Tax system in India

Taxes can basically be divided into 2 Categories-

1. Direct Tax: These are the taxes which are levied directly on the Income earned and is therefore known as Direct Taxes. 
2. Indirect Tax : These taxes are not directly levied on the Income earned but are levied on the Expenditure .

DIRECT TAX
These types of taxes are levied by the Central Govt and therefore the rates of taxes are uniform throughout the country . Various types of Direct Taxes are :-
1. Income Tax :
The most common form of tax isthe Income Tax which is levied on the Income of all Individuals. Different Rates of Taxes are payable depending on the Income of an Individual and the Tax Slab Rates for the year 2013-14 are as follows:-

I. Individual resident (born on or after 1st April 1953) or any NRI or HUF or AOP or BOI or AJP *

i. Income-tax:

	Income Slabs	Income Tax Rate
i.	Where the total income does not exceed Rs. 2,00,000/-.	NIL
ii.	Where the total income exceeds Rs. 2,00,000/- but does not exceed Rs. 5,00,000/-.	10% of amount by which the total income exceeds Rs. 2,00,000/-. Less: Tax Credit – 10% of taxable income upto a maximum of Rs. 2000/-.
iii.	Where the total income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/-.	Rs. 30,000/- + 20% of the amount by which the total income exceeds Rs. 5,00,000/-.
iv.	Where the total income exceeds Rs. 10,00,000/-.	Rs. 130,000/- + 30% of the amount by which the total income exceeds Rs. 10,00,000/-.

Surcharge: 10% of the Income Tax, where total taxable income is more than Rs. 1 crore.
Education Cess: 3% of the total of Income Tax and Surcharge.

II. Individual resident who is of the age of 60 years or more but below the age of 80 years at any time during the previous year (i.e. born on or after 1st April 1934 but before 1st April 1954)

i. Income-tax:

	Income Slabs	Income Tax Rate
i.	Where the total income does not exceed Rs. 2,50,000/-.	NIL
ii.	Where the total income exceeds Rs. 2,50,000/- but does not exceed Rs. 5,00,000/-	10% of the amount by which the total income exceeds Rs. 2,50,000/-.
iii.	Where the total income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/-	Rs. 25,000/- + 20% of the amount by which the total income exceeds Rs. 5,00,000/-.
iv.	Where the total income exceeds Rs. 10,00,000/-	Rs. 125,000/- + 30% of the amount by which the total income exceeds Rs. 10,00,000/-.

Surcharge: 10% of the Income Tax, where total taxable income is more than Rs. 1 crore.
Education Cess: 3% of the total of Income Tax and Surcharge.

III. Individual resident who is of the age of 80 years or more at any time during the previous year
(i.e. born before 1st April 1934)

i. Income-tax:

	Income Slabs	Income Tax Rate
i.	Where the total income does not exceed Rs. 5,00,000/-.	NIL
ii.	Where the total income exceeds Rs. 5,00,000/- but does not exceed Rs. 10,00,000/-	20% of the amount by which the total income exceeds Rs. 5,00,000/-.
iii.	Where the total income exceeds Rs. 10,00,000/-	Rs. 100,000/- + 30% of the amount by which the total income exceeds Rs. 10,00,000/-.

Surcharge: 10% of the Income Tax, where total taxable income is more than Rs. 1 crore.
Education Cess: 3% of the total of Income Tax and Surcharge.

2. Wealth Tax:
Wealth Tax isa Tax charged on thenet wealth of an Individual. If aperson has unproductiveassets worth morethan Rs. 30 Lakhs , Wealth Taxisliable to bepaid @ 1%. Although many assetsarenot includedin the purview of Rs.30 Lakhs, but still this limit of Rs .30 Lakhsistoo low aseven a small house in Indiacosts overRs .30 Lakhs.
Rarely anyone payswealth tax in India andeven thegovt is very lenient in collecting Wealth Tax andthistax isonly therein the booksand not applied practically.

INDIRECT TAX

This tax isleviedat the time of making any expenditure irrespectiveof whether it isbeing madefor providing a serviceor at the time of purchasing any goods. Although this Tax iscollectedfromthe person who isrendering theservice/selling the goods, it can berecovered from therecipient of service /buyerof goods.
Someof these taxes are leviedby the Central Govt andtherest bytheState Govt . The rates of taxes whichareleviedby the StateGovt differ from State to State.
TheGovt hasnow startedfocusing more on Indirect Taxes as comparedto the Direct Taxesbecause evasion of Indirect Taxes isvery difficult , andthegovt expectsthat asubstantial portion of the total taxescollectedin India wouldbein the form of Indirect Taxesin future.

CentralGovt Taxes

1. Service Tax:
Whenever any person availsof any service , Service Tax@ 12% ispayableon the value of services . However,if the turnover of theprovider of service does not exceed Rs .10 Lakhsp. a ., heisexempted from charging Service Tax from his customers . However , if the turnoverof the provider of serviceismore than Rs. 10 Lakhs , he ismandatorilyrequired to collect Service Tax . If hedoes not charge the ServiceTax, it wouldbeassumedthat the Total Valueof theServicesis inclusive of theServiceTax andhe wouldhaveto deposit the Service Tax portion with the Central Govt .
ServiceTax when introduced in theyear 1994 andwas earlierleviedonly on a specifiedlist of services, but with the Introduction of Negative List of Services w. e . f 1 July 2012, ServiceTax has now been leviedon all servicesexcept those specificallyexempted.

2. Excise Duty :

Central Excise Dutyisan indirect tax levied on thosegoodswhich are manufacturedin India forHome Consumption . The incidenceof applicability of Excise Duty is levied as soon as thegoods are manufactured.However,it isto bepaid to the Govt at thetimeof removal of goodsfromtheplace of manufacture . Different Rates of Excise Duty is leviedon different goods.
ExciseDutyon all Goods isleviedby the Central Govt , except on the following goodson which ExciseDuty isleviedby the StateGovt :-
i. AlcoholicLiquorfor Human Consumption ii . OpiumandotherNarcoticDrugs

3. Customs Duty:
CustomsDuty also popularlyknown as Import Duty isleviedon goodsthat are importedfromanycountry into India. CustomsDuty was introducedin India so as to safeguard the Indian Industry as the goodsimportedfrom abroadwere cheaperthan the goodsproducedin India . Asthegoodsimportedwerecheap, the endconsumerpreferred to purchase the importedgoodsrather than the Indian madegoodsas aresult of which the Indian economy wassuffering.
EarliertheImport Duties were very high, but now that the Indian manufacturing Industryhasalso matured, Customs dutiesarebeing slowly reducedso asto equate the competition between the locally made goodsand the imported goods.
Rateof CustomsDutyisalso different for different goodsdepending on thenature of thegoods, andis usually collected at the time of entry into Indiaitself.

State Govt Taxes:

Therateof tax of the below mentioned taxes variousfrom State to State:-
1. VAT ( Value Added Tax):
VATisaform of SalesTax which islevied on theSale of any good . Earlier SalesTax waslevied in Indiawherein tax usedto be collectedat asingle point(first/last) from thetransactionsinvolving the sale of goods . However , thereweremany loopholesin thisform of tax andthe tradersusually evadedpaying SalesTax.
So asto ensurepropercollection of taxes, the systemof VAT i. e . ValueAddedTax wasintroduced which isa multi-point systemof collection of taxes .VATwas introduced in Indiafrom 1 April2005. Over 130 Countrieshaveintroducedthe systemof VAT in the last 3 decadesand India was amongst thelast few to introducethistax .
Thesystemof VAT issuch that it is first levied on thefirst sellerof goods and then thenext selleronly paysVATon the ValueAddition donebyhim andnot on the Total Valueof theGoods.
Therateof VAT is different foreach type of goods . For necessities, the rateof tax is lower andfor luxurygoods –therateof taxes is much higher .

2. CentralSales Tax

This tax isapplicablewhen the goodsare transferredfrom onestateto anotherfor the purpose of selling the goodsin the other state .In other words ,thistax is levied on Inter – State Sales .This tax is governedby theCentral SalesTax(CST) Act ,1956 which came into force w.e.f.05-01-1957.
Theentirerevenue accruing by the levy of Central SalesTax is collectedandkept by the State in which thesale originates.

3. ProfessionalTax

Professional Tax isin its nascent stages in India and only very few states are charging this tax on the incomes of Salaried , Self -employed, Merchantsetc. Different states have different modus-operandi of levying this typeof tax and areonly charging a maximum of a few thousand rupees only.
Every State hasdifferent set of rules for levy of this type of tax and the category of individuals who come under the purview of this tax purely depends on the state from where they are working.

VariousOtherTaxesleviedbythe State Govt are :-

1. Entertainment Tax 2. Stamp Duty 3. Road Tax on Vehicles
Composite Sales

There maybesomesaleswherein more than 1 type of tax may be levied. For ex: FoodServedin aRestaurant.In a restaurant , not only isthe foodbeing soldbut theservices are provided. Therefore , both VAT andServiceTax are liable to beleviedon the same.
In such cases, it is important to bifurcate the value of goodsandservices and explicitly show thesame on the Invoice. Aftershowing this bifurcatedvalue on the Invoice , VATwouldbe leviedonlyon the Valueof GoodsSoldand Service Tax wouldbeleviedonly on theServices provided .
However , it is practically verydifficult to segregatethetwo into value of goods soldandthevalueof servicesprovided. In such cases, the govt issuesan Abatement Scheme , wherein one type of tax wouldbe leviedonlyon acertain percentage of the total invoicevalue and the other tax wouldbeleviedon the remaining invoice value .
Education Cess & SHEC
Education Cess @ 2% andSecondary and Higher Education Cess (SHEC)@1% are also levied overandabovethese taxes. However , thisisnot levied on theTotal Amount but only on theamount collected as Tax. Thisthing would become clearer by the following example :-
Valueof Service:
Rs .100
ServiceTax @ 12%: Rs. 12
Education Cess (2% of Rs. 12) Rs. 0.24
SHEC (1% of Rs. 12) Rs .0.12
Total Tax Rs .12.36
As explainedwith the help of the above example, Education Cess andSHEC would be levied only on amount of tax i.e. Rs.12 andnot on thevalue of service i.e.Rs. 100.
GST: Goods andService Tax
There are some many different types of Indirect Taxesthat it becomes difficult forabusinessman to understandthe nitty-gritty’s of each of thesetaxes.The BusinessCommunity hadpersuading the Govt to removethese different typesof taxes andto only asingle uniform tax systemforcollection of Indirect Taxes.
TheGovt hasagreedto remove all these taxes in duecourse of time and introduceasingletax system by the nameof GSTi . e . Goodsand Service Tax.
GST is still in itsplanning phase and wouldhaveto crossmany hurdlesbefore it becomesa reality. TheImplementation of GST isstill a few years away andtill the time GST is not implemented,all the existing taxes wouldcontinueto be levied .

Credit goes to-
About the author :
Mr Karan Batra  CharteredAccountant
currently working as a facultymemberat the Instituteof CharteredAccountantsof India.

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