Full Overview Of Direct & Indirect Taxation Structure In India
This paper seeks to provide a bird eye’s view of the taxation structure in India. The topics broadly covered here are Direct Taxes (Income Taxes) and Indirect taxes (At Central Government level and State Government level). The other level of classification can be based on who levies the taxes. It is an overview and not supposed to be a comprehensive in-depth analysis of different taxes.
Central Government levies taxes on the following:
- Income Tax: Tax on income of a person
- Customs duties: Duties on import and export of goods
- Central excise: Taxes on Manufacturing of dutiable goods
- Service tax: Taxes on provision of services
State Governments can levy the following taxes:
- Value Added Tax (VAT): This is tax on sale of goods. While intra-state sale of goods are covered by the VAT Law of that state, inter-state sale of goods is covered by the Central Sales Tax Act. Even the revenue collected under Central Sales Tax Act is done so by the State Governments themselves and actually the Central Government has no role to play so.
- Stamp duties and Land Revenue: Since land is a matter on which only State Governments can govern, thus the Stamp duties on transfer of immovable properties are levied by State Governments.
- State Excise on Liquor and certain agricultural goods.
Apart from the above, certain powers of taxation have been devolved in the hands of local bodies. These local governing bodies can levy taxes on water, property, shop and establishment charges etc.
- 0.1 Direct Taxes
- 0.2 Tax Resident
- 0.3 So what is taxable for a Resident but “Not Ordinarily Resident”?
- 0.4 What is taxable for a Non-Resident?
- 0.5 What is taxable for a Resident?
- 1 Taxation slabs for Individuals for the FY2015-16:
- 2 Corporate Taxation:
- 3 Dividend Distribution Tax (DDT)
- 4 Minimum Alternative Tax (MAT)
- 5 Tax Deduction at Source (TDS)
- 6 Indirect Taxes
They are called so as the burden of taxation falls directly on the tax payer.
Under the Income Tax Act, 1961 The Central Government levies direct taxes on the income of individuals and business entities as well as Non business entities also. The taxation level depends on the residential status of individuals. The thumb rule of residential status is that an individual becomes resident in India if he has remained in India for more than 182 days in a particular residential year. If he becomes resident in India, then his global income i.e. income earned even outside India is taxable in India. This has to be noted very carefully by Expatriates on deputation to India. They need to plan their stay in such a manner as to avoid becoming a resident in India. The following para explains this in a slightly more detailed manner:
An individual is treated as resident in a year if present in India:
- For 182 days during the year or
- For 60 days during the year and 365 days during the preceding four years.
So an expatriate has to time his stay in India by taking into account the above.
So what is taxable for a Resident but “Not Ordinarily Resident”?
A resident who was not present in India for 730 days during the preceding seven years or who was nonresident in nine out of ten preceding years is treated as not ordinarily resident. A person not ordinarily resident is taxed like a non-resident but is also liable to tax on income accruing abroad if it is from a business controlled in or a profession set up in India.
What is taxable for a Non-Resident?
Non-residents are taxed only on income that is received in India or arises or is deemed to arise in India. He is entitled to get benefit of any double taxation avoidance agreement that his country of residence has signed with India. Then he shall be liable for taxes at rates mentioned in the Indian domestic tax laws or the rates mentioned in the Double Taxation Avoidance Agreement whichever is lower.
What is taxable for a Resident?
His global income is taxable irrespective of whether earned or related or received in India.
Thus any expatriate needs to plan his stay so that he does not, unwittingly, become a Resident for tax purposes.
Taxation slabs for Individuals for the FY2015-16:
Individual resident aged below 60 year.
|Income Slabs||Tax Rates|
|Where the taxable income does not exceed Rs. 2,50,000/-.||NIL|
|Where the taxable income exceeds Rs. 2,50,000/- but does not exceed Rs. 5,00,000/-||10% of amount by which the taxable income exceeds Rs. 2,50,000/-.Less ( in case of Resident Individuals only ) : Tax Credit u/s 87A – 10% of taxable income upto a maximum of Rs. 2000/-|
|Where the taxable income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/-.||Rs. 25,000/- + 20% of the amount by which the taxable income exceeds Rs. 5,00,000/-.|
|Where the taxable income exceeds Rs. 10,00,000/-.||Rs. 125,000/- + 30% of the amount by which the taxable income exceeds Rs. 10,00,000/-|
2. Individual resident who is of the age of 60 years or more but below the age of 80 years at any time during the previous year
|Income Slabs||Tax Rates|
|1.||Where the taxable income does not exceed Rs. 3,00,000/-||NIL|
|2.||Where the taxable income exceeds Rs. 3,00,000/- but does not exceed Rs. 5,00,000/-||10% of the amount by which the taxable income exceeds Rs. 300,000/-.Less : Tax Credit u/s 87A – 10% of taxable income upto a maximum of Rs. 2000/-.|
|3.||Where the taxable income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/-||Rs. 20,000/- + 20% of the amount by which the taxable income exceeds Rs. 5,00,000/-|
|4.||Where the taxable income exceeds Rs. 10,00,000/-||Rs. 120,000/- + 30% of the amount by which the taxable income exceeds Rs. 10,00,000/-.|
3. Individual resident who is of the age of 80 years or more at any time during the previous year
|Income Slabs||Tax Rates|
|1.||Where the taxable income does not exceed Rs. 5,00,000/-||NIL|
|2.||Where the taxable income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/-||20% of the amount by which the taxable income exceeds Rs. 5,00,000/-.|
|3.||Where the taxable income exceeds Rs. 10,00,000/-||Rs. 100,000/- + 30% of the amount by which the taxable income exceeds Rs. 10,00,000/-|
Amounts invested in certain investments like Employee Provident Fund, Public Provident Fund, Tax saving Fixed Deposits, are also eligible for deduction under section 80C upto Rs.1,50,000 per year.
The rate at which Corporates are taxed in India is 30% plus a 3% cess. Thus the total comes to 30.9%. Further if the taxable income is more than Rs. 10 million, then there is an additional surcharge of 12% on the base tax rate.
Dividend Distribution Tax (DDT)
Under Section 115-O of the Income Tax Act, any amount declared, distributed or paid by a domestic company by way of dividend shall be chargeable to dividend tax. So if a company declares divided, it has to pay an effective rate of 16.995% on the dividends declared. This is apart from the 30.9 % taxes mentioned above. The rationale for this tax is that after paying this tax, the dividend so declared becomes tax free in the hands of the recipient of dividend.
Minimum Alternative Tax (MAT)
Normally, a company is liable to pay tax on the income computed in accordance with the provisions of the income tax Act, but many a times due to exemptions under the income tax Act, there is huge actual profit as shown in the profit and loss account of the company but no taxable income. To overcome this issue, and in order to bring such companies under the income tax act net, the concept of Minimum Alternate Tax (MAT) has been introduced. The present rate of MAT is 19.05%.
Another aspect which must be looked into is the concept of Witholding Taxes; also called as Tax Deduction at Source (TDS).
Tax Deduction at Source (TDS)
This point is being specifically mentioned because the penalties of non-compliance are very stringent. As per the provisions of the Indian tax laws, certain payments are covered under tax withholding norms. Under this, the person responsible for making any payment is required to withhold a certain specified percentage of the payment amount as taxes and deposit it with the Government treasury. In addition, the person is required to prepare a certificate of tax deduction and provide it to the person on whose behalf the deductions are made. Every quarter i.e. 3 months, returns have to be filed by the deductor and credit must be given to the deducted in the returns.
The following are the areas where tax withholding is most common in the Indian scenario:
The salaried employees of the drawing beyond the minimum taxable salary would be covered under the tax withholding requirements and annual tax withholding returns are to be submitted with the Revenue authorities.
Payments made to a contractor for carrying out any work would require withholding of tax at source from such payments, ifcertain threshold limits are crossed. Typical examples of such payments will include:
- Advertising payments
- Broadcasting and telecasting payments
- Office renovation payments
- Vehicle hire payments
- Catering payments.
- Job Work
Payments made for professional and technical fees to Doctors, Chartered Accountants, Lawyers, Management Consultants, Engineers, Architects and other professionals would fall under this section and tax would be required to be withheld from their payments. Such withheld tax shall be deposited with the Government.
Payments for rentals would attract tax deduction at source.
In India, indirect taxes is a vast ocean as there are number of taxes to be paid on manufacture, import, sale and even purchase in certain cases. Further the law is governed less by the Acts and more by day to day notifications, circulars and orders by the Governing bodies. So an explicit understanding is very much essential. A simplistic way to understand Indirect taxes is as follows:
|No.||Nature of Activity||Applicable Law||Governed By|
|1||Provision of services||Service Tax.Generally uniform rate of 12.36% (proposed to be 14% from 01-04-2015) is charged by Service tax Provider from recipient except in certain cases where liability is split between the provider of servicer and the recipient of service.Also in some cases, where there is mixed component of provision of service and provision of materials, there is some abatment given and service tax charged on the remaining part.
E.g. For restaurants, the service tax is charged only on 40% of the bill as it is assumed by Govt that the total bill consists of 60% materials and 40% service.
There is an exemption on payment of Service tax if the total turnover did not cross Rs. 1 million in the previous Financial Year.
|As Governed by the Finance Act, 1994 and other subsequent Finance Acts together read with notifications, circulars.Service tax is payable to the Central Government.|
|2||Manufacture of Excisable Goods||Central Excise duties are leviable on the manufacture of goods. However, the incidence of duty is postponed to the clearance of goods from factory or approved warehouse. It means the duty is payable once the manufactured goods leave the Warehouse/ Factory.Below are some of Excise duties leviableBasic – Basic Excise Duty is the most common Excise duty on manufacture of Goods. It is imposed under section 3 of the ‘Central Excise Act’ of 1944 on all excisable goods other than salt produced or manufactured in India, at the rates set forth in the schedule to the Central Excise tariff Act, 1985, falls under the category of basic excise duty in India.
it is mandatory to pay duty on all goods manufactured, unless exempted. For example, duty is not payable on the goods exported out of India or if the turnover does not reach Rs. 15 million in a year or based on certain process of production.
Excise duty rates are different for each product and based on harmonized system of classification.
The rates can be found in the following link
Apart from the basic excise duty, the other types of Excise duties are as follows but they are not of much relevance to the vast majority of goods as they are very specifically levied.
It should be noted that the excise duty is not on sale but on removal or clearance of goods which may or may coincide with sale.
|Central Excise Act, 1944 read with Central Excise Tariff Act, 1985 along with Rules prescribed and Circulars/ Notifications issued by the Central Board of Excise and Customs.It is payable to the Central Government.|
|3.||Import of Goods||Customs duty is required to be paid whenever goods are imported from other countries in India. Normally on Exports, there is no Customs Duty except for export of a few items. Thus the taxable event is the import/ export of goods.There are mainly two ways in which Customs is calculated and collected:
The rates of taxation in Customs can be found here:
Apart from the basic Custom duties, there are some other custom duties levied in certain circumstances like:
Countervailing Duty of Customs (CVD)
To give Indian manufacturing a level playing field, CVD is imposed. It is equal to the excise duty on like articles produced in India. The base of this additional duty is c.i.f. value of imports plus the duty levied earlier. If the rate of this duty is on ad-valorem basis, the value for this purpose will be the total of the value of the imported article and the customs duty on it (both basic and auxiliary).
Anti Dumping duties
These custom duties are basically intended to provide domestic manufacture against dumping of goods by foreign countries in India at dirt cheap ; even below cost prices. Mainly targeted against cheap Chinese imports. These are allowed after following WTO norms in this regard.
|Customs Act, 1962 read with Customs Tariff Act, 1975.Collected by Central Government|
|4||Sale of Goods||Value Added Taxes (VAT) for intra-state Sales and Central Sales Tax (CST) for inter-state sales.VAT is actually state specific since the states and not Central Government is empowered to collect Taxes on Sale of Goods. Thus each state has its own VAT specific Act and Rules. In Maharashtra, it is the Maharashtra Value Added Tax Act (MVAT) which governs the sale of goods.The usual rate of taxes are 5% and 12.5%. Goods which are specified are covered under 5% and others are covered in 12.5%. Further there are some high value transactions like trade in bullion which attracts 1% tax. Input credit is available on the goods purchased and can be set off against the MVAT payable.
Under MVAT Act, if trader has a turnover of below Rs. 1 million in previous financial year, then MVAT is not applicable in present year upto Rs. 1 million. Please note that it is optional and if the dealer. Trader does collect MVAT from the purchaser then the same will have to be deposited with the Government.
Also MVAT is not applicable if the Goods are exported under H Form i.e. for exports.
|Each state has a specific Act.Central Sales Tax Act deals with inter-state sale of goods. However even CST is actually collected only by states.|
Please note that the above are not mutually exclusive. For example, if the goods are manufactured and sold by manufacturer , then both Central Excise and MVAT are applicable.
Further there are some local indirect taxes levied like Local Body Taxes (LBT) or Octroi. These are expected to be abolished some time in future after introduction of Goods and Service Taxes (GST).
Going forward, to avoid the cascading effect of different types of duties and also to avoid the specific problem of non-availability of input credit for one type of tax against another, the Government intends to create one single tax everywhere which shall be called as the Goods and Service Taxes (GST). This is major tax reform intending to create one major market. It is expected to come by April 2016.
[box type=”shadow” ]Please note that this write-up is intended to give a general overview and under no circumstances, can be taken as actionable professional advice. While all due care has been taken to provide accurate information, readers are expected to take further professional advice. No liability rests or exists or is created against the author for any action taken by anyone on the basis of this article.[/box]