Major Taxes in India

The taxes of the government may be classified into three categories: 1) Taxes on income
and expenditure 2) Taxes on properties and capital and 3) Taxes on commodities. First two
types of taxes are direct taxes and the third type of taxes is indirect taxes.

A. DIRECT TAXES IN INDIA

INCOME TAX
Income tax has become the most important type of direct tax in India. The period of
assessment of income tax is one year. Money income is taken as the basis of income tax in
almost all countries of the world.
Income tax is levied on the income of individuals, Hindu undivided families, unregistered
firms and other association of people. In India, the nature of income tax is progressive.

For taxation purpose income from all sources is added and taxed as per the income tax
slabs of the individual.

The budget of 2017-18 proposed the following slab structure:

Income Slab Tax Rate

Up to 2,50,000 No Tax

Up to 2,50,000 to 5,00,000 5%

Up to 5,00,000 to 10,00,000 20%

Excess of 10,00,000 30%

Super-rich to pay surcharge

Surcharge of 10% of income tax where the total income exceeds Rs 50 lakh up to
Rs 1 Crore. Surcharge of 15% of income tax, where the total income exceeds Rs 1 Crore.

A notable feature of income taxation in India is that the whole proceeds of income
tax do not go to the central government. According to the recommendations of various
Finance Commissions, a large share of the total proceeds is distributed among state
governments.

These surcharges are only temporary and are withdrawn after some time. Now, a
2 per cent education cess on income tax was imposed with effect from the financial year
2004-05 which in the budget for 2007-08 was raised to 3 per cent. In order to give
incentives to the individuals to save more, contribution to PPF, premium on life insurance,
equity linked saving schemes (ELSS) of Mutual Funds, contribution by an employee to
pension funds, and investment in fixed deposits in scheduled commercial banks (for a term
of 5 years) are exempted from income tax subject to overall ceiling of Rs. 150,000.

Merits of Income Tax

1) Income tax is based on the principle of ability to pay.
2) It is one of the most important instruments for reducing inequalities in the
distribution of income, because it can be made easily progressive.
3) Income tax is one of the important tools for maintaining price stability.
4) It cannot be easily evaded.
5) A tax on income prevents the consumption of least useful items.
6) It conforms to the canons of productivity and elasticity.
DEMERITS
1) The main drawback of income tax is that it will tend to reduce the ability and
willingness to work, save and invest.
2) Direct taxes are inconvenient because complete records and files are to be
maintained up to date by each individual tax payer.
3) There is great scope for tax evasion by concealing actual income.
4) As the poor section of the community remains untouched under income tax, i it
fails to achieve the objective of creating civic consciousness among the people.

COPORATION TAX
A corporation tax is a tax on net income of business corporations or companies. In India,
it was introduced after the First World War and since then it has become an integral part
of Indian tax structure. This tax is paid by companies and is distinct from the taxes paid
by shareholders on their dividends. That is, corporation tax is paid out of the taxable
profits (net profit) after meeting all costs i.e., interest charges, wages and depreciation
costs etc. earned by the corporation during an assessment year and the remaining is
distributed among the shareholders in the form of dividends. The main feature of
Corporation tax is that the entire proceeds of this form the revenue of the Union
Government and no share is divided among states.

For taxation purpose, a company is treated as a separate entity and thus must pay
a separate tax different from personal income tax of its owner. Companies both public
and private which are registered in India under the companies act 1956 are liable to pay
corporate tax.
 The Budget 2017-18 proposed following tax structure for domestic corporate firms:

 For the Assessment Year 2017-18 and 2018-19, a domestic company is taxable at 30%.
 For Assessment Year 2017-18, the tax rate would be 29% where turnover or gross receipt
of the company does not exceed Rs. 5 crores in the previous year 2014-15.
 However, for Assessment year 2018-19, the tax rate would be 25% where turnover or
gross receipt of the company does not exceed Rs. 50 crores in the previous year 2015-16.

EXPENDITURE TAX
Expenditure tax is a tax on expenditure. It is levied when the income is spent. In
India it was first imposed in 1958 following to the recommendations of Professor.
Nicholas Kaldor. He had suggested the imposition ofthis tax to prevent the possibility of
tax evasion and to discourage superfluous consumption. According to Kaldor the major
advantages of expenditure tax are the following
a. It is more easily definable than income tax.
b. Expenditure is better index of taxable capacity.

The expenditure tax was abolished in 1962. It was again introduced in 1964 and
was abolished in 1966. In 1987, it was again introduced under the Expenditure Tax
Act,1987.

TAX ON WEALTH AND CAPITAL

Estate Duty: First introduced in 1953. It was levied on the total property passing on the
death of a person. The whole property of the deceased person constituted his wealth and
is liable for the tax. The tax now stands abolish w.e.f 1985.

Wealth Tax: First introduced in 1957. It was levied on the excess of net wealth (over
30,00,00,0 @ 1 percent) of individuals, joint Hindu families and companies. Wealth tax has
been a minor source of revenue. The tax now stands abolish wef 2015.

Gift Tax: First introduced in 1958. The gift tax was levied on all donations except the one
given by the charitable institution’s government companies and private companies. The
tax now stands abolished wef 1998.
Capital Gain Tax:

Capital gain implies gain arising from the sale of a capital asset. Capital gains occur
if the selling price of land, buildings, capital equipment, stock exchange securities, happen
to be more than the amount invested in them. One of the most important characteristics
of capital gains is that it is an irregular or unusual gain, unlike a person’s normal income
which is regular.

Capital gains can be divided into two categories: a) Short- term capital gains and b)
Long-term capital gains. Capital gains from sale of capital assets held for not more than 36
months are called Short- term capital gains. Similarly, capital gains from sale of capital
assets held for more than 36 months are considered long-term capital gains.

From FY 2017-18 onwards – The criteria of 36 months has been reduced to 24

months in the case of immovable property being land, building, and house property.

SECURITIES TRANSACTIONS TAX(STT)

This tax was introduced in 2004-05. STT is levied on the sale and purchase of
securities at the dealing/ strike price in addition to service tax and stamp duties collected
for registration and transfer of securities.

BANKING CASH TRANSACTION TAX

This tax was imposed for the first time in India during 2005-06. It was on
withdrawals of cash from a current account in a bank in excess of a specified amount on
any single day. The objective of this tax is to track the black money transactions.
B. INDIRECT TAXES IN INDIA:

Receipts from indirect taxes are a very important source of tax revenue for the
Central Government in India.

Three important indirect taxes levied by the central government in India are:

1. Union Excise Duties

2. Customs Duties

3. Service Tax

As economic growth takes place and production of commodities and services increases,
revenue from indirect taxes will increase. Therefore, imposition of indirect taxes gives
great buoyancy to tax system in India.

1. UNION EXCISE DUTY

An excise duty is in the true sense is a commodity tax because it is levied on production
of goods in India and not on the sale of the product. Excise duty is explicitly levied by the
central government except for alcoholic liquor and narcotics.

The Constitution of India, under Articles 269 (taxes levied and collected by the
Union and assigned to States) and 270 (Taxes levied and collected by the Union and
distributed between Union and States), has made a provision for levying Union Excise
Duties on all commodities produced anywhere in India except alcoholic liquors and
opium, narcotics and narcotic drugs (these are within the jurisdiction of the State
governments.)

It is different from customs duty because it is applicable only to things produced in India
and is also known as the Central Value Added Tax or CENVAT.

2. CUSTOM DUTY:

Taxes on international trade, particularly known as custom duties, are levied and
collected by the Central Government and entirely owned by it as per Constitutional
provision. These import duties on the import of foreign goods raise their prices and
therefore, they provide protection to the domestic industries. Initially, the customs
duties were very high and, in some cases, they were fixed at over 300 per cent of the
value of imported goods.
 It is a duty levied on exports and imports of goods. Import duty is not only a source
of revenue from the government but also have also been employed to regulate trade.
Import duties in India is levied on ad valorem basis.

Just as customs duty ensures that goods for other countries are taxed, octroi is
meant to ensure that goods crossing state borders within India are taxed appropriately.
It is levied by the state government and functions in much the same way as customs duty
does.

3. SERVICE TAX

Service tax is levied on the services provided in India. Service tax was first
introduced in 1994-95 on three services telephone services, general insurance and share
broking. Since then, every year the service net has been widened by including more and
more services. We now have an exclusion criterion based on ‘negative list’, where some
services are excluded out of tax net.

The current rate of service tax in India was 15% before being replaced by Goods
and Service tax.

VALUE ADDED TAX (VAT)

VAT is a multi-point tax levied at each stage of value addition chain with a
provision to allow input tax credit on tax paid at an earlier stage. It is a general
consumption tax assessed on the value added to goods. In the case of sales tax, there are
problems of double taxation of commodities and multiplicity of taxes, resulting in
cascading of tax burden. This results in double taxation with cascading effects. Under
VAT set off is given for input tax as well as tax paid on previous purchases.

Multiplicity of taxes with overlapping nature like the turn over taxes, Octroi, the
CST and surcharges is another feature of the present indirect tax regime. VAT is
unanimously acknowledged to be a major reform in the indirect taxation system. VAT
was first proposed by Germany but first implemented by France in 1954. The European
Economic Community introduced VAT in 1967. In India ‘The Indirect Taxation Enquiry
Committee’ (L.K.Jha Committee), 1976 suggested to adopt VAT applied to the
manufacturing stage combined with a reformed system of sales taxation. In pursuance of
the proposal made in the Long Term Fiscal Policy, the government introduced a modified
system of value added or MODVAT in the budget for 1986-87. It came in to force with
effect from March 1, 1986. The government has introduced the new Central Value Added
Tax (CENVAT) scheme by replacing the MODVAT scheme, with effect from April 1, 2000.

STATE LEVEL VAT

Following the June 18, 2004 decision of the Empowered Committee (convenor:
Asim Das Gupta) of state finance ministers to implement State-level VAT from April
1,2005, all 28 states and Union Territories had introduced VAT. The first state to
introduce VAT was Haryana in 2003 and the last state was Utter Pradesh in 2008.

FEATURES OF VAT
 It eliminates the cascading effects of taxes.
 It promotes competitiveness of exports.
 This is tax one pays when they buy goods or services.
 The shopkeeper or service provider adds it to the cost of the goods or services.
 This is a known as a consumer tax in some countries.
 In some countries, goods are priced in the shop minus this type of tax, but when
the customer comes to the checkout they will be asked for the cost price plus the
consumer tax.
 The shop collects this tax on behalf of the government.
 The difference between the amount of VAT the producer, wholesaler or retailer
charged the shopkeeper and the amount the shopkeeper charged the customer
must be paid to the government.
 If the amount of VAT paid by the business exceeds the VAT charged by
business, the government will repay the excess.
 This ensures that VAT is paid by the ultimate customer, not by the business.
 A value-added tax is an indirect national tax levied on the value added in
production of a good or service.
 In many European and Latin American countries the VAT has become a major
source of taxation on private citizens.
 Many economists prefer a VAT to an income tax because the incentive effects of
the two taxes differ sharply.

CAUTION:
 VAT is complex to administer.
 Co-operation from tax payers is essential for revenue collection.
 Sophisticated business record book keeping is a pre-requisite for the success of VAT.
 In a federal set up like India, VAT is to be modified substantially to accommodate the
concerns of the states.
  Stability and continuity of the already introduced VAT regime is to be ensured with
sufficient follow up mechanism.

MAJOR TAXES OF THE STATES IN INDIA

1) Land Revenue. 2) Agricultural Income Tax 3) State excise duties 4) Stamp
Duties, Court Fee and Registration. 5) Taxes on Urban Immovable Property. 6)
Taxes on Trade, Professional and Employment. 7) Motor Vehicle Taxation. 8)
Entertainment Tax 9) Electricity duties. 10) Sales Tax and 11) State VAT.

MAJOR TAXES OF THE LOCAL SELF GOVERNMENTS IN INDIA

1) Taxes on Land and Buildings.
2) Octroi and terminal taxes.
3) Taxes on Animals and Boats.
4) Taxes on Vehicles.
5) Taxes on Professions, Trades and Employment.
6) Taxes on advertisement other than those published in newspapers.
7) Other miscellaneous taxes like theatre or show tax, duty on transfer of
property, taxes on goods, passengers carried by roads, railways or tolls etc.