Various types of Taxes are levied on any business in India and through this post we would be giving a brief overview of the major taxes that are levied on any business in India.
Taxes can basically be divided into 2 Categories
- Direct Tax: These are the taxes which are levied directly on the Income earned and is therefore known as Direct Taxes.
- Indirect Tax: These taxes are not directly levied on the Income earned but are levied on the Expenditure.
The various types of Direct & Indirect Taxes have been explained below
These types of taxes are levied by the Central Govt and therefore the rates of taxes are uniform throughout the country. Various types of Direct Taxes are:-
1. Income Tax:
The most common form of tax is the Income Tax which is levied on the Income of all Individuals. Different Rates of Taxes are payable depending on the Income of an Individual and the Tax Slab Rates for the year 2012-13 are as follows:-
Income Tax Slab Rates for General Tax Payers
Income Tax Slab Rates for Senior Citizens i.e. above the age of 60
Income Tax Slab Rates for Very Senior Citizens i.e. above the age of 80
*In case of firms and companies, Income Tax is charged at a flat rate of 30%
The due dates for filing Income Tax Return is 31st July and 30th September depending on whether the Individual is required to get his accounts audited or not
2. Wealth Tax
Wealth Tax is a Tax charged on the net wealth of an Individual. If a person has unproductive assets worth more than Rs. 30 Lakhs, Wealth Tax is liable to be paid @ 1%. Although many assets are not included in the purview of Rs. 30 Lakhs, but still this limit of Rs. 30 Lakhs is too low as even a small house in India costs over Rs. 30 Lakhs.
Rarely anyone pays wealth tax in India and even the govt is very lenient in collecting Wealth Tax and this tax is only there in the books and not applied practically.
This tax is levied at the time of making any expenditure irrespective of whether it is being made for providing a service or at the time of purchasing any goods. Although this Tax is collected from the person who is rendering the service/selling the goods, it can be recovered from the recipient of service/ buyer of goods.
Some of these taxes are levied by the Central Govt and the rest by the State Govt. The rates of taxes which are levied by the State Govt differ from State to State.
The Govt has now started focusing more on Indirect Taxes as compared to the Direct Taxes because evasion of Indirect Taxes is very difficult, and the govt expects that a substantial portion of the total taxes collected in India would be in the form of Indirect Taxes in future.
Central Govt Taxes
1. Service Tax:
Whenever any person avails of any service, Service Tax @ 12% is payable on the value of services. However, if the turnover of the provider of service does not exceed Rs. 10 Lakhs p.a., he is exempted from charging Service Tax from his customers. However, if the turnover of the provider of service is more than Rs. 10 Lakhs, he is mandatorily required to collect Service Tax. If he does not charge the Service Tax, it would be assumed that the Total Value of the Services is inclusive of the Service Tax and he would have to deposit the Service Tax portion with the Central Govt.
Service Tax when introduced in the year 1994 and was earlier levied only on a specified list of services, but with the Introduction of Negative List of Services w.e.f 1st July 2012, Service Tax has now been levied on all services except those specifically exempted.
2. Excise Duty:
Central Excise Duty is an indirect tax levied on those goods which are manufactured in India for Home Consumption. The incidence of applicability of Excise Duty is levied as soon as the goods are manufactured. However, it is to be paid to the Govt at the time of removal of goods from the place of manufacture. Different Rates of Excise Duty is levied on different goods.
Excise Duty on all Goods is levied by the Central Govt, except on the following goods on which Excise Duty is levied by the State Govt:-
i. Alcoholic Liquor for Human Consumption
ii. Opium and other Narcotic Drugs
3. Customs Duty
Customs Duty also popularly known as Import Duty is levied on goods that are imported from any country into India. Customs Duty was introduced in India so as to safeguard the Indian Industry as the goods imported from abroad were cheaper than the goods produced in India. As the goods imported were cheap, the end consumer preferred to purchase the imported goods rather than the Indian made goods as a result of which the Indian economy was suffering.
Earlier the Import Duties were very high, but now that the Indian manufacturing Industry has also matured, Customs duties are being slowly reduced so as to equate the competition between the locally made goods and the imported goods.
Rate of Customs Duty is also different for different goods depending on the nature of the goods, and is usually collected at the time of entry into India itself.
State Govt Taxes
The rate of tax of the below mentioned taxes various from State to State:-
1. VAT (Value Added Tax):
VAT is a form of Sales Tax which is levied on the Sale of any good. Earlier Sales Tax was levied in India wherein tax used to be collected at a single point (first/last) from the transactions involving the sale of goods. However, there were many loopholes in this form of tax and the traders usually evaded paying Sales Tax.
So as to ensure proper collection of taxes, the system of VAT i.e. Value Added Tax was introduced which is a multi-point system of collection of taxes. VAT was introduced in India from 1st April 2005. Over 130 Countries have introduced the system of VAT in the last 3 decades and India was amongst the last few to introduce this tax.
The system of VAT is such that it is first levied on the first seller of goods and then the next seller only pays VAT on the Value Addition done by him and not on the Total Value of the Goods.
The rate of VAT is different for each type of goods. For necessities, the rate of tax is lower and for luxury goods – the rate of taxes is much higher.
2. Central Sales Tax
This tax is applicable when the goods are transferred from one state to another for the purpose of selling the goods in the other state. In other words, this tax is levied on Inter-State Sales. This tax is governed by the Central Sales Tax (CST) Act, 1956 which came into force w.e.f. 05-01-1957.
The entire revenue accruing by the levy of Central Sales Tax is collected and kept by the State in which the sale originates.
3. Professional Tax
Professional Tax is in its nascent stages in India and only very few states are charging this tax on the incomes of Salaried, Self-employed, Merchants etc. Different states have different modus-operandi of levying this type of tax and are only charging a maximum of a few thousand rupees only.
Every State has different set of rules for levy of this type of tax and the category of individuals who come under the purview of this tax purely depends on the state from where they are working.
Various Other Taxes levied by the State Govt are:-
- Entertainment Tax
- Stamp Duty
- Road Tax on Vehicles
There may be some sales wherein more than 1 type of tax may be levied. For ex: Food Served in a Restaurant. In a restaurant, not only is the food being sold but the services are provided. Therefore, both VAT and Service Tax are liable to be levied on the same.
In such cases, it is important to bifurcate the value of goods and services and explicitly show the same on the Invoice. After showing this bifurcated value on the Invoice, VAT would be levied only on the Value of Goods Sold and Service Tax would be levied only on the Services provided.
However, it is practically very difficult to segregate the two into value of goods sold and the value of services provided. In such cases, the govt issues an Abatement Scheme, wherein one type of tax would be levied only on a certain percentage of the total invoice value and the other tax would be levied on the remaining invoice value.
Education Cess & SHEC
Education Cess @ 2% and Secondary and Higher Education Cess (SHEC) @ 1% are also levied over and above these taxes. However, this is not levied on the Total Amount but only on the amount collected as Tax. This thing would become clearer by the following example:-
Value of Service: Rs. 100
Service Tax @12%: Rs. 12
Education Cess (2% of Rs. 12) Rs. 0.24
SHEC (1% of Rs. 12) Rs. 0.12
Total Tax Rs. 12.36
As explained with the help of the above example, Education Cess and SHEC would be levied only on amount of tax i.e. Rs. 12 and not on the value of service i.e. Rs. 100.
GST: Goods and Service Tax
There are some many different types of Indirect Taxes that it becomes difficult for a businessman to understand the nitty-gritty’s of each of these taxes. The Business Community had persuading the Govt to remove these different types of taxes and to only a single uniform tax system for collection of Indirect Taxes.
The Govt has agreed to remove all these taxes in due course of time and introduce a single tax system by the name of GST i.e. Goods and Service Tax.
GST is still in its planning phase and would have to cross many hurdles before it becomes a reality. The Implementation of GST is still a few years away and till the time GST is not implemented, all the existing taxes would continue to be levied.
About the author:
Karan Batra is a Chartered Accountant currently working as a faculty member at the Institute of Chartered Accountants of India.