Tax

Tax is a financial charge imposed upon an individual or a company by the Central and State Governments, along with local authorities like municipal corporations. The government cannot impose taxes unless they are passed by law. The computation and imposition of the taxes prevailing in the country are provided by the Ministry of Finance’s Department of Revenue.

India offers a structured tax system for its citizens. Taxes are the largest source of income for our country, and the funds are in turn used for various projects and purposes for the development of the nation. Taxes are levied on income stemming from salary, property rentals, profits from business, etc.

Benefits of Tax

Taxes are used by the government for a wide range of purposes, some of which are:

• Funding for public infrastructure

• Defense expenditure

• Development and welfare projects

• Salaries of state and government employees

• Scientific research

• Public education

• Public insurance

• Pension schemes

• Operation of the government

• Public transportation

• Unemployment benefits

• Public health

• Law enforcement

• Public utilities such as water, energy, and waste management systems

Types of Taxes

Depending on the manner in which the taxes are paid to the authorities, they are classified into direct and indirect taxes. Let us discuss them in detail :

Direct Tax

The tax that is paid directly to the government by the taxpayer. Estimating tax earnings from direct taxes is comparatively easy, as it bears a direct relationship to the income or wealth of the taxpayers. Common examples are Income Tax and Wealth Tax. Here’s the list of direct taxes.

Income Tax

Income Tax is levied on income from salary, business or profession, capital gains, house property, or from other sources. The concept is quite simple. A portion of your income is paid to the government every year, and this money is used to fund growth and development activities across the country.

Corporation Tax

It is levied on the income of domestic and foreign companies under the Income Tax Act, 1961. It is imposed on the net income of a company registered under the Companies Act, 1956. The income earned in India is taxed under the corporate tax. The corporate tax rate for domestic entities is 30% and foreign entities is 40%. Also, a surcharge is levied on companies depending on their profits.

Professional Tax

Professional tax is levied on every kind of profession, be it as an employee, professional, or freelancers, if the income exceeds a prescribed limit. It is levied by the state government and is different for different states. Under the Income Tax Act, 1961, it can be deducted from the taxable income. It is applicable even after GST implementation, but the maximum cap is set at Rs. 2,500.

Property Tax

A Property tax is levied annually or semi-annually on a landowner, and it includes all tangible real estate property, house, office building, and property given for rent to others. The tax amount is based on the area, property size, construction, building, etc. The owner of the property is the one liable to pay the tax. The tax rate is different for different states. It also depends on the use of the property (industrial/domestic purpose).

Inheritance (Estate) Tax

An inheritance/estate/death tax is a tax which arises upon the death of an individual, and is charged on the inheritor/s. It is levied on the total value of the property that is inherited from the person who has died.

Gift Tax

This tax is levied on all gifts in excess of Rs. 25,000, in the form of cash, check, draft or others, if received from one who is not a blood relative.

Road Tax 

It is imposed on all vehicles used on public roads, and is levied by the government of the state where the vehicle is purchased. It is a one time tax for private vehicles, but an annual tax for commercial vehicles. The tax is calculated based on a number of factors, such as cost price, engine capacity, unladen weight, seating capacity, etc. The government charges a GST of 28% and an additional cess ranging from 1%-15% depending on the engine capacity. Electric cars have a lower tax - of 12%.

Indirect Tax

Indirect taxes are collected from direct taxes. These are consumption-based and are applied to goods and services when they are bought or sold. The government receives indirect tax from the seller of the goods/service. The seller then passes the tax on to the end-user. Common examples are Goods and Services Tax (GST), sales tax, Value Added Tax (VAT), etc.

Goods and Services Tax (GST)

GST is the greatest tax reform that India has undergone since its independence. It was implemented from July 2017 and is designed to provide uniformity to taxes levied on goods and services across India. To that effect, the GST replaced all other taxes levied by the state and central governments. As per the present data, goods and services are taxed according to specific rates of 0%,  5%, 12%, 18% or 28%, while other goods/services are classified as exempt.

Customs Duty

It is levied on goods coming from outside the country, ultimately paid by consumers and retailers in India.

Central Excise Duty

This tax is payable by the manufacturers, who in turn shift the tax burden to retailers and wholesalers.

Service Tax

It is imposed on the gross/aggregate amount charged by the service provider on the recipient.

Sales Tax

This tax is paid by the retailer, who then shifts the tax burden to customers by charging sales tax on goods & services.

Value Added Tax (VAT)

It is collected on the value of goods or services that were added at each stage of their manufacture/distribution, and is finally passed on to the customer.

Advantages of Paying Taxes

It is beneficial for anyone who earns a taxable salary to file their income tax returns. Here are some of those benefits of paying your taxes:

• Easy loan approvals

• Many foreign embassies require you to provide your income tax returns of the previous years during the visa interview. 

• Self-employed individuals: are not eligible for Form 16. If the annual income of freelancers, consultants, entrepreneurs, and partners of firms exceeds the basic exemption limit, then ITR receipts can be furnished as proof of income. It is also proof of taxes paid and come in handy during any financial/business transaction.

• ITR receipts are sometimes requested when applying for any government tenders, to ensure that you have sufficient income.

• Short-term or long-term capital loss can be carried forward to be adjusted against the capital gains made in the subsequent years. This can be availed only if income tax returns have been filed.

• To claim tax refunds

• High-cover life insurance can be availed.

Penalty for Not Paying Tax

The Government has made acts related to taxation, and every citizen is liable to comply with the rules mentioned in them, failing which strict actions may be taken on them. Let us see a few penalties below:

• As per section 140A (1), if an individual fails to pay taxes, partially or wholly on principal amount of interest, he will be considered as a defaulter. 

• The assessing officer can impose a penalty amount equal to the arrears as per section 221 (1).

• If an individual conceals income or earning, a fine of 100% - 300% can be imposed on the defaulter under section 271 (C).

• If an individual does not respond to a tax notice under section 142 (1) or 143 (2), the officer can ask him/her to file the return or furnish all details of assets and liabilities in writing.

FAQs

Should a record of all earnings be maintained?

Yes. You must maintain records and proof of earning for all your sources of income as directed by the Income Tax Act.

What is the meaning of ‘Profession’ in ‘Professional tax’? 

Profession refers to a vocation or the use of one’s technical knowledge and skills on an independent basis. A few examples of professional fields are as given below:

• Engineering

• Technical consultancy

• Legal

• Medical

• Accountancy

• Architecture

• Interior decoration

• Writers

• Artists

How long should the books of accounts be maintained?

The books of accounts must be maintained for 6-7 years from the end of the Assessment Year.

What is an assessment year and a financial year?

Assessment year: The year in which you earn an income. 

Financial year: The year following the assessment year, in which the income is evaluated.

What are the different ways to file income tax returns?

You can file your returns by any of the following ways:

• Submitting a form physically

• Electronic transmission of data through EVC

• Electronic transmission of data and submission of verification in Return Form ITR-V

• Electronic returns with digital signature

How should returns be filed electronically?

Returns can be filed electronically on the Income Tax Department website.

How are excess taxes refunded?

In order to claim a refund, you must file income tax returns. The excess amount you have paid as tax will be credited to your bank account through the ECS facility.

What are the different heads under which taxpayers are taxed?

Under Section 14 of the Income Tax Act, 1961, the taxpayers are charged on 5 heads, i.e., income from salary, profits and gains of profession or business, house property, capital gains, and other sources.

News Updates

Supreme Court advices on the levying of tax on glass bottles

As of first July 2020, manufacturers have to pay a purchase tax on empty bottles which they buy from unregistered dealers for the purposes of packaging and refining products like juices and beer. This update from the country’s apex court is a considerable setback to the manufacturers.

This decision was taken by Justices Dinesh Maheshwari and AM Khanwilkar. They said that the purchase turnover of the purchase of empty bottles for the purposes of manufacture of sale of beer, juices and Indian-made foreign liquor from unregistered dealers is now subject to a purchase tax under Section 7a of the Tamil Nadu General Sales Tax Act. This decision was taken when the panel was hearing an appeal of commercial Tax Officer vs. Mohan Breweries and Distilleries.

Legal experts say that this step shall produce significant changes in entry tax cases where the concepts of sale of use and of manufacture are relevant. 

Andhra Pradesh records marginal increase in tax revenue

As of 23rd June 2020, the Commercial Taxes Department of Andhra Pradesh collected Rs. 43,332 crore against its target of Rs. 55,243 crore in the financial year 2019-2020. However, this amount is significantly more than what was collected in the previous financial year. 

In 2019-2020, sums collected for various purposes are: Rs. 232.37 crore for professional tax, Rs. 10,403.84 for liquor, Rs. 10,265.85 for petroleum products, as well as the GST revenue of Rs. 22,430.38. Andhra Pradesh’s Deputy Chief Minister said that the amount collected in 2019-2020 (Rs. 43,332.45) was more than Rs. 43,053.92 collected the previous year. This was an increase of Rs. 0.65%.

Pondicherry government decides to levy 50% more tax on alcohol. 

As of 2nd April 2020, India is on the verge of releasing its second round of relief package for the economy, which has been affected by the pandemic. Some industry sectors are significantly affected, including small, medium and micro level enterprises. Similarly affected are such enterprises dealing with services and exports. As of now, the government is in talks with the World Bank for getting some form of relief package for the strengthening of its healthcare industry. Some steps which are currently being taken include reduction in import and export duties, introducing a moratorium on some tax payments for some industry sectors, and levying additional interest for exports, and the relaxing in the payment of fees and dues. The RBI has introduced measures like introducing cuts in the repo rate by 75 basis points and a reduction of 100 basis points in the cash reserve ratio. These were to free up liquidity. A 3-month moratorium has been mentioned as well.

Pandemic tax relief measures by the government may cost it 3% of the GDP

As of 27th March 2020, tax experts say that the tax relief measures given by the government to easy life during the pandemic will have a significant effect on the government’s earnings. The move shall be to address issues like deferment of payments and liquidity, even if they give 2% to 3% to the GDP. 

Rs. 1.95 lakh tax will have to be given if one’s income is Rs. 15 lakh

As of 6th March 2020, according to the guidelines established in the 2020 Budget, if one's annual gross income is Rs. 15 lakh, the person is liable to pay Rs. 1.95 as tax. However, the said taxpayer will have to give up on a number of exemptions like Section 80C. New tax slabs are optional and are also subject to certain conditions. According to the Indian Finance Minister, people earning Rs. 15 lakhs and not claiming deductions will have to pay the tax. Earlier, the tax under this slab was Rs. 2.73 lakhs, bringing the deduction to a total of Rs. 78,000. The tax measure is to remove 70 out of the 100 exemptions to simplify the Income Tax Act.

People earning salary over Rs. 13 lakhs per year can save more now

As of 5th March, 2020, under the new tax system introduced by the government, people earning a salary of Rs. 13 lakh, and who can also get Rs. 2 lakhs as tax deductions, can save more on tax if they opt for the new tax system. However, those earning below Rs. 12 lakh per year shall be benefitted by staying with the old system. If you have a salary of Rs. 13 lakh per year, you’ll have to pay Rs. 1.43 as tax under the new system. In the old system, one has to pay Rs. 1.48 for the same. If you earn Rs. 14 lakh per year, you’ll save Rs. 10,400 in taxes. If you earn Rs. 15 lakh per year, you’ll save Rs. 15,600 in taxes if you claim Rs. 2 lakh in deductions.

Fiscal deficit put at 3.8% for Financial Year 2020 for the Budget 2020

As of 1st February 2020, the Union Finance Minister said in her budget speech that the country’s fiscal deficit is pegged at 3.8%, which is a significant ease from 3.3% as targeted by the government. It should be noted that the gap of expenses and income has touched 114.8% the previous financial year with an estimate of Rs. 8.07 crore by November 2019.