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BASIC KNOWLEDGE

TAX in India

Taxes are levied by governments on their citizens to generate income for undertaking projects to boost the economy of the country and to raise the standard of living of its citizens. The authority of the government to levy taxes in India is derived from the Constitution of India, which allocates the power to levy taxes to the Central and State governments. All taxes levied within India need to be backed by an accompanying law passed by the Parliament or the State Legislature.

The payment of tax is beneficial on multiple levels including the development of the nation, betterment of infrastructure, the upliftment of the society, and even for welfare activities for the nation.

Types of Taxes

There are two main categories of taxes, which are further sub-divided into other categories. The two major categories are direct tax and indirect tax. There are also minor cess taxes that fall into different sub-categories. Within the Income Tax Act, there are different acts that govern these taxes.

1. Direct Tax

Direct tax is tax that are to be paid directly to the government by the individual or legal entity. Direct taxes are overlooked by the Central Board of Direct Taxes (CBDT). Direct taxes cannot be transferred to any other individual or legal entity.

Sub-categories of Direct Taxes

The following are the sub-categories of direct taxes:

Income tax:
This is the tax that is levied on the annual income or the profits which is directly paid to the government. Everyone who earns any kind of income is liable to pay income tax. For individuals below 60 years of age, the tax exemption limit is Rs.2.5 lakh per annum. For individuals between the age of 60 and 80, the tax exemption limit is Rs.3 lakh. For individuals above the age of 80, the tax exemption limit is Rs.5 lakh. There are different tax slabs for different income amounts.Apart from individuals, legal entities are also liable to pay taxes. These include all Artificial Judicial Persons, Hindu Undivided Family (HUF), Body of Individuals (BOI), Association of Persons (AOP), companies, local firms, and local authorities

Capital gains:

Capital gains tax is levied on the sale of a property or money received through an investment. It could be from either short-term or long-term capital gains from an investment. This includes all exchanges made in kind that is weighed against its value.

Securities transaction Tax: STT is levied on stock market and securities trading. The tax is levied on the price of the share as well as securities traded on the ISE (Indian Stock Exchange).

Prerequisite Tax:

These are taxes that are levied on the different benefits and perks that are provided by a company to its employees. The purpose of the benefits and perks, whether it is official or personal, is to be defined.

Corporate tax:

The income tax paid by a company is defined as the corporate tax. It is based on the different slabs that the revenue falls under. The sub-categories of corporate taxes are as follows:

Dividend distribution tax ( DDT):

This tax is levied on the dividends that companies pay to the investors. It applies to the net or gross income that an investor receives from the investment.

Fringe benefit taxo (FBT):

This is tax levied on the fringe benefits that an employee receives from the company. This include expenses related to accommodation, transportation, leave travel allowance, entertainment, retirement fund contribution by the employee, employee welfare, Employee Stock Ownership Plan (ESOP), etc.

Minimum Alternative Tax (MAT):

Companies pay the IT Department through MAT which is governed by Section 115JA of the IT Act. Companies that are exempt from MAT are those that are in the power and infrastructure sectors

2. Indirect Tax

Taxes that are levied on services and products are called indirect tax. Indirect taxes are collected by the seller of the service or product. The tax is added to the price of the products and services. It increases the price of the product or service. There is only one indirect tax levied by the government currently. This is called GST or the Goods and Services Tax.

GST: This is a consumption tax that is levied on the supply of services and goods in India. Every step of the production process of any goods or value-added services is subject to the imposition of GST. It is supposed to be refunded to the parties that are involved in the production process (and not the final consumer).

GST resulted in the elimination of other kinds of taxes and charges such as Value Added Tax (VAT), octroi, customs duty, Central Value Added Tax (CENVAT), as well as customs and excise taxes. The products or services that are not taxed under GST are electricity, alcoholic drinks, and petroleum products. These are taxed as per the previous tax regime by the individual state governments.

emergency when you have to seek the help of a consulate.

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

Government tenders: This depends on the individual government department with no specific strict rules, yet ITR receipts are sometimes requested to be furnished when applying for any government tenders. This is to ensure that you have sufficient income and can support the payment obligations.

Carrying forward of losses: Short-term or long-term capital losses are usually carried forward to be adjusted against the capital gains made in the subsequent years. For example, the long-term capital loss of one year can be carried forward for up to 8 consecutive years that immediately succeed the year in which the loss had occurred. However, a long-term capital loss can be adjusted only against a short-term capital gain of that year. Short-term capital gains, however, can be adjusted against both short-term and long-term gains. However, this can only be availed if income tax returns have been filed.

Claiming tax refunds: Any refunds that are due from the IT Department can only be claimed if income tax returns have been filed. Even if income is below the tax exemption bracket, there could be refunds from different savings instruments that can be claimed if ITRs are filed. An example is fixed deposits, on which there is tax deducted at source at 10%.

High-cover life insurance: Life cover or a Term Policy with sum insured that ranges from Rs.50 lakh to Rs.1 crore can be availed only by furnishing income tax returns which helps in the verification of annual income. Such a high insurance cover is only given when there is a high income for which income tax return receipts are necessary.

Compensation: For self-employed individuals, ITR receipts may have to be furnished in order to claim compensation in the event of a motor vehicle accident that results in a disability or accidental death. This is because, in order to arrive at the appropriate compensation, income of the person is to be established first

Penalty for not Paying Taxes

The government can impose penalties of varying degrees on any individual or legal entity who evades taxes. The penalty is dependent on the category of the tax that has not been paid. This means that the amount that is owed as taxes should be paid and in addition to that, the fine as well as its interest is to be paid as the penalty.

ways in which you can file your income tax returns. They are Electronic transmission of data under the electronic verification code and afterwards submission of verification in Return Form ITR-V, Paper form and Electronic returns with digital signature.

How are excess taxes refunded?

To claim refunds on excess taxes paid, you will first have to file your income tax returns. They will be credited to your bank account through the Electronic Clearing System (ECS) facility.

What are the different heads under which taxpayers are taxed?

Income tax payers are taxed on 5 heads under Section 14 of theIncome Tax Act, 1961. They are Income from salary, profits and gains of profession or business, house property, capital gains, other sources.

What differentiates gross total income from total taxable income?

Gross total income is basically the sum of your income from salary, income from capital gains, profits or gains from profession or business, income from house property and income from other sources. It is the amount of money you have earned totally from all your sources of income. Your total income is basically your gross total income minus deductions under Section 80C to Section 80U.

How much income should I earn to pay tax?

Individuals who are under 60 years of age will be subject to income tax if they earn an income in excess of Rs.2.5 lakh. Indian residents who are above 60 years of age but under 80 will be taxed if they earn more than Rs.3 lakh per annum, while those who are above 80 years of age will have to pay tax if they earn in excess of Rs.5 lakh per year.

How do I calculate my taxes?

To calculate your tax liability, you will have to add your income from salary, income from capital gains, profits or gains from profession or business, income from house property and income from other sources, which will give you your gross total income.

How do I calculate my taxes?

Then, you will have to take into account your deductions under Section 80C to Section 80U, which will give you your total income. From your total income, allow for rebate under Section 87A and subtract it to arrive at your tax liability after rebate. Then, add surcharge, which will give you your tax liability after surcharge. Then, add the applicable cess. You will then know your tax liability.