Wednesday, 29 March 2017

Understanding Taxes in India

Income-tax (IT) is defined as some part of your income that you pay to the government to support the country’s infrastructural development. It is also used to pay the salaries of state and central government employees, etc. All taxes are based on the Income Tax Act, 1961.

Principles of Tax:

·         Adequacy: taxes should be just-enough to raise the revenue required by the Government for the provision of important public services.
·         Broad Base: all government efforts are to spread the taxes to the larger section of the population to minimize the individual tax burden.
·         Compatibility: taxes should be coordinated to ensure overall tax objectives of good governance.
·         Convenience: taxes should be enforced in approach that facilitates voluntary compliance to the extent possible.
·         Tax revenue: from a specific source of tax revenue should be decided to exact purpose when there is a direct cost-and-benefit between the expenditure and such as the use of the car, fuel, road maintenance.
·         Efficiency: The tax collection efforts should not cost an extremely high percentage of tax revenues.
·         Equity: taxes should equally burden all individuals in similar economic circumstances.
·         Neutrality: The tax structure is supposed to be neutral for everyone in the country and there is no cope for individual decisions-making.
·         Predictability: collection of taxes should reinforce their regularity
·         Restricted exemptions: tax exemptions must be for specific purposes and for a limited period.

Methods of Tax:

Currently, there are two methods of taxation for the purchase and resale of used vehicles:
  1. Standard taxation (input tax deduction on purchase, VAT on the entire sales price)
  2. Margin taxation (without input tax deduction, for example when a private customer purchases the vehicle; VAT is only the difference between the original purchase price and the sales price)

Types of Taxes:

Direct Taxes and Indirect Taxes are the two types of taxes paid directly to the Government of India. There has been a rise in the Direct Tax collections in India over the years.

Direct Taxes, which are imposed by the Government of India, are:

(1)  Income Tax:
Income tax, this tax is mostly known to everyone. Every person whose total income exceeds taxable limit has to pay income tax based on current rates applicable time to time.

(2)  Capital Gains Tax:
Capital Gain tax as it is a tax on capital gain. If you sale your property, shares, bonds, etc. and earn a profit on it. The capital gain is the difference between the price paid for it and money received from selling the asset. Capital gain tax is categorized into long-term gains and short-term gains. The Long-term Capital Gains Tax is charged if the capital assets are reserved for more than period 1 year in the case of share and 3 years in the case of property. Tax is applicable if short term capital gain is held for less than the period mentioned above.

(3)  Securities Transaction Tax:
Government has introduced Securities Transaction Tax which is valid for every transaction done at the stock exchange. That means if you buy or sell equity shares, equity leaning Mutual Funds, etc., you have to pay this tax.

(4)  Perquisite Tax:
This one is related to the benefit given by the employer to employee. E.g. If your company provides you non-monetary benefits like a car with driver, club membership, etc. All this benefit is taxable under perquisite Tax.

(5)  Corporate Tax:
Corporate Taxes are annual taxes payable on the income of a corporate in India. For tax, they are classified into domestic and foreign companies.

Corporate Tax in India:
Types of company
Total income more than INR 10 million
Total income less than INR 10 million
Domestic company
30% +surcharge +Education Cess
30%+Education Cess
Foreign company
40%+surcharge +Education Cess
40%+Education Cess

Indirect Taxes in India:

(6) Sales Tax:
Sales tax charged on sales of movable goods. Charge by Union Government, while sales tax on intra-State sale is charged by State Government. CST is payable on sales is @ 2%, CST is from the Union Government, the revenue goes to State Government. CST Act is administered by the State Government.

(7) Service Tax:
You take most of the paid services you have to pay service tax on those services. This tax is called service tax. Most of the services are covered under this category now. They include tour operator, telephone, architect, interior decorator, beauty parlor advertising, banking, health center, financial service, event management, and all maintenance service also.

(8) Value Added Tax:
The Sales Tax is the mainly important source of revenue for the state governments; every state has their particular Sales Tax Act. The government is planning to combine service tax and sales tax in the form of Goods service tax.

(9)  Custom Duty:
It is a type of indirect tax charged on goods imported into India. One has to pay this duty on imported goods. This duty is payable at the port of entry.

(10) Excise Duty:

It is related to the production of goods. The tax is charged on goods produced within India. It is opposite to customs duty which is charged on bringing goods from outside of the country.

Blog Post by Shruti B.

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