The tax system in India is administered by the Central Government and the State Governments, which separately impose various taxes. There are a few minor charges that are also imposed by local governments, such as the Municipality. The government taxes the income of individuals and companies in various ways.
India’s Tax Structure
In India, two main categories of taxes can be distinguished:
- Direct Taxes
- indirect Taxes
Types of Direct Taxation
Income Tax
- The income tax system in India is progressive.
- Different income tax rates are applied based on the net income amount.
- When the total income exceeds Rs 50 lakh but not Rs 1 crore, an additional 10% tax is due.
Tax on Companies
- It is a tax assessed against corporations’ and businesses’ profits and alternatively referred to as corporation tax.
- A firm is considered a separate entity for tax purposes and must pay taxes apart from its owners’ income tax.
- Corporation tax must be paid by all firms, public and private, that are registered under the firms Act 1956 and are located in India.
- As of January 2022, corporation tax will be payable at 22% by all domestic businesses.
Minimum Alternate Tax
- To avoid paying corporation tax to the government, companies with high profits and significant dividends to shareholders had to pay minimum alternate tax, calculated as a fixed percentage of book profit.
- As of January 2022, the MAT rate is 15%.
Capital Gains Tax
- A capital gain is any profit or gain that is made when a capital asset is sold.
- Property, buildings, jewelry, patents, and copyrights are capital assets.
- However, jewels and debt-oriented mutual funds are not subject to this change since they are transportable.
- Capital gains taxes on short- and long-term profits are imposed differently based on the quantity of income received.
Transaction Tax on Securities
- A tax is the securities transaction tax on gains on securities, such as shares, options, and futures, that are exchanged on the domestic stock exchange.
Transaction Tax on Commodities
- Both buyers and sellers of exchange-traded non-agricultural commodity derivatives in India are liable for the commodity transaction tax.
- Metals and energy goods are examples of non-farm commodities that fall under the purview of CTT.
Alternate Minimum Tax
- For limited liability partnerships, the Alternate Minimum Tax (AMT) is equivalent to the Minimum Alternate Tax (MAT) for corporations.
- This tax does not apply to other commercial entities, such as partnerships, associations of people, and sole proprietorships.
Estate Duty
- 1953 saw its original presentation. A person’s belongings are subject to their estate upon death.
- The deceased’s entire estate is considered his riches and is subject to taxation. However, no tax has been imposed since 1985.
Wealth Tax
- It applied to individuals, married Hindu families, and businesses with more net worth than needed.
- The tax was removed starting in 2015.
Gift Tax
- A public or private organization supporting charitable institutions was the only one whose donations were exempt from the gift tax.
- It wasn’t until 1998 that the tax was collected.
Fringe Benefits Tax
- In reaction, the government implemented the Fringe Benefits levy (FBT), essentially a levy that an employer must pay instead of the benefits provided to his or her employees.
- Taxing any benefits utilized to evade paying taxes was the goal.
- The fringe benefits tax was removed from the 2009 Union budget for India.
Types of Indirect Taxation
Customs Duty
- When commodities are carried across international boundaries, customs charges are levied as a tariff or fee.
- Customs laws impose various duties, including export duties, basic duties, countervailing taxes, protective duties, and anti-dumping duties.
- The manufacture, distribution, and use of products and services are all subject to the products and Services Tax (GST), a national indirect tax.It has superseded all indirect taxes levied on goods and services.
Sales Tax
- In India, a sales tax is a type of tax that the government imposes on the buying or selling a certain commodity within the country. IGST has taken its place.
Excise Duty
- Since excise duty is imposed on manufacturing goods rather than their sale in India, it is a real commodities tax. CGST has assumed this role.
Service Tax
- In India, there is a service tax on all services provided.
- In India, the service tax rate was 15% until the GST took its place.
Value Added Tax
- India’s states and union territories—aside from Andaman Nicobar and Lakshadweep—have implemented Value Added Tax (VAT).
- The tax, which is imposed on various commodities sold in the state, is set by the state.
- State VAT had taken the role of the State Sales Tax and was in force until July 1, 2017. Since then, SGST has assumed its place.
Tax on Dividend Distribution
- Since dividends are considered income by shareholders, they should ideally be subject to taxation.
- The tax that the Indian government levies on Indian businesses is based on the amount of dividends paid to shareholders.
- The Finance Minister eliminated the Dividend Distribution Tax in Budget 2020.
