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Taxation in India

 India Tax is regulated and administered by the Ministry of Finance under the Government of India.

Taxation is the government's main source of revenue and several types of taxes are applied to different categories of the population.

The following is a brief description of some of the taxes that are levied in India by the government:

Income Tax : The Income Tax Act of 1961 stipulates that any person who qualifies as an assessee and whose gross income is more than the exemption limit is required to pay Income Tax in accordance with the rates indicated by the Finance Act.

Corporate Tax : India Corporate Tax is the tax charged on the profits earned by associations and companies by several jurisdictions. The rate of Corporate Tax in India depends on whether the profits have been passed on to the shareholders or not.

Value Added Tax : This is the tax that a manufacturer needs to pay while purchasing raw materials and a trader needs to pay while purchasing goods. VAT is eventually expected to replace Sales Tax. All goods and services provided by business individuals and companies come under the ambit of VAT.

Capital Gains Tax : A Capital Gain can be defined as an any income generated by selling a capital investment (business stocks, paintings, houses, family business, farmhouse, etc.). 

The 'gain' here is the difference between the price originally paid for the investment and money received upon selling it, and is taxable.

Service Tax : As per the Finance Act of 1994, all service providers in India, except those in the state of Jammu and Kashmir, are required to pay a Service Tax in India.

Fringe Benefit Tax : As per Section 115WB of the Finance Bill, expenses incurred for employees, by an employer (individual/company/local authority/trader) for purposes of entertainment, gifts, telephone, clubbing, festivals etc., will be treated as Fringe Benefits and will be taxed.

Types of Tax

* Direct Tax
* Indirect Tax
* Flat Tax
* Consumption Tax
* Income Tax
* Sales Tax
* Excise Tax
* Wealth Tax
* Transfer Tax
* Poll Tax
* Payroll Tax
* Dividend Tax
* Fuel Tax
* Social Security Tax
* Self Employment Tax
* Federal Income Tax
* Deposit Interest Retention Tax
* Estate Tax

Tax System in India

India has a well developed taxation structure. The tax system in India is mainly a three tier system which is based between the Central, State Governments and the local government organizations.

In most cases, these local bodies include the local councils and the municipalities.

According to the Constitution of India, the government has the right to levy taxes on individuals and organizations.

However, the constitution states that no one has the right to levy or charge taxes except the authority of law. Whatever tax is being charged has to be backed by the law passed by the legislature or the parliament.

The main body which is responsible for the collection of taxes is the Central Board of Direct Taxes (CBDT). It is a part of the Department of Revenue under the Ministry of Finance of the Indian government.

The CBDT functions as per the Central Board of Revenue Act of 1963.

Types of direct taxes

Usually, the Central Government levies taxes on income, central excise duties, services taxes and various other types of direct taxes.

Some of the various forms of direct taxes are:

Corporate Income taxes: 
According to the Income Tax Act, the companies and business organizations in India are taxed on the income from their worldwide transactions. In case of non resident business organizations, tax is levied on the income which is earned from their business transactions in India or any other Indian sources.

In case of the resident or domestic organizations, a tax of 35 % and a 2.5 % surcharge is levied. In case of foreign corporate organizations, a basic tax rate of 40 % and 2.5 % surcharge is levied. In addition to these, 2% of education cess is also charged on the tax amount. In case the net profit becomes more than $ 33333, the organizations have to pay an additional 1 % as wealth tax.

Personal Income Tax:
The Central Government levies the Personal Income Tax. It is administered and supervised by the Central Board of Direct taxes as per the provisions of the Income Tax Act.

The personal income tax rates are as follows:
* 0-100,000- No tax needed
* 1, 00,000-1, 50,000- 10 %
* 1, 50,000-2, 50,000- 20 %
* 2,50,000 and above- 30 %

If the personal income becomes more than INR 8, 50,000, a surcharge of 10 % of the total tax amount is levied.

Some adjustments have been made in the recent budget about the rates of tax on the personal income. The threshold limit has been increased by INR 10,000 which gives the assessee a tax relief Rs. 1,000. If the assessee is a woman, the threshold limit will be increased to Rs.145, 000 from Rs 135,000 while in case of senior citizens and the aged, the threshold limit has been increased to Rs 195,000 from Rs.185, 000.

This will give the assessee a tax relief of Rs 2000. Under the section 80D, the deduction of medical insurance premium has been increased to a maximum limit of Rs 15,000 while for senior citizens, it has been increased to a maximum of Rs.20, 000.

Capital Gains Tax:
The central government also charges tax on the capital gains that is derived from the sale of the assets. There are a number of provisions like:

The Long-term Capital Gains Tax is charged if:
* The capital assets are kept for more than three years
* If the securities and shares are listed under any recognized Indian stock exchange.

In case of the long term capital gains, they are taxed at a basic rate of 20 %. Normal corporate income tax rates are applicable for short term capital gains. 10 % tax is levied on the short term capital gains that take place from the transfer of the units of mutual funds and equity shares.

In case of the short term and long term capital losses, they are lowed to be carried forward for 8 consecutive years.

Types of indirect taxes
Excise Duty:
The central government levies excise duty under the Central Excise act of 1944 and the Central Excise Tariff Act of 1985.

In most cases, around 16% excise duty is charged and in some cases, an additional excise duty of around 8 % is also charged.

Due to the recent budget amendments, an educational cess of around 2 % is also charged.

In the recent budget, a number of tax exemptions have been initiated. Tax relied has been created in sectors which create jobs like small scale industries, cottage industries, food processing sectors, bio diesel and so on.

In order to provide access of electricity and purified water, the water plans and purification technology sectors are also exempt from tax. Excise duty has been increased by around 5 % on cigarettes and other tobacco products.

Customs Duty:
Customs duty in India falls under the Customs Act 1962 and Customs Tariff Act of 1975. Usually, the goods that are imported to the country are charged customs duty along with educational cess.

For industrial goods, the rate has been slashed to 15%. The customs duty is evaluated on the value of the transaction of the goods.

The Central Board of Excise and Customs under the Ministry of Finance manages the customs duty process in the country.

Service Tax:
Usually, 10 % service tax is levied on various services that are provided in the country. In the recent budget, the tax exemption limit in case of the small service providers has been raised to Rs.800, 000 from Rs.400, 000.

Tax relief has also been provided to the services of the Resident Welfare Associations whose members contribute monthly Rs 3000 for the services.

Types of state taxes

Apart from the central taxes, the states also levy taxes on various good and services. Some of the taxes are:

Sales Tax/VAT:
In most cases, sales taxes are charged on the sale of movable goods. In most of the states, from April 1, 2005, the sales taxes have been replaced with Value Added Tax (VAT). In case of VAT, taxes are only levied on the goods and not the services.

VAT comprises 4 slabs:
* 0% for essential commodities
* 1% levied on bullion and valuable stones
* 4% on industrial inputs and capital goods of mass consumption
* All other items 12.5%

The VAT rates of petroleum tobacco, liquor and so on are higher and differ from state to state.

In addition, there are some other state and local taxes that are applicable.

They are:
* Octroi/entry tax
* Stamp duty on asset transfer
* Property/building tax
* Agriculture income tax



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