The Indian taxation system is structured such that taxes are collected by both the Central Government and the State Governments. Local governments, like the Municipality and Local Governments, levy certain minor taxes as well.
Money is essential to run a government and handle a state’s affairs. As a result, the government levies a variety of taxes on the earnings of individuals and businesses.
Read on to learn more about Taxation in India.
Classification of Taxes
Taxes are broadly classified into two types: Direct and Indirect Taxes
A direct tax is one that is paid directly to the imposing authority by an individual or company (general the government). The individual or entity taxed with it is responsible for the payment.
The Central Board of Direct Taxes is in charge of levying and collecting Direct Taxes, as well as developing different direct tax policies.
A taxpayer pays a direct tax to the government for a variety of reasons, such as personal property, real property, income or asset, Gift, FBT, Capital Gains, and so on.
The term “indirect tax” has several meanings. An indirect tax, also known as a sales tax, a particular tax, value-added tax (VAT), or goods and services tax (GST), is one that is collected from the individual who suffers the ultimate economic cost of the tax via an intermediary.
Subsequently, the intermediate files a tax return and sends the tax revenues to the government together with the return. In this respect, an indirect tax is distinguished from a direct tax, which is collected straight by the government from the individuals (legal or natural) on whom it is levied.
Many corporations began offering various bonuses to their employees in order to lower the profit on booked entry and keep them within their input cost. As a result, profits are reduced, and the government is taxed less.
As a result, the government introduced Fringe Benefits Tax (FBT), which is essentially a tax that a company must pay instead of the benefits provided to its or workers. It was an attempt to collect a comprehensive tax on those advantages that escaped the tax.
The list of perks included a wide range of services, privileges, facilities, or amenities provided directly or indirectly by a company to current or former workers, such as phone reimbursements, free or discounted tickets, or even corporate contributions to a superannuation fund.
FBT was implemented as part of the Finance Bill of 2005 and was defined at 30% of the value of the company’s perks. This tax had to be charged by the employer in addition to the income tax, regardless of whether the firm owed income tax or not.
The FBT was repealed in India’s Union Budget of 2009.
The concept of Minimum Alternate Tax (MAT) was initiated in the direct tax system to ensure that companies with large profits and significant dividends to shareholders who were not making a contribution to the Government through corporation tax by taking advantage of the different incentives and exclusions provided in the Income-tax Act, pay a set percentage of net profits as minimum alternate tax.
According to the Income Tax Act, if a firm’s taxable income will be less than a specified proportion of its booked profits, that portion of the book profits is deemed taxable income and must be taxed.
It is known as MAT and is a direct tax. It was enacted to dissuade certain businesses from managing their accounts in such a manner that they end up paying little or no tax to the government.
MAT is currently at 18.5 percent.
The Income-tax Act now imposes Minimum Alternate Tax (MAT) and Alternate Minimum Tax (AMT) on corporations and limited liability partnerships (LLPs), respectively.
That is, what MAT is to corporations, AMT is to LLPs. Other types of commercial organizations, such as partnership businesses, sole proprietorships, associations of individuals, and so on, are not subject to this tax.
To broaden the tax base in relation to profit-linked deductions, it is suggested to change AMT provisions in the Income-tax Act to specify that any individual other than a corporation who has claimed an exemption under any section (other than section 80P) is subject to pay AMT.
Under the proposed changes, where an individual’s regular income tax payable for a prior year is less than the substitute minimum tax payable for this kind of previous year, the adapted total income is considered to be such person’s total income, and he is subject to taxation tax on such total income at the percentage of 18 and 1/2 percent.
Excise duty (Central VAT) is a tax levied on products manufactured within the country. The Central Excise and Salt Act of 1944, the Excise Tariff Act of 1985, and the Modified Value Added Tax (MODVAT) scheme, often known as CENVAT, all impose excise charges.
The rates of excise duty collected vary based on the type of the goods made, the nature of the manufacturing enterprise, and the location of the ultimate sale, among other factors.
Duty rates either are ad valorem (a fixed proportion of the cost of production), specified (a fixed rate based on the characteristics of the manufactured item, such as length or count of product), or a mix of both.
The MODVAT system, which was implemented in 1986 on the proposal of the L K Jha Committee, applies to a limited number of commodities.
The goal of this strategy is to reduce the cascade impact of duty incidence on a number of excisable items that are then utilized as inputs for additional excisable commodities.
MODVAT credit can be obtained under the plan on the procurement of raw materials on which tax has been paid.
This MODVAT credit can be used to offset excise duty payable on future goods manufacturing.
A sales tax is collected the first time a commodity is manufactured or imported and sold.
If the product is sold without additional processing, it is free from sales tax. Central sales tax, or 4%, is typically charged on all inter-state purchases. State sales tax, or 4%, is normally collected on all inter-state sales.
The rates of state sales taxes that apply to sales conducted within a state range from 4 to 15%. Exports and services, on the other hand, are free from sales tax.
In India, service tax is a component of Central Excise. It is a tax on services rendered in India, with the exception of the state of Jammu & Kashmir.
The Central Board of Excise and Customs (CBEC) is in charge of collecting the tax.
Current affairs study for UPSC is also vital for keeping students up to date on government efforts. Knowing the Indian bureaucracy and government’s interaction with the rest of the world is only feasible by keeping a watch on it and staying up to speed on recent events. The government’s current proposals, major actions on the international front, discussions about strengthening the economy, and so on are all essential for this exam.
For more UPSC exam preparation topics, visit UPSC Pathshala.