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Don't Tax Your Income, Tax Your Consumption

The taxation system in India is such that the taxes are levied by the Central Government and the State Governments. Some minor taxes are also levied by the local authorities such as the Municipality and the Local Governments.

To run the government and manage the affairs of a state, money is required. So the government imposes taxes in many forms on the incomes of individuals and companies.

Classification of Taxes

Broadly taxes are divided into two categories:
  1. Direct Taxes
  2. Indirect Taxes

Direct Taxes

A direct tax can be defined as a tax that is paid directly by an individual or organization to the imposing entity (generally government). A direct tax cannot be shifted to another individual or entity. The individual or organization upon which the tax is levied is responsible for the fulfillment of the tax payment.

The Central Board of Direct Taxes deals with matters related to levying and collecting Direct Taxes and formulation of various policies related to direct taxes.

A taxpayer pays a direct tax to a government for different purposes, including real property tax, personal property tax, income tax or taxes on assets, FBT, Gift Tax, Capital Gains Tax, etc.

Indirect Taxes
The term indirect tax has more than one meaning. In the colloquial sense, an indirect tax such as sales tax, a specific tax, value-added tax (VAT), or goods and services tax (GST) is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the consumer).

The intermediary later files a tax return and forwards the tax proceeds to the government with the return. In this sense, the term indirect tax is contrasted with a direct tax which is collected directly by the government from the persons (legal or natural) on which it is imposed.

Some of the important Direct taxes:

Fringe Benefit Tax
To reduce the profit on booked entry, many companies started providing various benefits to their employees and maintain them under their input cost. Thus reducing the profit which in turn leads to less taxation by the government.

Therefore government-imposed Fringe Benefits Tax (FBT) which is fundamentally a tax that an employer has to pay instead of the benefits that are given to his/her employees. It was an attempt to comprehensively levy a tax on those benefits, which evaded the tax.

The list of benefits encompassed a wide range of privileges, services, facilities, or amenities which were directly or indirectly given by an employer to current or former employees, be it something simple like telephone reimbursements, free or concessional tickets, or even contributions by the employer to a superannuation fund.

FBT was introduced as a part of the Finance Bill of 2005 and was set at 30% of the cost of the benefits given by the company. This tax needed to be paid by the employer in addition to the income tax, irrespective of whether the company had an income-tax liability or not.

The fringe benefits tax was abolished in the 2009 Union budget of India.

Minimum Alternate Tax
The concept of Minimum Alternate Tax (MAT) was introduced in the direct tax system to make sure that companies having large profits and declaring substantial dividends to shareholders but who were not contributing to the Government by way of corporate tax, by taking advantage of the various incentives and exemptions provided in the Income-tax Act, pay a fixed percentage of book profit as minimum alternate tax.

As per the Income Tax Act, if a company's taxable income is less than a certain percentage of the booked profits, then by default, that much of the book profits will be considered as taxable income and tax has to be paid on that.

It is called MAT and is a direct tax. It was introduced to deter some companies who managed their account in such a way that they end up paying zero or no tax to the government.
The current rate of MAT is 18.5%.

Alternate Minimum Tax
Under the existing provisions of the Income-tax Act, Minimum Alternate Tax (MAT) and Alternate Minimum Tax (AMT) are levied on companies and limited liability partnerships (LLPs) respectively.

That means what is MAT to the companies, AMT is to the LLPs. However, no such tax is levied on the other form of business organizations such as partnership firms, sole proprietorship, an association of persons, etc.

To widen the tax base vis--vis profit linked deductions, it is proposed to amend provisions regarding AMT contained in the Income-tax Act to provide that a person other than a company, who has claimed deduction under any section (other than section 80P), shall be liable to pay AMT.

Under the proposed amendments, where the regular income-tax payable for a previous year by a person (other than a company) is less than the alternate minimum tax payable for such previous year, the adjusted total income shall be deemed to be the total income of such person and he shall be liable to pay income-tax on such total income at the rate of eighteen and one-half percent.
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Indirect Taxes in India

Indirect taxes in India can be broadly classified into:
  • Production of goods: Excise or CenVAT
  • Distribution of goods: Sales Tax

Production and Distribution of services (because they can't be separated):

Service Tax

In India, generally, taxes on production or manufacturing (Excise) is levied by the centre, and taxes on sales (Sales Tax) is levied by the states.

Excise duties

  • Excise duty (Central VAT) is a tax on the manufacture of goods within the country. Excise duties are levied under the Central Excise and Salt Act, 1944, the Excise Tariff Act, 1985, and the Modified Value Added Tax (MODVAT) scheme or CENVAT.
  • The rates of excise duty levied vary depending inter alia on the nature of the item manufactured, the nature of the manufacturing concern, and the place of ultimate sale.
  • The duty rates are either ad valorem (i.e. a fixed percentage of the cost of production), specified (a fixed rate depending on the nature of the manufactured item, for example, length of product or count of product), or a combination of both.
  • The MODVAT scheme, introduced in 1986, on the recommendation of the L K Jha Committee, applies to certain specific items.
  • The objective of this scheme is to limit the cascading effect of duty incidence on several goods subject to excise which are further used as inputs for other excisable goods.
  • Under the scheme, MODVAT credit can be claimed on the purchase of raw materials on which excise has been paid.
  • This MODVAT credit can be used to set off excise duty payable on subsequent manufacture of goods.

Sales tax

  • Sales tax is levied on the sale of a commodity that is produced or imported and sold for the first time.
  • If the product is sold subsequently without being processed further, it is exempt from sales tax. Sales tax is levied by either the Central or the State Government, Central Sales tax, or 4% is generally levied on all inter-State sales.
  • State sales taxes that apply to sales made within a State have rates that range from 4 to 15%. However, exports and services are exempt from sales tax.

Service tax

  • Service tax is a part of Central Excise in India. It is a tax levied on services provided in India, except the State of Jammu and Kashmir.
  • The responsibility of collecting the tax lies with the Central Board of Excise and Customs (CBEC).

Income Tax Authorities and their Powers

  • The Government of India has constituted a number of authorities to execute the Income Tax Act and to control the Income Tax Department efficiently.
  • The Central Board of Direct Taxes is the supreme body in the direct tax set-up. It has to preform several statutory functions under the various acts and it is responsible for the formulation and implementation of different policies relating to direct taxes administration. The Board consists of a Chairman and six members.

Appointment of Income Tax Authorities in India

The Central Government can appoint those persons which it thinks are fit to become Income Tax Authorities. The Central Government can authorize the Board or a Director-General, a Chief Commissioner or a Commissioner or a Director to appoint income tax authorities below the ranks of an Deputy Commissioner or Assistant Commissioner, According to the rules and regulations of the Central Government controlling the conditions of such posts.

Powers of Income Tax Authorities:

  1. Power relating to Discovery, Production of evidence, etc:
    The Assessing Officer, The Joint Commissioner, the Chief Commissioner or the Commissioner has the powers as are provided in a court under the code of Civil Procedure, 1908, when trying to suit for the following matters:
    1. discovery and inspection;
    2. to enforce any person for attendance, and examining him on oath
    3. issuing commissions; and
    4. compelling the production of books of account and other document.
  2. Power of Search and Seizure:
    Today it is not hidden from income tax authorities that people evade tax and keep unaccounted assets. When the prosecution fails to prevent tax evasion, the department has the to take actions like search and seizure.
  3. Requisition of Books of account, etc:
    Where the Director or the Director-General or Commissioner or the Chief Commissioner in consequence of information in his possession, has reason to believe that (a), (b), or (c) as mentioned under section 132(1) and the book of accounts or other documents or the assets have been taken under custody by any authority or officer under any other law, then the Chief Commissioner or the Director General or Director or Commissioner can authorize any Joint Director, Deputy Director, Joint Commissioner, Assistant Commissioner, Assistant Director, or Income tax Officer to require the authority to provide sue books of account, assets or any documents to the requisitioning officer, when such officer is of the opinion that it is no longer necessary to retain the same in his custody.
  4. Power to Call for Information:
    The Commissioner The Assessing Officer or the Joint Commissioner may for the purpose of this Act:
    1. can call any firm to provide him with a return of the addresses and names of partners of the firm and their shares;
    2. can ask any Hindu Undivided Family to provide him with return of the addresses and names of members of the family and the manager;
    3. can ask any person who is a trustee, guardian or an agent to deliver him with return of the names of persons for or of whom he is an agent, trustee or guardian and their addresses;
    4. can ask any person, dealer, agent or broker concerned in the management of stock or any commodity exchange to provide a statement of the addresses and names of all the persons to whom the Exchange or he has paid any sum related with the transfer of assets or the exchange has received any such sum with the particulars of all such payments and receipts;
  5. Power of Survey:
    The term 'survey' is not defined by the Income Tax Act. According to the meaning of dictionary 'survey' means casting of eyes or mind over something, inspection of something, etc. An Income Tax authority can have a survey for the purpose of this Act.

    The objectives of conducting Income Tax surveys are:
    • To discover new assessees;
    • To collect useful information for the purpose of assessment;
    • To verify that the assessee who claims not to maintain any books of accounts is in-fact maintaining the books;
    • To check whether the books are maintained, reflect the correct state of affairs.
  6. Collection of Information:
    For the purpose of collection of information which may be useful for any purpose, the Income tax authority can enter any building or place within the limits of the area assigned to such authority, or any place or building occupied by any person in respect of whom he exercises jurisdiction.

Written By: Soyam Sanket Mishra

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