Taxation In India

A tax is a sum of money demanded by a government for its support or specific facilities or services levied upon incomes, property and sales.

How exactly does taxation work?

To help fund public works and services and to build and maintain the infrastructure used in a country, the government usually taxes its citizens and corporate residents. The tax collected is used for the betterment of the economy and all living in it. In the U.S. and many other countries in the world, taxes are applied to some form of money received by a taxpayer. The money could be income earned from salary, capital gains from investment appreciation, dividends received as additional income and payments made for goods and services and more.

A percentage of the taxpayer’s earnings or money is taken and remitted to the government. Payment of taxes at rates levied by the state is compulsory and tax evasion (the deliberate failure to pay one’s full tax liabilities) is punishable by law. Most governments use an agency or department to collect taxes: in the United States, this function is performed by the Internal Revenue Service (IRS) and in India, this function is performed by the Income Tax Department.

If you earn any kind of income in India, you are liable to pay income tax, as per the IT Act. Once the tax is paid, you are also required to file tax returns for the same. If you fail to pay the income tax on time or do not file tax returns, you will be required to pay the penalty. In some cases, it could also result in prosecution.

India offers a well-structured tax system for its population. The government’s major revenue source is the taxes paid by the citizens and the corporate. This money is deployed for various purposes and projects for the development of the nation.

The tax structure is determined by the central and state government and unless the law is passed the government cannot impose any tax. Taxes in India are levied by the central government and the state government. Other than these authorities the local operating municipalities also levy some minor taxes. 

Which bodies in India are helping run the tax system smoothly?

  1. Central Board of Direct Taxes (CBDT): It helps in the policy and planning of direct taxes. It also assists the Income Tax department in the administration of direct taxes.
  1. Central Board of Excise and Customs (CBEC): It deals with administering custom, central excise duties and service taxes.
  1. Central Board of Indirect Taxes & Customs (CBIC): It assists the government in making policies related to GST, continuing central excise levy and customs functions.

What are the types of taxes?

Classification of taxes is done under two categories: direct and indirect taxes. The implementation of both these taxes is the major distinguishing factor. Tax paid by the assessee (the individual liable to pay tax) is a direct tax, whereas the tax levied on goods and services is an indirect tax. 

  • Direct Tax- This tax is directly paid by a person or corporate entity, is non-transferable and has to be paid by the individual or organization on which it is levied. The government collects direct taxes for different purposes. Let’s say a person is an Indian resident and earns an annual income of ₹50 lakhs. They are liable to pay direct tax to the government which is 30% of the total income, according to the tax slab rates formulated by the government of India. There are different kinds of direct tax:

i) Income Tax: It is one of the most well known but the least understood taxes in India.  It is levied on an individual's earnings in a financial year. It applies to both individuals and companies. For an individual, the tax depends on which tax bracket they fall under depending on how much they earn. This might range between 0% to 30%. 

ii) Corporate Tax: It is paid by companies from the revenue they earn. It varies, depending on whether a company is domestic or international.

iii) Capital Gains Tax: It is paid when an individual earns a profit on selling a capital asset. It is divided into two types depending on its holding period: long-term (more than 36 months) and short-term (less than 36 months) 

  • Indirect Tax- The assessee does not pay the tax directly to the government authorities. The indirect tax is collected by one entity, usually, a producer or retailer, who sells goods or offers services and pays tax to the government, but it is passed on to the consumer as part of the purchase price of a good or service. So it’s the consumer ultimately paying the tax. Earlier there was VAT, Service Duty and Excise Duty, but now it is unified and people are required to just pay GST.  For example, a restaurant charges you indirect tax, whereby they provide both goods (food) and service (ambience and waiting on you), for which they charge you GST. The amount, then, is paid to the government. Goods and Service Tax (GST) has proven to be a significant step towards the reform of indirect taxation in India. It is a comprehensive indirect tax on the manufacture, sale and consumption of goods and services throughout India and subsumes many indirect taxes levied by the Central and State Governments.

Coming to income tax, which is such a significant portion of your income, it is very natural to think about the benefits of income tax and filing returns for the taxpayers. If you are wondering the same, here are some benefits you should know about-

  1. Nation Building: Taxes help the government of a country generate funds for its development and functioning. Every individual is expected to pay a certain amount as taxes to the government, based on their income. Hence, taxes are not the same for every individual.

2. Loan Processing: When people wish to take loans, they're expected to file income tax returns of at least 3 years. This helps them in getting the loan sanctioned.       

3. Address Proof: Another important benefit of income tax is that the tax assessment documents work as address proof. There are several documents such as passport, visa application, Aadhar card and license for which you are required to submit address proofs. Standard proofs like ID cards are generally not valid for such documents. Your income tax documents can be used in such cases.

  1. Claim Tax Deductions: One of the biggest benefits of income tax returns is claiming tax deductions. There are several ways in which you can reduce your overall tax liability. If you have made such tax-saving investments but have paid more income tax in the form of TDS (Tax Deducted at Source), you can claim a refund for the same by filing tax returns.
  1. High-Value Investments: High-value investments such as purchasing a property are reported to the IT department. When you pay taxes and file returns, these transactions can be reported and substantiated, as per your income.

Key Incentives of Taxation in India:

Special tax benefits are given to companies setting up in certain notified regions of India, including many northeastern states.

Businesses involved with manufacturing, production of goods and certain services or companies undergoing substantial expansion between 2017-2027 can deduct 100% of profits from their taxable income for a period of 10 years. Furthermore, a refund of excise duty on specific types of value addition is also available for 10 years.

Service sectors qualified for these benefits include:

  • Entrepreneurship development
  • Nursing and paramedical
  • Civil aviation-related training
  • IT-related training centres
  • IT hardware manufacturing units
  • Biotechnology.

However, companies engaged in the production of tobacco, betel leaf and plastic bags of less than 20 microns or goods produced by petroleum and gas refineries are not eligible for these incentives.

The above stated is the process and requirement of taxation, the incentives granted by the government to taxpayers and the ones that are not given the same facility. This process enables the equal distribution of tax payments per person, depending on their expenditure and enables a fair means of payment.

Necessity goods such as grains are not heavily taxed as every individual requires them, whereas goods such as alcohol and tobacco which are not necessities are taxed heavily as they are luxury goods.

Hence, taxation plays a vital role in the development of a country’s economy.

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