TAX STRUCTURE IN INDIA

By Subholina sen

Introduction:
India has a well-developed tax structure with clearly demarcated authority between Central and
State Governments and local bodies. Central Government levies taxes on income (except tax on
agricultural income, which the State Governments can levy), customs duties, central excise and
service tax.
The Tax Structure in India is quite strong and follows the financial year. The taxation under the
tax structure in India is applicable for any kind of income pertaining to a person working as an
employee under the public sector units, private sector units, foreign companies in India,
Departments of the State Governments of India, and Departments of the Central Government of
India or self-employed individuals engaged in commercial activities which is legal in nature.
The several corporations engaged in commercial activities also come under the taxation. The
public bodies, state governments and central government have clear demarcation of their
functioning. The central government imposes tax on all kinds of income such as central excise,
customs duties, and service tax apart from income pertaining to agriculture. The State
Governments of India is responsible for imposing tax pertaining to Value Added Tax (VAT),
sales tax, income from agriculture, state excise duty, stamp duty, professional tax, land revenue,
etc. Taxes imposed by the local bodies are pertaining to octroi tax, water supply utilities,
drainage and sewage utilities, property tax, etc. In last 10-15 years, Indian taxation system has
undergone tremendous reforms. The tax rates have been rationalized and tax laws have been
simplified resulting in better compliance, ease of tax payment and better enforcement. The
process of rationalization of tax administration is ongoing in India. Since April 01, 2005, most of
the State Governments in India have replaced sales tax with VAT.

Different taxes levied under tax structure in India:

Direct Taxes

 Personal Income Tax

 Tax on Corporate Income
 Tax Incentives
 Capital Gains Tax
 Wealth Tax

Indirect Taxes

 Securities Transaction Tax

 Service Tax
 Excise Duty
  Customs Duty

Taxes Levied by State Governments and Local Bodies

 Other Taxes
 Sales Tax or Value Added Tax

The different heads of income for tax structure in India:

 Salary
 House property
 Profit in business or profession
 Capital gains
 Other sources

The different exemption schemes under the tax structure in India:

 Exemption on income spent on higher educational purpose
 Exemption on income spent for the treatment of a diseased person who is
dependent
 Exemption on income spent as contribution to provident fund, insurance policies,
etc.
 Exemption on the income spent on buying national savings certificates and
investments in other government based savings schemes
 Exemption on the income of a disabled person
 Exemption on the income spent on the payment of interest on loan

The important facts under the tax structure in India:

 The laws on central government income tax collection and recovery is governed
by the Department of Tax and Revenue under Ministry of Finance, India
 The system of taxation is completely based on the personal assessment of income
 Penalties and interest are charged on the non-payment of taxes and failure to file
returns
 The filing date is not extended and any late filing is charged with interest
 The returns pertaining to the losses have to be filed within the due date
 All the large sized and medium sized taxpayers are subjugated to investigative
assessment
 Designated due dates are ascertained for the purpose of filing of returns
 The tax is deducted at source by the employers on behalf of the employees and
from all kinds of defrayments to non-residents

I) DIRECT TAXES:
 Income Tax
The income tax system in India is unitary. Income less permissible expenses from all
sources (other than long-term capital gains) of each tax payer s aggregated and
subject to tax at a flat rate in the case of companies and partnership firms and at
progressives rates in the case of other taxpayers. Long-term capital gains are
concessionally taxed at lower rates.
Residents are taxed on their worldwide income. Subject to treaty exemptions,
nonresidents are taxed only on income that is received in India or that arises in India
or is deemed to arise in India.
India follows the "classical system," under which corporate income is taxed both to
the corporation and upon distribution to the shareholders as dividends. However,
dividends received by one domestic company from another domestic company are not
taxed in the hands of the recipient company to the extent it distributes the dividends
to its shareholders within the time allowed for filing its tax return.
Geographical source of income
Generally, income arises in India if it becomes due in India. This depends on where
the income-producing asset is located, where the services giving rise to the income
are performed, where the sale is affected, and other considerations. In addition, the
Income Tax At specifically mentions that the following income is deemed to arise in
India:
o Income arising directly or indirectly through or from any business connection
in India; through or from any property, asset or source of income in India; or
through the transfer of a capital asset situated in India.
o Salaries earned in India, even if paid outside India.
o Dividends paid by Indian companies outside India.
o Interest, royalties or technical service fees payable by the government.
 o Interest, royalties or technical service fees payable by persons other than the
government unless the funds borrowed, the patent, the technical information,
etc., are utilized in a business outside India or for earning income from a
source outside India.
Classes of taxpayer
The income tax law classifies taxpayers as follows.
1. Companies.
2. Firms (partnerships).
3. Associations of persons or bodies of individuals.
4. Individuals.
5. Hindu undivided families.
6. Local authorities (municipal bodies).
7. Artificial juridical persons.

 Wealth Tax
Other than Income-tax, there is another direct tax act called the Wealth-tax Act, 1957.
It extends to the whole of India. It shall be deemed to have come into force on the 1st
day of April, 1957. Wealth tax is an annual tax like income tax. It is charged for every
assessment year for net wealth of corresponding valuation date on every individual,
Hindu Undivided Family and company at the rate of 1% of the amount by which net
wealth exceeds Rs. 15 lakhs.
The Wealth Tax Act is an important direct tax legislation. Wealth tax is 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.
Incidence of Wealth tax
For an individual who is a citizen of India and resident in India, a resident-HUF and
company resident in India, wealth tax is chargeable on net wealth that consists of:
1. All assets in India and outside India
2. All debts present in India as well as outside India are deductible while calculating the
net wealth.
3. For any individual who is an Indian citizen but not residing in India, HUF, non-
resident or not ordinarily resident in India and a company non-resident in India:
4. All assets in India except loan and debts interest whereon is exempt from income-tax
under section 10 of the Income-tax Act are chargeable to tax
5. All debts in India are deductible in computing the net wealth.
6. All assets and debts outside India are out of the scope of Wealth Tax Act.
 Capital Gains Tax

Tax is payable on capital gains on sale of assets. Long-term Capital Gains Tax is
charged if:
• Capital assets are held for more than three years and
• In case of shares, securities listed on a recognized stock exchange in India, units of
specified mutual funds, the period for holding is one year.
Long-term capital gains are taxed at a basic rate of 20%. However, long-term capital
gains from sale of equity shares or units of mutual funds are exempted from tax.
Short-term capital gains are taxed at the normal corporate income tax rates. Short-
term capital gains arising on the transfer of equity shares or units of mutual funds are
taxed at a rate of 10%.
Long-term and short-term capital losses are allowed to be carried forward for eight
consecutive years. Long-term capital losses may be offset against taxable long-term
capital gains and short-term capital losses may be offset against both long term and
short-term taxable capital gains.

II) INDIRECT TAXES

 Excise duty:
Manufacture of goods in India attracts Excise Duty under the Central Excise act 1944
and the Central Excise Tariff Act 1985. Herein, the term Manufacture means bringing
into existence a new article having a distinct name, character, use and marketability
and includes packing, labeling etc.
Most of the products attract excise duties at the rate of 16%. Some products also
attract special excise duty/and an additional duty of excise at the rate of 8% above the
16% excise duty. 2% education cess is also applicable on the aggregate of the duties
of excise. Excise duty is levied on ad valorem basis or based on the maximum retail
price in some cases.

 Customs Duty:
The levy and the rate of customs duty in India are governed by the Customs Act 1962
and the Customs Tariff Act 1975. Imported goods in India attract basic customs duty,
additional customs duty and education cess. The rates of basic customs duty are
specified under the Tariff Act. The peak rate of basic customs duty has been reduced
 to 15% for industrial goods. Additional customs duty is equivalent to the excise duty
payable on similar goods manufactured in India. Education cess at 2% is leviable on
the aggregate of customs duty on imported goods. Customs duty is calculated on the
transaction value of the goods.
Rates of customs duty for goods imported from countries with whom India has
entered into free trade agreements such as Thailand, Sri Lanka, BIMSTEC, south
Asian countries and MERCOSUR countries are provided on the website of CBEC.
Customs duties in India are administrated by Central Board of Excise and Customs
under Ministry of Finance.

 Service Tax:
Service tax is levied at the rate of 10% (plus 2% education cess) on certain identified
taxable services provided in India by specified service providers. Service tax on
taxable services rendered in India are exempt, if payment for such services is received
in convertible foreign exchange in India and the same is not repatriated outside India.
The CENVAT Credit Rules allow a service provider to avail and utilize the credit of
additional duty of customs/excise duty for payment of service tax. Credit is also
provided on payment of service tax on input services for the discharge of output
service tax liability.

Extension of service tax to: services outsourced for mining of mineral, oil or gas;
renting of immovable property for use in commerce or business (residential
properties, vacant land used for agriculture and similar purposes, and land for sports,
entertainment and parking purposes & immovable property for educational or
religious purposes to be excluded); development and supply of content for use in
telecom and advertising purposes; asset management services provided by
individuals; design services; services involved in execution of a works contract with
an optional composition scheme under which tax will be levied at only 2% of the total
value of works contract.

Exemption to: Services provided by Resident Welfare Associations to their members

who contribute Rs.3000 or less per month for services rendered, services provided by
technology business incubators, their incubatees whose annual business turnover does
not exceed Rs.50 lakhs to be exempt for first three years; clinical trial of new drugs to
make India a preferred destination for drug testing.

 Securities Transaction Tax:

Transactions in equity shares, derivatives and units of equity-oriented funds entered
in a recognized stock exchange attract Securities Transaction Tax at the following
rate:-
 a. Delivery base transactions in equity shares or buyer and seller each units of an
equity-oriented fund - 0.075%
b. Sale of units of an equity-oriented fund to the seller mutual fund - 0.15%
c. Non delivery base transactions in the above - 0.015%
d. Derivatives (futures and options) seller - 0.01%

 Sales Tax:
Sales tax is levied on the sale of a commodity which is produced or imported and sold
for the first time. If the product is sold subsequently without being processed further,
it is exempt from sales tax.
Sales tax can be levied either by the Central or State Government, Central Sales tax
department. Also, 4 per cent tax is generally levied on all inter-State sales. State sales
taxes that apply on sales made within a State have rates that range from 4 to 15 per
cent. Sales tax is also charged on works contracts in most States and the value of
contracts subject to tax and the tax rate vary from State to State. However, exports
and services are exempt from sales tax. Sales tax is levied on the seller who recovers
it from the customer at the time of sale.
Sales Tax in India is that form of tax which is imposed by the government on
sale/purchase of a particular commodity within the country. It is imposed under
Central Government (Central Sales Tax) and the State Government (Sales Tax)
Legislation. Normally, each state has its own sales tax act and levies the tax at various
rates. Apart from sales tax, certain states also impose extra charges such as works
contracts tax, turnover tax & purchaser tax. Thus, sales tax plays a major role in
acting as a major generator of revenue for the various State Governments.

Under the sales tax which is an indirect form of tax, it is the responsibility of seller of
the commodity to collect or recover the tax from the purchaser. Generally, the sale of
imported items as well as sale by way of export is not included in the range of
commodities that require payment of sales tax. Moreover, luxury items (such as
cosmetics) are levied higher sales tax rates. The Central Sales Tax (CST) Act that
comes under the direction of Central Government takes into consideration all the
interstate sales of commodities.
Hence, we see that sales tax is to be paid by every dealer when he sells any
commodity, during inter-state trade or commerce, irrespective of the fact that there
may be no liability to pay tax on such a sale of goods under the tax laws of the
appropriate state. Sales tax is to be paid to the sales tax authority of the state from
which the movement of the commodities starts or commences.

 Value Added Tax (VAT):

 Value Added Tax (VAT) is nothing but a general consumption tax that is assessed on
the value added to goods & services. It is the indirect tax on the consumption of the
goods, paid by its original producers upon the change in goods or upon the transfer of
the goods to its ultimate consumers. It is based on the value of the goods, added by
the transferor. It is the tax in relation to the difference of the value added by the
transferor and not just a profit.
All over the world, VAT is payable on the goods and services as they form a part of
national GDP. More than130 countries worldwide have introduced VAT over the past
3 decades; India being amongst the last few to introduce it.
It means every seller of goods and service providers charges the tax after availing the
input tax credit. It is the form of collecting sales tax under which tax is collected in
each stage on the value added of the goods. In practice, the dealer charges the tax on
the full price of the goods, sold to the consumer and at every end of the tax period
reduces the tax collected on sale and tax charged to him by the dealers from whom he
purchased the goods and deposits such amount of tax in government treasury.
VAT is a multi-stage tax, levied only on value that is added at each stage in the cycle
of production of goods and services with the provision of a set-off for the tax paid at
earlier stages in the cycle/chain. The aim is to avoid 'cascading', which can have a
snowballing effect on the prices. It is assumed that because of cross-checking in a
multi-staged tax; tax evasion would be checked, hence resulting in higher revenues to
the government.
Importance of VAT in India
India, particularly being a trading community, has always believed in accepting and
adopting loopholes in any system administered by State or Centre. If a well-
administered system comes in, it will not only close options for traders and
businessmen to evade paying their taxes, but also make sure that they'll be compelled
to keep proper records of sales and purchases.

III) Other State Taxes

• Stamp duty on transfer of assets

• Property/building tax levied by local bodies
• Agriculture income tax levied by State Governments on income from plantations
 • Luxury tax levied by certain State Government on specified goods

IV) Tax Incentives

Government of India provides tax incentives for:-
a) Corporate profit
b) Accelerated depreciation allowance
c) Deductibility of certain expenses subject to certain conditions.

These tax incentives are, subject to specified conditions, available for new investment
in:

a) Infrastructure,
b) Power distribution,
c) certain telecom services,
d) Undertakings developing or operating industrial parks or special economic
zones,
e) Production or refining of mineral oil,
f) Companies carrying on R&D,
g) Developing housing projects,
h) Undertakings in certain hill states,
i) Handling of food grains,
j) Food processing,
k) Rural hospitals etc.

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