INDIAN TAX SYSTEM

TAXATION
It is a compulsory contribution imposed by a public authority. It is the main source of income for public authorities.

Objective of Tax Policy

Tax policy was designed to perform two basic functions: Revenue Functions Regulatory Functions:

Reducing disparities in income and wealth distribution , Restraining consumer demand with a view to containing inflation Promoting savings and investment Shifting investment from non essential , non priority to priority sectors.
Pursuance of these goals, progressive tax rates were imposed: excise duties were enhanced more on so called luxury goods, Tax holidays were granted for new investment specially in backward areas.

Importance of Tax policy

1.Problems related to economic growth, removal of poverty and inequalities, chronic unemployment and regional disparities for e.g. India 2. Tax policy to yield increased revenues to the government. 3.Tax system to promote private savings and direct them into investment in priority industries ( India having saving rate but low investment rate.) 4.Reducing disparities in income and wealth distribution , 5.Restraining consumer demand with a view to containing inflation.

The Indian government introduced a liberal economic policy from 1991 which brought about a massive change in the Tax System in India like:

The rationalization of the tax rates, Simplification of the tax laws, Easy tax payment, Reduction in customs and excise duties, Lowering corporate tax, Widening of the tax base and Modulating the tax administration.

Classes of taxpayer
The income tax law classifies taxpayers as follows. 1. Companies. 2. Firms (partnerships). 3. Associations of persons or bodies of individuals. 4. Individuals. 5. Hindu undivided families. 6. Local authorities (municipal bodies). 7. Artificial juridical persons.

Taxable income

Income is classified into the following five heads, depending on its source.
1. Income from salaries. 2. Income from house properties. 3. Profits and gains from business or profession. 4. Capital gains. 5. Income from other sources. Specific provisions govern the computation of net income from each source. Gains on the transfer of capital assets (other than long-term capital gains) are aggregated with the net income from other heads to arrive at the total taxable income. Longer-term gains are taxed at lower rates.

Tax holidays
Both new industrial undertakings located in the specified "backward states" or districts and new industrial undertakings set up for generation or generation and distribution of power are entitled to full tax exemption of profits for the first five years of operation, followed by partial tax exemption of 30 percent (for companies) of the profits of the next five years. Similar exemption is available to enterprises carrying on the business of developing, maintaining and operating a notified "infrastructure facility" with respect to profits land gains spread over any 10 consecutive years falling within the first 12 years.

CLASSIFICATION OF TAXES

Direct Taxes Direct tax is demanded from the very persons who, it is intended or desired ,should pay it A tax is considered to be direct if the impact and incident of the tax is on the same person. Indirect Taxes A tax is considered to be indirect if the impact and incident of the tax is on different person.

Difference
Dirct tax Indirect tax

Directly paid by the persons on whom it is legally imposed

Impact is on the same persons who pays the tax Tax burden cannot be shifted to other persons and the consumer directly pay the to the local Government, State government, Center Government.

Indirectly paid by the other persons

Impact is on many persons

Tax burden can shift to the other persons (other than the payee).

Example: Income tax ,house property tax, land and estate tax or service tax

Consumption taxes, excise duties, sales tax, octroi.

Tax System in India is a three tier system

NATIONAL TAXES Collected by the central government like (income,wealth,corporate tax ,custom duties). STATES TAXES On goods and services manufactured and produces in the state, on land and real estate transactions (stamp duties). LOCAL TAXES By ULB/ Municipalities / Municipal Corporate/Development Authorities (vacant land taxes, Sanitation ,Water and Property Tax.)

Structure of Indian tax system

.

The main taxes levied by the Central Government: The union government levies certain taxes as per the rules of the Indian constitution. They are-

Direct Taxes
Tax on Corporate Income Capital Gains Tax Personal Income Tax

Indirect Taxes
Excise Duty Customs Duty Service Tax Securities Transaction Tax

The main taxes levied by the state governments: The principal taxes levied by the State Governments as per the rules of the Indian constitution are-

Sales Tax on intra-State sale of goods or Value Added Tax Stamp Duty on transfer of assets State Excise duty on manufacture of alcohol Agriculture income tax Duty on Entertainment Tax on Professions

The taxes levied by local bodies:

Tax on property Tax on market Octroi Utility tax
Octroi is a tax levied on the entry of goods into a municipality or any other specified jurisdiction for use, consumption or sale. Octroi is levied at the time when the goods enter the municipal limits where the goods are to be ultimately sold, used or consumed

Definitions..
An income tax is a tax levied on the income of individuals or business (corporations or other legal entities). Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. .. Service tax : is a part of Central Excise in India. It is a tax levied on services provided in India, Customs: is an authority or agency in a country responsible for collecting and safeguarding customs duties and for controlling the flow of goods including animals, personal effects and hazardous items in and out of a country.

Definitions..
Central excise: the department concerned with tax on goods manufactured or produced. A sales tax is a consumption tax charged at the point of purchase for certain goods and services. stamp duty: tax levied upon certain documents; a stamp being applied to show that tax has been paid.

Collects fees and/or excise duties levied on absolute alcohol, country liquor, beer, wine, toddy and neera.

Definition. The goods and service tax (GST) is proposed to be a comprehensive indirect tax levy on manufacture, sale and consumption of goods as well as services at a national level. Modvat("Modified Value Added Tax) . It is a scheme for allowing relief to final manufacturers on the excise duty borne by their suppliers in respect of goods manufactured by them.modvat is a scheme where x Ltd can take credit for excise duty paid by y Ltd so that lower excise duty is payable by x Ltd

GST
The Central GST and the State GST would be levied simultaneously on every transaction of supply of goods and services except the exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits. Further, both would be levied on the same price or value unlike State VAT which is levied on the value of the goods inclusive of CENVAT. While the location of the supplier and the recipient within the country is immaterial for the purpose of CGST, SGST would be chargeable only when the supplier and the recipient are both located within the State.

Difference
CST VAT

Under the CST Act, the tax is collected at one stage of purchase or sale of goods. Therefore, the burden of the full tax bond is borne by only one dealer,

the VAT system, the tax burden would be shared by all the dealers from first to last. Then, such tax would be passed upon the final consumers

Under the CST law, concessional rates the VAT regime will do away with are provided on certain taxes such concessions as it would provide the full credit on the tax that has been paid earlier.

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.

Graduation taxation

DIFFERENCE Progressive taxation

When tax rate rises with an increases in income,etc graduate is upwards and is known as progressive taxation It has forms :Step system and Sad system Step system: Specific rates were laid down for the whole of the income. Hence under this income, the tax amount did not rise gradually, but it moved by leap or jumps

A variation in the rate of tax with variation in the amount on income,property,etc

Slab system: The tax is calculated or different slabs of income

Example: property tax Example: income tax

Regressive tax
"Regressive" describes a distribution effect on income or
expenditure, referring to the way the rate progresses from high to low, where the average tax rate exceeds the marginal tax rate. In terms of individual income and wealth, a regressive tax imposes a greater burden (relative to resources) on the poor than on the rich there is an inverse relationship between the tax rate and the taxpayer's ability to pay as measured by assets, consumption, or income.

Proportional tax
Income tax that takes the same percentage of all incomes, whether large or small. Also called flat tax.

DOUBLE TAXATION
Double taxation is the case where two or more countries concurrently tax the same tax payers on account of the same subject matters of tax (such as income, property, etc). Double taxation generally arises on account of conflicting criteria adopted by different countries to levy the taxes.

Double Tax Avoidance Treaty

India has entered into DTAA with 65 countries including the US. In case of countries with which India has Double tax Avoidance Agreement, the tax rates are determined by such agreements. Domestic corporations are granted credit on foreign tax paid by them, while calculating tax liability in India.

Double taxation
Two or more governments may enter into an agreement where by it is ensured that the same subject matter is not taxed by two governments. This solution would be called avoidance of double taxation. Governments may enter into an agreement whereby the economic units liable to double taxation are provided partial relief. A country may decide to give unilateral tax relief to its own subjects even when no tax agreement exists with other countries. India has entered into comprehensive agreement for the advantage of double taxation of income with several countries including Austria, Belgium, and The federal republic of Germany, France, Japan and the Scandinavian countries.

The Fringe Benefit tax

A tax to be paid by an employer in addition to the income tax payable for every assessment year starting from the assessment year 2006-07. the tax is to be paid in respect of the fringe benefits provided or deemed to have been provided by an employer to his employees 1. Any privilege, service, facility or amenity directly or indirectly provided by an employer whether by way of reimbursement or to his employees [including former employee or employees] and 2. Any free or concessional ticket provided by the employer for Private journey of his employees or their family members and

Calculation of income tax

Group Men Women Senior citizen>65 Income Up to 160000 Up to 190000 Up to 240000 Tax rate Nil Nil nil

Men Women Senior citizen

For all For all

160001-500000 190001-500000 240001-500000

500000-800000 >800000

10% 10% 10%

20% 30%

New Direct Tax Code: Pay less in taxes from April 2011 The new provisions under the Direct Tax Code are as follows: Tax for income between Rs. 2 lakh - Rs. 5 lakh: 10% Tax for income between Rs. 5 lakh - Rs. 10 lakh: 20% Tax for income over Rs. 10 lakh: 30% The limit for exemptions for salaried people is Rs. 2 lakh, while that for senior citizens is Rs. 2.5 lakh.

Corporate tax has been kept at 30%.

The new Code comes into effect from April, 2012.

India Union Budget 2010-2011 Indirect Tax Proposals.

Service Tax rates to remain constant at 10% in an attempt to include more services under the tax code Increase in the tariff on smoking and non-smoking tobacco commodities 2% increase in Central Excise tariff from the previous 8% to the proposed 10%

Total excise tax exemption on electric cars

Central Customs tariff to remain constant at 10% kg

Conti
Excise tariff of Rs 1 per liter on diesel and petrol Service Tax exemption on News agencies Limited reduction in the excise tariff on cement Service Tax exemption on farming seeds Hike in the customs tariff on gold and platinum exports from the previous Rs 200 to the proposed Rs 300 Hike in Import tax on silver metal to Rs 1500 on every Central Excise tariffs on big cars, sports utility vehicles (SUVs) and multiutility vehicles (MUVs) are hiked by 22% against the existing 20%.