Know A-Z about Taxation in India

With separate authorities for the federal, state, and local governments, India has an advanced tax system. Except for agricultural income taxes, which are collected by the state governments, the central government imposes income taxes, service taxes, central excise taxes, and customs duties.
Professionals, land revenue, stamp duty, state excise, and value added tax (VAT) are all subject to state government taxes. Taxes on real land, octroi, and facilities like water supply and drainage can be levied by local governments.

Over the last ten to fifteen years, there have been substantial changes made to the Indian tax structure. Simplified tax laws and rationalized tax rates lead to better enforcement, easier tax payment, and better compliance.

Taxes Levied by Central Government

1. Direct Taxes
   • Tax on Corporate Income
   • Capital Gains Tax
   • Personal Income Tax
   • Tax Incentives
   • Double Taxation Avoidance Treaty

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2. Indirect Taxes
    • Excise Duty
    • Customs Duty
    • Service Tax
    • Securities Transaction Tax

Taxes Levied by State Governments and Local Bodies
• Sales Tax/VAT
• Other Taxes

1. Direct Taxes :

Taxes on Corporate Income :

Companies with their headquarters located in India are required to pay taxes on all of their worldwide income in accordance with the Income Tax Act. To put it simply, non-resident corporations pay taxes on the money they earn from Indian sources or from business dealings in India. A corporation is regarded as an Indian resident if it is incorporated in India or if all of its management and control are based there.

Based on their total sales, domestic corporations pay a surcharge that varies from 0% to 12% in addition to the normal tax rate of 30%.

Depending on their total revenue, foreign corporations are subject to a 40% base tax rate plus a 0-5% surcharge. Additionally, there is a 3% education cess on the tax that must be paid.

Domestic corporations must pay 16.995% dividend distribution tax on declared dividends, which includes a 3% education cess and a 12% surcharge. In the hands of the receivers, these dividends are exempt, though.

LLP’s are required to pay tax @30%+surcharge+education cess. There is no tax on profits distributed.

Additionally, corporations must pay the Minimum Alternative Tax (MAT).Corporations are required to pay 18.5% tax (plus any surcharges and cess) when the tax due under regular tax regulations is less than 18.5% of their book earnings.

Alternate Minimum Tax (AMT) for limited liability companies, partnership firms, etc. AMT on adjusted total income at the rate of 18.5% (plus appropriate cess) must be paid when the amount of tax due under ordinary tax laws is less than 18.5% of adjusted total income.

Permanent Establishment, Branch Office, Project Office, or Liaison Office: In India, a fixed location of business is considered a permanent establishment and must pay 40% tax plus a surcharge and education cess. Distributions of profits are tax-free.

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.

The basic tax rate on long-term capital gains is 20%. On the other hand, long-term capital gains from the sale of mutual fund units or equity shares are tax-free.

The standard corporate income tax rates apply to short-term capital gains. 10% tax is applied to short-term capital gains that result from the transfer of equity shares or mutual fund units.

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.

Personal Income tax :

According to the terms of the Income Tax Act, the Central Government levies personal income tax, which is then managed by the Central Board of Direct Taxes within the Ministry of Finance. The following are the personal income tax rates:

Income range (Rupee) Tax Rate (%)(Age below 60 years)

0-250,000                        Nil

250,000-500,000             10

500,000-1,000,000          Rs 25,000/- + 20% of the amount exceeding Rs 5,00,000

1,000,000 and above       Rs1,25,000 + 30% of the amount exceeding Rs 1,000,000.

Surcharge of 12% on total tax is levied if income exceeds Rs. 100,00,000.

Education cess (total) : 3 percent of income tax and surcharge.

Tax Incentives :

Government of India provides tax incentives for:-

• Corporate profit

• Accelerated depreciation allowance

• Deductibility of certain expenses subject to certain conditions.

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

• Infrastructure,

• Power distribution,

• Certain telecom services,

• Undertakings developing or operating industrial parks or special economic zones,

• Production or refining of mineral oil,

• Companies carrying on R&D,

• Developing housing projects,

• Undertakings in certain hill states,

• Handling of food grains,

• Food processing,

• Rural hospitals etc.

2. Indirect Taxes :

Excise Duty

Under the Central Excise Tariff Act of 1985 and the Central Excise Act of 1944, commodities manufactured in India are subject to excise duty. In this context, “manufacture” refers to the creation of a new product with a unique name, personality, purpose, and marketability that also involves labeling, packing, and other details.

Since March 1, 2015, the excise duty rate has been set at 12.5%. The Central Excise tax now includes the education cess as well as the secondary and higher education cess.

Recent budget initiatives in this regard are as follows:

• Education cess and Secondary and Higher education cess to be subsumed  in the Central Excise duty.

• Online central excise and service tax registration to be done in two days.

Central Excise duty is administered by the Central Board of Excise and Customs.

Customs Duty :

Imported products in India are subject to basic customs tax, supplementary customs duty, and education cess; the Tariff Act specifies the rates of basic customs duty. The Customs Tariff Act of 1975 and the Customs Act of 1962 govern the levy and the rate of customs duty in India.

Custom duty rates depend on classification under the customs tariff.

Customs duty typically comprises the following components:

1. Basic Customs Duty

2. Additional Customs Duty

3. Education cess/ secondary and higher education cess

4. Special Additional Customs Duty

Customs duties in India are administrated by Central Board of Excise and Customs under Ministry of Finance.

Recent budget initiatives in this regard are as follows:

• Basic Custom duty on certain inputs, raw materials, intermediates and components in 22 items, reduced to minimise the impact of duty inversion.

Service Tax :

Certain selected taxable services rendered in India by designated service providers are subject to a 14% service tax rate. If payment for taxable services supplied in India is made in convertible foreign currency and is not exported outside of India, service tax is not due. A service provider may apply for and use the credit of excess customs or excise charge to pay service tax under the Cenvat Credit Rules. In order to discharge the output service tax burden, credit is also given upon payment of service tax on input services.

The Government of India has introduced a negative list-based taxation of services with effect from 1 July, 2012. Except the services enlisted in the negative list all other services are taxable unless these entail:

 1. Sale or purchase of goods

 2. Transfer or gift of immovable property

 3. Transaction in money or actionable claim

 4. Service provided by employee to employer in the course of employment.

Services provided outside India will not be liable to service tax. Such services will be deemed as exports, subject to the fulfilment of conditions.

Recent budget initiatives in this regard are as follows:

• Service-tax plus education cesses increased from 12.36% to 14% to facilitate transition to GST.

Securities Transaction Tax :

Securities Transaction Tax is applied at the following rate to transactions involving equity shares, derivatives, and units of equity-oriented funds that are entered into a recognized stock exchange:

• Purchase or sale of equity shares (delivery based) – 0.1%,

• Sale of units of an equity-oriented fund to the seller mutual fund – 0.001%

•  Non delivery base transactions in the above – 0.025%

•  Sale of futures in securities   – 0.01%

Value Added Tax/Sales Tax :

Value Added Tax (VAT) took the place of sales tax on April 1, 2005. Only goods are subject to VAT; services are not. VAT does not take the place of other indirect taxes like excise duty, service tax, etc. State governments are in charge of implementing VAT at the state level. With a technique of credit for the input VAT paid, VAT is applied at every stage of the sale process. There are four VAT slabs:

• 0% for essential commodities

• 1%-2% on bullion and precious stones

• 4%-5% on agricultural and industrial inputs and capital goods and items of mass consumption

• All other items 12.5%-15%

• Petroleum products, tobacco, liquor etc., attract higher VAT rates that vary from State to State

A Central Sales Tax at the rate of 2% is also levied on inter-State sales.

Other State Taxes :

• Stamp duty on transfer of assets

• Profession tax

• 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

Municipal Taxes :

• Octroi/entry tax: – Some municipal jurisdictions levy octroi/entry tax on entry of goods.

3. Goods and Services Tax (GST):

The Goods and Services Tax is referred to as GST. It is an indirect tax that has taken the place of other indirect taxes in India, including services tax, VAT, and excise duty. On March 29, 2017, the Parliament passed the Goods and Services Tax Act, which became operative on July 1st.

Stated differently, the provision of goods and services is subject to the Goods and Service Tax (GST). Every value addition is subject to the comprehensive, multi-stage, destination-based Goods and Services Tax Law in India. GST is a single domestic indirect tax law that applies to the entire nation after absorbing the majority of indirect taxes.

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