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Overview of taxation system in India

India has a well-developed tax formation with acutely demarcated authority between Central and State Governments and local bodies. Central Government levies some direct and indirect taxes on person and commodities respectively. Direct taxes are, Personal Income Tax, Wealth Tax, and Corporation Tax while indirect tax includes; Sales Tax, Excise Duty, Customs Duty and Service Tax. Currently, corporation tax (20% of total tax collection) is the most influential source of income of the central administration.

Tax System in India

India has a well-developed tax structure with clearly demarcated authority between Central and State Governments and local bodies. Central Government levies some direct and Indirect taxes on individual and commodities respectively. Direct taxes are, Personal Income Tax, Wealth Tax, and Corporation Tax while indirect tax includes; Sales Tax, Excise Duty, Customs Duty and Service Tax.

Value Added Tax (VAT), stamp duty, state excise, land revenue and profession tax are levied by the State Governments. Local bodies are permitted to levy a tax on properties, octroi and for services like water supply, drainage etc.

Indian taxation system has experienced huge changes during the last decade. The tax rates have been deliberated and tax laws have been analysed following in better compliance, ease of tax payment and better enforcement. The method of rationalization of tax administration is continuous in India.

Direct Taxes

In the case of direct taxes (Income Tax, Wealth Tax, Corporation tax etc.), the burden directly falls on the taxpayer. These are those taxes which can’t be transferred on the others by the taxpayers.
  • Income Tax:

    According to Income Tax Act 1961, every person, who is an assessee and whose total income surpasses the maximum exclusion limit, shall be chargeable to the income tax at the rate or rates designated in the Finance Act. Such income tax shall be paid on the total income of the prior year in the relevant tax year.
     
  • Corporate Tax:

    it is a tax required on the net income of the company. Description: Companies, both private and public which are recorded in India under the Companies Act 1956, are subject to pay corporate tax. For the assessment year 2014-15, domestic corporations are taxed at the rate of 30%.

Definition of a company

A company has been established as a juristic body having an independent and separate legal existence from its shareholders. The income of the company is measured and evaluated clearly in the hands of the company. However, the income of the company, which is assigned to its shareholders as a dividend, is charged in their individual hands. Such concentration of income is not treated as expenditure in the hands of the company; the income so distributed is an appropriation of the profits of the company.

Different kinds of taxes relating to a company
  1. Minimum Alternative Tax (MAT)
  2. Fringe Benefits Tax (FBT)
  3. Dividend Distribution Tax (DDT)
  4. Banking Cash Transaction Tax (BCTT)
  5. Securities Transaction Tax (STT)

Wealth Tax

Wealth tax, in India, is levied under the Wealth-tax Act, 1957. Wealth tax is a tax on the profits received from property ownership. The tax is to be given year after year on the same property on its market value, whether or not such property yields any income. Under the Act, the tax is charged in respect of the wealth held during the assessment year by the following persons:
  • Individual
  • Hindu Undivided Family (HUF)
  • Company

Indirect Taxation

Indirect taxes are those taxes which can be transported on the others by the taxpayers. As if the central government increases the rate of service tax on different services then sellers pass on this supplement on the final consumers of the services.
  1. Sales tax (imposed on the sale of goods. It can be of two types; central sales tax and states sales tax)
  2. Central Sales Tax (CST):

    It is usually payable on the sale of all goods by a merchant in the course of inter-state trade or commerce or, outside a state or, in the course of import into or, export from India.

Value Added Tax (VAT)

VAT is a multi-stage tax on goods that is levied across different stages of production and supply with credit given for tax paid at each stage of Value bonus. Introduction of state-level VAT is the most important tax reform measure at the state level. The state-level VAT has followed the existing State Sales Tax. It was started from April 1, 2005, in the country.


Excise Duty

Central Excise duty is an indirect tax levied on goods created in India. Excisable goods have been defined as those, which have been defined in the Central Excise Tariff Act as being subjected to the duty of excise.

There are three types of Central Excise duties raised in India particularly:
  1. Basic Excise Duty

    This is the duty imposed under section 3 of the Central Excises and Salt Act,1944 on all excisable goods other than salt which are produced or produced in India at the rates outlined in the schedule to the Central Excise Tariff Act,1985.
     
  2. Additional Duty of Excise

    Section 3 of the Additional Duties of Excise (goods of special importance) Act, 1957 empowers the levy and collection in respect of the goods described in the Schedule to this Act. This is levied instead of Sales Tax and shared between Central and State Governments. These are levied following different enactments like medicinal and toilet preparations, sugar etc. and other industries development etc.
     
  3. Special Excise Duty

    As per the Section 37 of the Finance Act, 1978 Special excise Duty was brought on all excisable goods on which there is a levy of Basic excise Duty under the Central Excises and Salt Act, 1944. Since then each year the applicable provisions of the Finance Act defines that the Special Excise Duty shall be or shall not be levied and collected during the relevant financial year.


Customs Duty

Custom or import taxes are levied by the Central Government of India on the goods imported into India. The rate at which customs duty is leviable on the goods depends on the kind of goods defined under the Customs Tariff. The Customs Tariff is usually followed by the Harmonised System of Nomenclature (HSL).

In line with following the customs duty and bringing it at par with the ASEAN level, the government has decreased the peak customs duty from 12.5 per cent to 10 per cent for all goods other than agriculture products. Nevertheless, the Central Government has the ability to regularly exempt goods of any specified description from the whole or any part of the duties of customs leviable thereon. In extension, preferential/concessional rates of duty are also possible under the various Trade Agreements.

Service Tax

Service tax was launched in India way back in 1994 and started with mere 3 basic services viz. general insurance, stockbroking and telephone. Today the counter services subject to tax have reached over 120. There has been a constant increase in the rate of service tax. Currently, India receives near about 60% of its GDP from it. The current rate of service tax is 14% in India.

Brij Lal v. Commissioner of Income Tax [1]

In view of the different judgements of the Supreme Court in Anjum Ghaswala[2], Hindustan Bulk Carrier[3] and Damani Brothers[4], a recommendation was made to the Full Bench of the Supreme Court to answer the questions:
  1. Whether sections 234A, 234B and 234C refers to proceedings of the Settlement Commission under Chapter XIX-A?
     
  2. If the answer to the above question is in the positive, what is the concluding point for duty of such interest — whether such interest should be computed up to the date of the order under section 245D(1) or up to the date of the order of the Commission under section 245D(4); and
     
  3. Whether the Settlement Commission can reopen its concluded processes by invoking section 154 so as to levy interest under section 234B, though it had not been so done in the original proceedings?

The Supreme Court brought perfection to the issues by holding as under:
  • Though Chapter XIX-A is a self-contained Code, the method to be followed by the Settlement
    Commission under sections 245C and 245D is nothing but tax or estimate of total income which catches place at the section 245D(1) step. In that number, requirements dealing with a regular assessment, self-assessment and levy and computation of interest for default in payment of advance tax, etc. are engrafted. Accordingly, sections 234A to 234C are appropriate.
     
  • Interest under sections 234A to 234C is payable only up to the date of the section 245D(1) order and not up to the date of the section 245D(4) order. The Legislature has not contemplated levy of interest for the period between the section 245D (1) and the section 245D(4).
     
  • Section 245-I provides that the order of the Settlement Commission shall be final and conclusive.
    Hence, the Settlement Commission cannot reopen its concluded proceedings by invoking section 154 of the Act so as to levy interest under section 234B, particularly, in view of section 245-I.
     
  • Therefore, the Supreme Court held that the Settlement Commission cannot reopen ended operations by having recourse to section 154 to levy interest under section 234B if it was not done in the original proceedings.

Vijaya Bank v. Commissioner of Income Tax [5]

On a problem before the Hon’ble Supreme Court whether it is necessary for assessee-bank to close an individual account of each of its debtors in its books for claiming deduction under section 36(1)(vii) of the Income-tax Act, the Supreme Court referring to its judgment in Southern Technologies Limited v. Joint CIT[6] judged that in order to explain the term “write-off” one has to see how they write off has been produced.

If an assessee debits a number of doubtful debtors to profit and loss account and credits the asset account (i.e., sundry debtors) it would create an actual write off of a debt. On the opposite, if the amount is credited to current liabilities and provisions, then it would be a provision.

In the latter case, the assessee would not be allowed to the deduction after 1-4-1989. It was also believed that the assessing officer was allowed to tax the subsequent repayment if any, under section 41(1) of the Income-tax Act. Reference may also be made to the Supreme Court decision in TRF Limited vs CIT10 wherein it was held that bad debts need not be proven to be irretrievable under section 36(1)(vii). It is sufficient if they are written off.

End-Notes:
  1. [2010] [328 ITR 477]
  2. 252 ITR
  3. 259 ITR 449
  4. 259 ITR 475
  5. [2010] [323 ITR 166]
  6. 320 ITR 577

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