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Classification of Taxes

What is Tax?

Tax, in general, is the imposition of financial charges upon an individual or a company by the Government of India or their respective state or similar other functional equivalents in a state. The computation and imposition of the varied taxes prevalent in the country are carried on by the Ministry of Finance’s Department of Revenue. During the year of 2010 – 2011, the gross collection of tax amounted to around INR. 7.92 trillion, where the direct tax has got 56 % contribution and the indirect tax has got 44 % contribution. In 2014-15 the gross tax collection was up by 5,46,661 crores or by a percentage of 12.93% as compared to what is was in the fiscal year 2013-14.

Different Types of Taxes

Prevalence of various kinds of taxes is found in India. Taxes in India can be either direct or indirect. However, the types of taxes even depend on whether a particular tax is being levied by the central or the state government or any other municipalities. Following are some of the major Indian taxes:

Direct Taxes

It is names so because it is directly paid to the Union Government of India. As per a survey, the Republic of India has witnessed a consistent rise in the collection of such taxes over a period of past years. The visible growth in these tax collections as well as the rate of taxes reflects a healthy economical growth of India. Besides that, it even portrays the compliance of high tax along with better administration of taxation. To name a few of the direct taxes, which are imposed by the Indian Government are:

  • Banking Cash Transaction Tax
  • Corporate Tax
  • Capital Gains Tax
  • Double Tax Avoidance Treaty
  • Fringe Benefit Tax
  • Securities Transaction Tax
  • Personal Income Tax
  • Tax Incentives
  • Indirect Taxes

As opposed to the direct taxes, such a tax in the nation is generally levied on some specified services or some particular goods. An indirect tax is not levied on any particular organization or an individual. Almost all the activities, which fall within the periphery of the indirect taxation, are included in the range starting from manufacturing goods and delivery of services to those that are meant for consumption. Apart from these, the varied activities and services, which are related to import, trading etc. are even included within this range. This wide range results in the involvement as well as implementation of some or other indirect tax in all lines of business.

Usually, the indirect taxation in the Indian Republic is a complex procedure that involves laws and regulations, which are interconnected to each other. These taxation regulations even include some laws that are specific to some of the states of the country. The regime of indirect taxation encompasses different kinds of taxes. The organizations offer services in all or most of the related fields, some of which are as follows:

  • Anti Dumping Duty
  • Custom Duty
  • Excise Duty
  • Sales Tax
  • Service Tax
  • Value Added Tax or V. A. T.
  • Municipal or Local Taxes in India

The most known tax, which is levied by the local municipal jurisdictions on the entry of goods, is known as the Entry Tax or the Octori Tax.

Income Tax

Income Tax in India includes all income except the agricultural income that is levied and collected by the central government. This particular income is also shared with the states. The Income Tax was incorporated in India from the year1860.

However, after many alterations, finally with the Indian Income Tax Act, 1922, there was a revolutionary change brought by the All India Income Tax Committee. This is significant as after this the administration of the Income Tax came under the direct control of the Central Government. This Act got amended again in the year 1961, and the present Income Tax regime in India is still following the provisions of the Act of 1961.

As per the Income Tax Act 1961, the assessee whose total income level is more than the maximum exemption limit, are under the domain of chargeable Income Tax. The assessee has to pay the Income Tax at the rates stated in the provisions of the Finance Act. The payment of the Income Tax is to be calculated on the total income of the last year in the relevant financial assessment year. For the determination of the total income of an individual the residential status in India is a necessary parameter. Every Income Tax payer should file Tax Return under the existing law.

Consumption Tax

Consumption Tax is applicable on the consumption of any type of good or service. This particular tax is based on consumption and not on income or labor. The Consumption Tax can be regarded as a sales tax, as this tax is also regressive in nature like the other pure sales taxes. However, there are some remedies by which the Consumption Tax can be made progressive in nature. Some of the methods for reducing the regressive trait of this tax include use of exemptions, deductions, graduated rates, or rebates. This will in other terms allow accumulation of savings exempting the tax burdens.

Dividend Tax

Dividend Tax is type of an income tax which is levied on the payments made as the dividend to the shareholders of the company paying the tax. Dividends are the shares of the profit of the company which are the given to the shareholders.

The controversy arises here because dividend is nothing but the part of the profit of the company. The profit is the income of the company and a tax is paid on that income. Again, when the dividend is paid to the shareholders, a dividend tax is levied on them and so there is double taxation on the same income – once, tax is paid by the company and then the shareholder pays the tax on the same amount as well.

The dividend tax has become one of the major issues of debate in the financial market. Many of the countries are taking steps for abolishing the dividend tax as because the double taxation is not considered good for the economy. The dividend tax also poses a problem for the senior citizens and the retired personnel. Many financial experts are of the opinion that dividend tax should be abolished in order to develop the economy and a fair practice of taxation should be followed.

Endowment Tax

Over the years Indian companies have been asking for a break from endowment taxes so that they can provide the institutions with more funds. Prominent businessmen like Rajan Mittal, the Vice Chairman cum Managing Director of Bharati Enterprises have lent their support towards giving business organizations 100 percent break from endowment taxes.

He has reasoned that this benefit is necessary so that companies could contribute towards better research in the higher educational sector. His statements have found support from other well known names in the Indian business fraternity such as Amit Mitra, who works as the secretary general of the FICCI.

As of now, Indian companies can provide financial aid to educational institutions that are located outside the country as they are operated by trusts. In India, trusts that run educational set-ups can receive the benefit only if they are acknowledged as a section 25 organization as per the Income Tax Act or under the charities commissioner. Lot of companies provide financial aid to international education institutes and the main reason for this is the attitude of the Income Tax Department, which sees such transactions as tax evasion exercises. These business houses also prefer to be transparent when it comes to detailing the usage of funds spent by them.

Estate Tax of Inheritance Tax or Death Tax

Estate Tax, also referred as Death tax or Inheritance Tax, is gaining prominence with the boom in the real estate market across the world. The Estate Tax rates vary widely across countries all over the world.

It is recorded that Japan stands at the top offering a tax rate of 70%, followed by South Korea (50%), the US (46%), and 40% for France and UK each. Along with India, there are some other countries like China, Australia, Russia, and Malaysia, which do not levy Estate tax. It should be noted that Estate Tax or Estate Duty which was earlier incorporated in India in the year 1953, was taken away under the aegis of the then Finance Minister, V.P. Singh in the year 1985. The economic growth and flourishing capital markets in India have been generating an unprecedented boost for the Indian promoters. Still not like the other advanced market economies of the world, there is no Estate Tax in India. On the other hand, across the globe the Estate Tax, also known as the Death Tax, is very important.

In general, the Estate Tax is payable on the economic value of the accumulated savings and assets of a deceased person. This tax on Estate was framed with the objective to prevent the inheritors from a rich family to enjoy too much privilege as compared to the less advantageous in the society. The intention was to strike a balance and maintain inter- generation equity. On the other hand, many tax experts often ridicule this Estate Tax, as this is difficult to assess and collect.

Flat Tax, also known as Flat Rate Tax

By Flat Tax or Flat Rate Tax it is indicated that the taxes on household income and corporate profits are fixed at a constant rate. Generally household income below a statutorily fixed level on the basis of the type and size of the household, are exempted from paying Flat Taxes.

This type of Flat Taxes is not a proper Flat Tax as there is a discrepancy between the taxable income and the total income. Taxation on consumption can also be labeled as a Flat Tax. In the advanced economies, a tax is payable on the incomes of the households and corporate profits, as a result of which Flat Tax is not very common in these nations. The United States have initiated a quick move to reform its tax system as under the present condition of competition in the global economy the jobs and capital flow to with the initiation of better tax law. The nine countries of the former Soviet Bloc have taken up versions of the Flat Tax, which has been yielding excellent results for the growth and development of the respective economies.

In general, a Flat Tax is simple, fair, and sets a necessary parameter for the growth of a state economy. Flat Tax requires only two forms of postcard size, one for labor income and the other for business and capital income. Flat Tax provides equal treatment to all the taxpayers without any discrimination based on the source, use, and level of income. This is also beneficial, as Flat Tax would reduce marginal tax rates and abolish the tax bias against all forms of saving and investment. However, even this Flat Tax is not free from loopholes as the households on the basis of family sizes get an exemption from paying the stipulated tax.

Fuel Tax

Fuel tax is also called as petrol tax, gas tax, gasoline tax, or fuel duty. The fuel tax is a type of a sales tax which is imposed on the sale of fuel. The fuel tax is one of the important factors pertaining to taxation in many countries.

The fuel tax in some countries is mostly hypothecated to roadways and transportation facilities such as in United States. The fuel tax in several other countries is regarded as the source of general type of revenue income. The fuel tax is mostly imposed on the fuel which is used for the purpose of transportation and not imposed on fuel used for the purpose of running agricultural vehicles, used as heating oil in households and other non transportation uses.

The demand for petrol is not very elastic in nature, so the fuel tax will regarded as a revenue generating source in the short run of the economy but as time passes, in the long run as per the theory of the experts, the populace would lower the consumption of fuel by the means of mass transit systems, fuel economic transport facilities, alternative source of fuel, etc and the sale of the fuel would fall, bringing down the tax revenue on the fuel. Some of the environmentalists are thinking of the idea of introducing fuel tax as a method of checking the pollution due to the burning of fossil fuels.

Gift Tax

Gift tax in India is regulated by the Gift Tax Act which was constituted on April 1, 1958. It came into effect in all parts of the country except Jammu and Kashmir. As per the Gift Act 1958, all gifts in excess of Rs. 25,000, in the form of cash, draft, check or others, received from one who doesn’t have blood relations with the recipient, were taxable.

However, with effect from October 1, 1998, gift tax got demolished and all the gifts made on or after the date were free from tax. But in 2004, the act was again revived partially. A new provision was introduced in the Income Tax Act 1961 under section 56 (2). According to it, the gifts received by any individual or Hindu Undivided Family (HUF) in excess of Rs.50,000 in a year would be taxable.

Important Definitions for Gift Tax

“Gift” means the transfer by one person to another of any existing movable or immovable property made voluntarily and without consideration in money or money’s worth, and 14 [includes the transfer or conversion of any property referred to in section 4, deemed to be a gift under that section].

“Donee” means any person who acquires any property under a gift, and, where a gift is made to a trustee for the benefit of another person, includes both the trustee and the beneficiary;

“Donor” means any person who makes a gift.

According to the law, individuals can receive gifts from the following sources:

  • Relatives or Blood Relatives
  • At the time of Marriage
  • As inheritance
  • In contemplation of death

Though Gift Act 1958 was not initially applicable to Jammu & Kashmir, however the current clubbing provisions in the Income Tax Act 1961 would be applicable to gifts of movable properties in the said state as well.

Gifts Exempted from Tax

Gifts are exempted from gift tax in the following cases:

  • The gift was given by a blood relative, irrespective of the gift value.
  • Immovable properties located outside the country.

An Individual cannot take his/her movable properties outside the country, unless the donor-

  • is an Indian citizen, who is originally a resident of India, or the individual is not a resident of India during the year of gift
  • Out of balance gift by NRI (Non-Resident Indian) in his Non-resident account.
  • Foreign currency gift of convertible foreign exchange, remitted from overseas by an NRI to a resident relative.
  • Foreign exchange asset gifted by NRI to his/her relatives.
  • Special Bearer Bonds, 1991.
  • Saving certificates issued by the Central Government (notified as exempted).
  • Capital Investment Bonds up to Rs.10,00,000 per year.
  • Relief Bonds gifts by an original subscriber.
  • Gifts of Certain bonds from the NRI to his/her relatives, which are subscribed in foreign currency (specified by the Central Government).
  • Gift to government or any local authority.
  • Gifts to any charitable institutions.
  • Gifts to notified temples, churches, mosques, gurudwaras and other places of worship.
  • Gift to children for educational purpose (Reasonable amount).
  • Gifts by an employer to its employees in the form of bonus, gratuity or pension.
  • Gifts under will.
  • Gifts in contemplation of death.

Sales Tax

Sales tax is levied when goods are sold or bought within a country or a state. There are two major types of sales taxes – central sales tax, levied by the Union Government and sales taxes, which are charged by the state governments.

Central sales taxes are applied when a dealer sells goods during interstate commerce or trade. These taxes are also implemented when a product is sold outside a state or when it is exported or imported.

The basic rule of sales taxes is that majority of products are liable to be taxed with the exception of drugs and food. Most of the services are exempted from sales taxes. In recent times, however, the state governments have been adding to the list of services that can be subjected to sales taxes.

It is advisable for the dealers to check with the relevant state sales tax departments to get the complete list of products and services that can be subjected to the said tax.

Sales Tax: Concerned Authority and Taxpayers

Sales taxes are provided to the concerned authorities of the state which is source of the transfer of the goods in question. Every dealer who sells goods in a state during interstate commerce and trade is supposed to pay these taxes. The states cannot impose sales taxes in case the sale or purchase happens outside its limits of jurisdiction and if the goods are being exported or imported from and in India. In such cases, only the parliament has the authority to levy these taxes.

Sales State Tax Laws and its Rules and Regulations

The important principles applicable in case of state sales tax laws may be enumerated as below:

  • A good is regarded as sold/bought when the transfer involves money.
  • When the dealers are being assessed they need to provide all the documents and proofs of their tax payment so that the commercial or sales tax officer is satisfied.
  • In majority of the transactions, sales tax applies on the basis of a single point.
  • All the states have different procedures for appeals made by the assessee.
  • In some states the assessee are categorized into manufacturers, selling agents, and dealers, and they are required to obtain necessary certificates. Different rates apply to these entities.
  • All the dealers are supposed to make application registrations and procure it as well. The registration number needs to be provided for all cash or bill memos.

Sales Tax ID Numbers

The sales tax ID numbers are primarily business versions of the Social Security Numbers. The holders of these numbers can both pay and collect sales taxes on goods specified by the respective state governments. These numbers are normally provided within a month of application by the state departments of taxation.

Tax Exemptions

Exemptions from sales taxes are offered if the product or service has been sold to a reseller like a retailer or wholesaler who has an authentic state resale certificate. If assets are sold to tax-exempt organizations like charities or schools then exemptions provided as well.

Sales Tax in case a company is closing down

If a receiver or liquidator is employed for a company that is presently being shut down, the officer should provide information about his or her hiring to the concerned sales tax authorities within 30 days of his hiring.

In case of such companies, the preferential creditors are regarded as the sales tax authorities and they will inform the officer about the tax amount to be paid within a time period of 3 months.

The liquidator is not supposed to sell off any assets of the particular company before paying the remaining sales taxes. However, they can sell off the assets for the purpose of generating the money needed to pay the taxes that have to be paid as per the CST Act.

This procedure can also be followed if the company needs to pay off certain creditors before the government receives its tax dues. The liquidator or receiver, still, needs to consult the relevant authorities before taking such a step.

In case a company is liquidated without the recovery of the amount, the director or group of directors need to pay off the amount. Directors can still avoid paying this tax if they can prove the payment was due as a result of negligence, financial misappropriation or failure to perform the required duties.

Violation of Sales Tax and Punishment given thereafter

Following are major offences committed in the domain of sales tax:

  • Providing incorrect information in Forms C, F, E-I, H, and E-II.
  • Misappropriating goods that have been procured at a discounted rate as per Form C.
  • Not obtaining registration as per the CST Act or not adhering to the related security provisions.
  • Owning Form C without adhering to the CST Act regulations.
  • An incorrect statement from a registered dealer that the purchased goods have been covered as per an authentic certificate of registration for concessional rates obtained by the same.
  • If an unregistered dealer collects an amount as sales tax. This is also applicable in case a registered dealer does the same thing in violation of the CST Act.
  • Falsely projecting oneself as a registered dealer.
  1. E. T. or Self Employment Tax

Self-employment tax (SET) is a type of a taxation pertaining to the social security tax and the Medicare tax for the individuals those who are self employed, i.e., the people engaged in business or commercial activity of some kind which is legally approved by the Governmental authorities. The concept of self-employment tax is more or less similar to the social security tax and the Medicare tax which is withhold from the monthly income of the professionals engaged in any kind of services under the private or the public sector. The employers of most of the working professionals calculate the social security tax and the Medicare tax of the concerned person.

Social Security Tax

Social Security Tax is a popular concept in the United States of America. The Social Security Tax is a benefit scheme for the employees after their retirement from work.

The social security tax is contributed in two parts – a part of the monthly income of the employee is deducted at source and another part is contributed on a monthly basis by the employer under whom the employee is working. The total sum of money makes up the social security tax. The social security tax benefits are financed with the help of the tax levied on the employee’s income. In case of a self-employed person, the contribution for the social security tax is made entirely by the person himself. The social security tax is levied under the norms of the United States Social Security Act of 1935, which was set up for the purpose of providing national social insurance in order to provide economic security to employees in the United States.

The social security tax programs are popular in India in the name of Provident Fund. The concept of the Provident Fund is similar to the social security tax programs. Provident Funds are of different types such as Public Provident Fund, General Provident Fund, and Employee’s Provident Fund. The General Provident Fund is provided to the employees of the central government, the Public Provident Fund is provided by the State Bank of India, the largest commercial bank in India for the employees of the state government, and the Employee’s Provident Fund is also provided by the State Bank of India, for the private sector employees.

Transfer Tax

Transfer Tax in other words implies the tax imposed on the handing over of the title of property ownership by one person to another. It incorporates a legal transaction fee, which is involved with the title to property being transferred from one to another.

This tax is not very common form of taxation and is imposed where the registration of the transfer involves a legal requirement. Such are generally found to be associated with transfers of real estate, shares, or bond. Although Stamp Duty and the Real Estate Transfer Tax are examples of the Transfer Tax, it should be noted that the fees paid to the notaries during any legal jurisdictions are not treated as transfer tax.

Payroll Tax

Payroll tax is one of the important concepts in taxation. Payroll tax comprises of 2 types of taxes. The Payroll tax may follow a fixed rate format or the rate may be directly proportional to the income or wage of the employee. More about payroll tax

Poll Tax

In India, Poll Tax is similar to the road tax on vehicles, but it should be noted that this tax is not very popular here. However, in the year 2002, it was decided by the Minister for Transport that the Poll Tax on all-India tourist vehicles entering the state of the Jammu and Kashmir would be Rs. 2,000 per day per vehicle.

Property Tax

The property taxes in India are normally imposed on the yearly value of the taxable assets. In case the income is rental, it will be subjected to the tax rates applicable for income from housing property.

If the property is held for professional or business reasons then the profits from the same will be subjected to taxes:

Property Tax Deductions

In India deductions from property taxes are provided in the following cases:

If 30% of the yearly value of the house has been used for maintenance and repairs

If the property has been bought, repaired, established, or renewed using loans. If the house has been remade using borrowed money then the interest paid on the same will be exempted from property taxes.

Concept of Deemed Owner

In few cases the assessee may not actually own the property but may be regarded as a deemed owner. In such instances, the assessee will be regarded as the property’s owner and income generated from that property will be subjected to property taxes.

The following cases are regarded as being instances of deemed owners:

  • If an individual has handed over any property for a small compensation or has gifted it to a minor child or spouse. However, transfers to married daughters will not be considered.
  • Any individual who conforms to the provisions in the Section 53A of the Transfer of Property Act will be considered a deemed owner. This section focuses on situations whereby a building has been transferred but there is no proper registered agreement to document the transaction.
  • Owners of impartable estates are regarded as possessors of such property.
  • If an individual has leased a property for a minimum period of 12 years he or she will be regarded as a deemed owner.
  • Members of co-operative societies, companies and other associations who have been assigned a real estate property as per a house building scheme are considered as deemed owners.

Self Occupied Property

A property is regarded as a self owned one under the following circumstances:

  • If the property or a part of the same is owned for residential purposes
  • If the property or a certain portion of it is being used for business and professional reasons and the owner has to stay at another location
  • Co-owners
  • If a property is co-owned by 2 or more people the following factors come into play while deciding on the tax amount:
  • If the co-owners have definite and clear shares they will not be regarded as an association
  • The share of every individual who makes an income from the property will be included in the aggregate income of the co-owners.

Wealth Tax

Wealth tax is normally levied on the basis of the net wealth of the assessee, which could be an individual, a company or a Hindu Undivided Family.