies make up the tax structure. When it comes to taxes in India, there are two types: direct and indirect taxes as mentioned and discussed below.
The Income tax, capital gain tax, corporate tax, gift tax, and such others are examples of direct taxes, whereas indirect taxes include the GST or the Goods and Services Tax, VAT or the value-added tax, service tax, customs duty, and other indirect taxes. But many of them has been subsumed from the inception of GST.
This article would give you an overview on the taxation laws of this country in the simplest manner.
Tax Laws of India
The tax laws or taxation laws of India can be divided into two majorly and this would include:
- Direct Tax Laws
- Indirect Tax Laws
In India, direct taxes are imposed on your income or earnings or theprofits, while indirect taxes are imposed on your expenditure incurring or the spending. The earning party, whether an individual, an HUF, or a corporate company, would be held responsible for depositing the direct tax liability.
Indirect taxes are mostly collected by entities and corporate companies that provide services and products. As a result, these entities are responsible for depositing indirect taxes.
Let us discuss this in detail:
Direct Tax Laws
Individuals, HUF and corporate companies are all subject to direct taxes. These taxes can’t be passed on to anybody else. The income tax is the most important sort of direct tax for individual taxpayers. This tax is imposed once a year during the assessment period on the earning made by you during the relevant financial year which starts on the 1st of April a year and ends on 31st of March in the succeeding year.
If your yearly income exceeds the minimal exemption level, you must pay income tax, according to the Income Tax Act of 1961 and its prescribed slab rates. Various parts of the Act provide tax advantages. Before we discuss tax benefits, it’s critical that you understand your income tax bracket.
Types of Direct Taxes
In India, direct taxes make for about half of the government’s revenue. Income tax isn’t the sole direct tax, though. The following are the several forms of direct taxes that apply in India:
- Personal Income Tax
- Tax on Capital Gains
- Corporate Income Tax
Except for capital gains and earnings from business and profession, the income tax applies to any income earned by an individual or a HUF. The appropriate slab rates for the Assessment Year are used to calculate income tax.
The slab rates are announced in the annual budget by the national government.
You can also use section 80C to minimise your taxable income by making tax-saving investments and expenses.
Individuals in India earn a wide variety of incomes. As a result, it is critical to impose a tax on you depending on your earnings, with the tax proportion differing if someone makes more. The Income Tax Act categorises different income levels and imposes varying rates based on the categorization. The various categories are referred to as tax slabs. Your tax bracket is determined not just by your income but also by your age. The income-tax slabs are changed every year at the Central Government’s Budget Session.
The other types of Direct Tax have been discussing below:
1. Capital Gains Tax
Only earnings from the sale of a capital asset are subject to capital gains tax. The tax rate on capital gains is determined on the kind of the gain made by the assessee. The capital gains tax is divided into two classes or types under the Income Tax Act of 1961:
- Capital Gains Tax on Short-Term Gains
- Capital Gains Tax on Long-Term Gains
Short-term capital gains occur when assets are sold within a certain time frame, such as:
- a) Stocks that were sold within a year of acquisition
- b) Units of debt mutual funds that have been sold within a period of 36 months after acquisition.
- c) Gold or real estate sold within a period of 36 months from the date of acquisition.
The profits or losses will become long-term capital gains or losses if the asset is sold after the designated time.
Long-term capital gains may be eligible for indexation benefits depending on the kind of asset. Indexation applies the inflationary advantage to your capital gains, lowering your tax obligation.
2. Corporate Tax
The corporate tax is imposed on firms and entities that file returns as a company or corporate. This is likewise a flat charge based on the firm’s turnover. And shall be different to foreign companies.
3. Indirect Taxes
In India, indirect taxes have been the government’s most constant and greatest income stream. Multiple indirect taxes have existed in India’s taxation system, some of which are still in use:
- Service Tax
- Customs Duty
- Tax on Entertainment
- Excise Duty in India
- VAT or the Value Added Tax
- STT or the Securities Transaction Tax
- Stamp Duty
For a huge number of products and services in India, indirect taxes such as service tax, excise duty and value-added tax, have been eliminated or put out. A single Goods and Services Tax or the GST taxation system has replaced several levies or taxes.
Customs duty tax is imposed on products imported into India from other nations, as well as on items exported from India in a few situations.
The Securities Transaction Tax, or the STT, is a tax on financial transactions involving the exchange of securities. Equities, mutual fund units, futures, and options contracts are just a few examples. This tax is imposed on securities exchange transactions as a matter of course. Stamp tax and STT can, however, be paid on securities traded outside of the exchange or over the counter.
Buyers and sellers of securities can take advantage of cheaper short and long-term capital gains taxes on the exchange thanks to STT.
Stamp duty is a tax imposed by a state government on the transfer of assets within its borders. It serves as legal evidence of the asset’s or security’s ownership.
In India, entertainment tax is a state-imposed tax that applies to all transactions involving the entertainment industry. Movie premieres, athletic events, concerts, amusement parks, and theatres are examples of such enterprises and activities.
What is GST?
GST which is the short form used for Goods and Services Tax is an indirect tax that was introduced by the Government of India for replacing all other indirect taxes like Sales Tax, Service Tax, Excise Duty, and so on. GST basically shall be levied on the supply of certain goods and services and is applicable all over the country, India.
In the tax regime, we can say that all the players of the market ranging from the manufacturer to the consumer should pay GST when they undertake the supply of goods or services on which the same is applicable. The manufacturer will be paying GST on the raw materials purchased for production and would then be adding value to the product. The service provider will also have to pay GST on the product along with value-added by the provider on the same, which when coming to the retailer is also same with regard to the products which they have obtained from the manufacturer or distributor for being sold to the consumers. Finally, the consumer will purchase the goods or avail of the services on which they should be paying the GST as per the applicable rates prescribed by the GST Acts in place.
Say, for example, a textile manufacturer purchases yarns of clothing for making shirts on which he or she pays GST. The manufacturer will then add value to this clothing by stitching it into a shirt, which then is given to a warehousing agent who ads a label to the same which again is a value addition. The warehousing agent then distributes this to the retailer who pays GST to the agent and then sells these shirts in small numbers to the final consumers who will again pay GST to the retailer.
As per the two Parliamentary Acts on GST which includes the IGST (Integrated Goods and Services) Act and CGST (Central Goods and Services) Act, all the above said parties paying GST can set off the same with what they have collected from the other party, enabling them to pay only the net amount rather than the gross amount of tax or GST.
Hence, we can say that GST is a comprehensive, multi-stage, destination-based tax. By taking the same example, say that the manufacturer is in Tamil Nadu, while the retailer and the final consumers are located in Maharashtra, the final sale is taking place in Maharashtra, due to which the entire tax revenue would now be going to the state of Maharashtra and not Tamil Nadu, making the same a destination-based tax.
And it is having the following components majorly:
- CGST, i.e., Central Goods and Services Tax which is charged on the intrastate supply of goods and services.
- SGST, i.e., State Goods and Services Tax which is charged along with CGST on the intrastate supply or supply of goods and services within the state.
- IGST, i.e., Integrated Goods and Services Tax which is charged on the inter-state supply or the supply of goods and services between two different states.
- UTGST, i.e., Union Territory Goods and Services Tax levied along with CGST, on the supply of goods and services within any of the Union Territories, including the following:
Andaman and Nicobar Islands, Daman and Diu, Dadra and Nagar Haveli, Lakshadweep, and Chandigarh.
Prior to GST the following taxations were levied on the products and services sold in India,
- Excise Duty
- Entertainment Tax
- Value Added Tax or VAT
- Service Tax
- Central Sales Tax
- Purchase Tax
- Entry Tax
- Luxury Tax.
Many taxes under this were collected by the state like the luxury tax, VAT etc. At the same time Service Tax, Excise Duty were collected by the Central Government.
Exemption on Taxation
A tax deduction is a reduction in income that reduces your tax burden over time. Deductions are costs you spend during the year that can be deducted from your total income to determine how much tax you owe. You may minimise your overall income by taking advantage of a variety of deductions. Here are a few of the most typical ways to claim a tax deduction:
- House Rent Allowance (HRA) – If you live in rented housing, you may be eligible for a tax advantage under HRA. The amount exempted from income tax might be fully or partially exempt.
- Medical Insurance Deduction – If you have purchased a medical insurance policy, the premium you paid for the coverage may be deducted from your gross income, allowing you to save money on taxes (up to a limit).
- Meal vouchers – Some firms, such as Sodexo, may supply you with food coupons. Up to a certain point, such meal tickets are tax-free. Food vouchers are excluded up to Rs 26,400 per year.
- Sections 80C, 80CC, and 80CCD (1) – This is the most common choice, and you’re probably already taking use of it to lower your taxes. This allows you to lower your taxable income by investing in tax-advantaged investments.
- Tax Saving Investments – You can lower your taxable income by investing in certain securities. The term “tax saving investment” refers to an investment strategy that decreases your taxable income. Even the Indian government provides a few tax-saving options, such as the National Pension Scheme, Public Provident Fund (PPF), and others. Life insurance premiums or term insurance premiums, Tax Saving Fixed Deposits, Equity Linked Savings Schemes (ELSS), Employee Provident Fund (EPF), and other tax-saving investments are also popular.
Thus, we can now conclude that the Indian Taxation System is vast and what we have depicted here is only a simple and small overview for understanding purpose. The basics we have discussed here ensures us that the system allows us to pay tax only on what we have earned and even provide various relaxations through the provisions and sections depicted.