Tax System in India

“It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture from the Earth to give it back a thousand fold”– Kalidas in Raghuvansh eulogizing King Dalip

The Government in a welfare state takes primary responsibility for the welfare of its citizens, as in health care, education, employment, infrastructure, social security and other development needs. To facilitate these, Government needs revenue. The taxation is the primary source of revenue to the Government for inducing such public welfare expenditure.

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TYPES OF TAXES

Majorly there are two types of taxes namely, direct taxes and indirect taxes. However, apart from these two traditional taxes, there are other taxes also, ‘Other Taxes’ are imposed on both the taxes, direct and indirect tax like the currently launched Swachch Bharat Cess, Infrastructure Cess , and KrishiKalyan Cess among others.

DIRECT TAX

Direct tax is a kind of tax where the incidence and impact of tax fall on the same entity. In the case of direct tax, the burden can’t be shifted by the taxpayer to someone else. These are largely taxes on income or wealth. Examples of direct tax- income tax, property tax, gift tax, inheritance tax, etc.

Income Tax-

It is a tax which is imposed on your income in a fiscal year. There are a lot of aspects to the income tax, like taxable income, reduction of the taxable income, tax slabs, tax deducted at source (TDS), etc. This tax applies to both the companies and individuals. Every year, the Act is amended by a Finance Act passed by Parliament, which includes additions and deletions.

Vastly, income has been divided into five categories:

• Income from salary
• Income from house property
• Profits and gains of business or profession
• Capital Gains
• Income from other sources

The GoI has fixed tax slabs for different groups of people, namely very senior citizens (who have attained an age above 80 years), senior citizens ( who are in the age group of 60 – 80 years), and the general taxpayers.

Tax Slab of Income Tax for Financial Year 2022-23

Tax Slab for HUF and individual taxpayers(both males and females)(not more than 60 years of age)

Tax slab for HUF and individual taxpayers (60 years or more but not more than 80 years) (both males and females)

Tax Slab for Super Senior Citizens (80 years of age or more) (both males and females)

Surcharge Rates Applicable to Income tax for FY 2022-2023

Capital gains Tax- It is applicable or payable whenever one gets a considerable sum of money, can possibly be from sale of any property or from an investment. There are two types of capital gains, that is :

• Long Term Capital Gains(LTCG) – for investment made for a period of more than 36 months.
• Short Term Capital Gains(STCG)- for investments made for a period not more than 36 months.
• The criteria is 24 months for immovable properties such as land, building and house property from FY 2017-18.
• The reduced period of the aforementioned 24 months is not applicable to movable property such as jewellery, debt-oriented mutual funds etc.

Tax Rates –LTCG & STCG

Securities Transaction Tax(STT) –It is a tax levied at the time of sale and purchase of securities listed on Indian Stock exchanges.

Securities are trading investment instruments such as shares, bonds, debentures, equity-oriented mutual funds, etc and are issued either by companies or by the Indian government. The rate of Securities Transaction Tax differs based on the type of security traded.

Perquisites Tax– Perquisites are benefits or privileges received by a person as a result of his/her official position and are over and above the salary. They are both taxable and non-taxable depending upon the nature.

Classification of Perquisites:

• Taxable Perquisites -perquisites taxable in nature are rent free accommodation, supply of gas, water and electricity, reimbursement of medical benefits, etc.
• Exempted Perquisites- non-taxable perquisites include travel allowance, computer/laptop provided for official use, interest free salary loan provided by employer, etc.

Corporate Tax-The income-tax paid by domestic companies, and foreign companies on their income in India is Corporate Income-Tax (CIT)

Meaning of Income of a company-

• Profits earned from the business
• Capital Gains
• Income from renting property
• Income from other sources like dividend, interest etc.

Wealth Tax-Wealth tax is imposed on the wealthier section of the society. The intention of doing so is to bring uniformity amongst the taxpayers. However, it was abolished in the budget of 2015 (effective FY 2015-16)

Gift Tax-As per the law, as it stands today which was amended in 2017, gifts received by any person or persons are taxed to the recipient under ‘Income from other sources’ at normal tax rates.

The Expenditure Tax Act– governs all the taxation related to the chargeable expenditure incurred by an individual in restaurants and hotels. This is applicable and levied in restaurants and in hotels where the room rent is Rs.3,000 and higher.

INDIRECT TAX

The taxes imposed on goods and services are referred to as indirect taxes. It is different from direct taxes as they are not imposed on an individual who shells out them directly to the Indian government, they are, as an alternative, imposed on the products and the individual selling the product collects them.

Sales Tax-The tax imposed on the sale of any product is called sales tax. The product can be anything produced in India or imported and can also cover services provided. It is levied on the product’s seller who then passes it to the individual who buys the said product with this tax summated to the product’s price.

There are 5 types of sales tax in India:

• Retail Sales Tax – Tax applicable on retail goods sale: Final consumer pays it directly
• Manufacturer’s Sales Tax – Tax applicable on manufacturers of defined goods
• Wholesale Sales Tax – Tax applicable on distributors of manufactured goods
• Use Tax – Tax applicable on consumers below the tax paying jurisdiction
• Value Added Tax (VAT) – Tax applicable on all kinds of sales levied by certain state governments.

Value added Tax (VAT)-The VAT was a tax imposed on the prudence of the state government of the country. The VAT is levied on several goods that were sold in the state and the state itself decided the amount of tax.

Goods and Service Tax (GST)- Goods and services tax means a tax on supply of goods and services or both, exempted on supply of alcoholic liquor for human consumption (Article 366 (12A) of Constitution of India).  GST is a value added tax levied on sale or service or both. It is a destination based consumption tax. It brings uniform tax structure all over India. GST is a consumption-based tax because it is chargeable where the consumption is taking place.

Custom Duty- While you buy anything that requires being imported from abroad, you  are applied a charge on it and that is known as the customs duty. It is applied to all the products, which come in by air, sea or land. One can acquire products bought from different countries in India but you will be charged a customs duty. The intention of the customs duty is to make sure the goods that enter the country are taxed and there is no harm to the domestic market.

Excise Duty-An excise or excise tax (sometimes called an excise duty) is a type of tax charged on goods produced within the country (as opposed to customs duties, charged on goods from outside the country). Production or sale of a good is taxable under this. This tax is now known as the Central Value Added Tax. It is compulsory to pay duty on all goods manufactured, unless exempted.

OTHER TAXES-

• Cess Tax- It is a form of tax levied by the government of a country to raise funds for a specific purpose. In India, currently Educational Cess, Swachh Bharat Cess and KrishiKalyan Cess are functional.
• Entertainment Tax-Entertainment tax is levied by the government on commercial shows, movie tickets, sporting events, music festivals, amusement parks, exhibitions, theatre shows, and other private festivals.
• Toll Tax-Toll Tax is the amount you pay to use the expressway or highway anywhere in the country. The government has been constructing better connectivity between different states, which involves hefty amount of money. These expenses are recovered by charging a toll tax from highways.

CONCLUSION

The ability of the end taxpayer to pass the tax burden to someone else is the difference between direct and indirect taxes. Direct tax permits the government to collect taxes directly from consumers and are progressive in nature, allowing the economy to cool off from inflationary pressures. Indirect taxes allow the government to expect consistent returns while also bringing practically every member of society into its fold – something that direct taxes have failed to do.

Direct and indirect taxes are both significant for the government because they are intertwined with the whole economy. As a result, tax collection is critical for both the government and the country’s well-being.

Author– Shobhita Saran (Legal Intern)  and Mr. Ajay Kacher (M.Com, LLB, CS)- Legal Associate at IP & Legal Filing. In case of any queries please contact/write back to us at support@ipandlegalfilings.com.