By Sahil Mehta
As promised, this post will deal about most of the taxes that are applicable in India and how they affect you. Taxes are a major source of revenue for the government and an even bigger source of pain to us and corporates. We cover the definitions here. Tax rates are likely to be changed, so wait for our post budget.
Direct
Taxes
A direct tax is
one paid directly to the government by the persons on whom it is imposed
(often accompanied by a tax return filed by the taxpayer). Examples include income
tax, corporate tax, and transfer taxes such as estate (inheritance) tax and
gift tax.
Income
Tax – I doubt you need me to tell you what this is. The income earned by an
individual in a fiscal year is liable to tax by the government at the prevailing
rates. Essentially whatever you earn, a part of it goes to the government.
Exemptions under 80c - Section 80C of the Income Tax
Act allows certain investments and expenditure to be tax-exempt. The total
limit under this section is Rs. 100,000 (Rupees One lac) which can be any
combination of the below:
- Contribution to Provident Fund
or Public Provident Fund
- Payment of life insurance premium
- Investment in pension Plans.
- Investment in National Savings
Certificates
- Post office investments
Corporate
tax – It is the tax levied on the income or capital of companies in India. Generally,
the tax is imposed on net profits.
Minimum Alternative Tax – Tax imposed on companies.
This is done to tax companies who avoid paying tax in spite of having high
income by showing high depreciation and dividends.
Indirect
Taxes
These are taxes where an economic transaction takes place. An indirect tax is a tax collected by
an intermediary (such as a retail store) from the person who bears the ultimate
economic burden of the tax (such as the customer). The intermediary later files
a tax return and forwards the tax proceeds to government with the return. An
indirect tax may increase the price of a good so that consumers are actually
paying the tax by paying more for the products.
Service Tax - It is a tax levied on services provided
in India, except the State of Jammu and Kashmir. At present there are 119
services covered under the service tax net.
Excise Duty - An excise or excise duty is
commonly understood to refer to an inland tax on the sale, or production for
sale, of specific goods; or, more narrowly, as a tax on a good produced for
sale, or sold, within a country.
An excise is
distinguished from a sales tax or VAT in three ways: (i) an excise typically
applies to a narrower range of products; (ii) an excise is typically heavier;
and (iii) an excise is typically specific (so much per unit of measure;
e.g. so many rupees per litre), whereas a sales tax or VAT is ad valorem,
i.e. proportional to value)
GST -
The Goods and Services Tax (GST) is a value added tax, which was supposed to be
implemented in India by April 2012. The GST will replace all indirect taxes
levied on goods and services by the Indian Central and State governments. It is
aimed at being comprehensive for most goods and services with minimum
exemptions. The unification of various indirect taxes under GST is expected to
simplify the tax process greatly and also increase the tax base (number of
people liable to pay taxes). The road map for implementing GST quickly is
eagerly awaited by the industry and markets.
Customs Duty - A tax levied on imports by the customs
authorities of a country to raise state revenue, and/or to protect domestic industries
from more efficient or predatory competitors from abroad.
Other Terms
Subsidies form a considerable
expenditure for the government. Some commonly subsided goods are diesel,
cooking gas, food products etc. There is an urgent need to reduce the subsidy
burden of the country. However lowering subsidies, generally, leads to
increased costs which hurts the poor particularly.
Surcharge - A surcharge may mean an extra fee added
onto another fee or charge.
Cess – It is a
special tax levied by the government for a specific purpose only. For example
in India, we have a 3% education cess. This cess is charged on the taxable
amount including applicable surcharge. This money is supposed to be spent on
improving the education sector in India.
So that wraps up about all the important stuff you need to know about taxes. In the next one, we shall deal with the railway budget. Cheerio!
