Understanding your tax liabilities can help you minimize your tax liabilities while ensuring compliance with the law.
Taxes in India are of two types:
- Direct Tax
- Indirect Tax
What is Direct Tax?
Direct tax is imposed directly on individuals or entities, typically based on their income, wealth, or property, and is paid directly to the government. It cannot be shifted to any other person or entity; the taxpayer is solely responsible for paying the tax liability.
It plays an important role in the government’s overall tax revenue. In India, direct taxes are collected by the Central Board of Direct Taxes (CBDT), responsible for enforcing direct tax laws and regulations and ensuring taxpayers comply with their tax obligations.
Direct taxes can create a more equitable tax system, as they are based on the ability of the taxpayer to pay and can help reduce income inequality.
Types of Direct Taxes in India are –
- Income Tax paid by (Individual, HUF, firm other than LLP )
- Property Tax
- Corporate Tax
- Tax on undisclosed foreign income and assets, etc.
Let’s understand Income Tax in detail, as it is India’s most common type of Direct tax. Such a tax is levied on the taxable income of individuals and companies.
- Income Tax paid by (Individual, HUF and firms)
If an Individual, HUF, or a firm is required to furnish their income tax return under sections 139(4A), 139(4B), 139(4C), or 139(4D) etc., they should file the ITR form that is appropriate based on their income and the nature of their business. The taxable income is the amount earned from various sources such as salary, wages, interest, dividends, rental income, etc, after allowing for applicable exemptions, deductions, and allowances.
Who is eligible to pay Direct tax in India:
Individuals, HUFs, firms (excluding LLP) and companies must file their income tax returns by submitting the appropriate ITR form if they fall under the following categories:
- Salaried individuals are required to file ITR-1
- Individuals and HUFs with no income from business and profession must file ITR-2.
- Individuals and HUFs having income from business and profession are required to file ITR-3.
- If individuals, HUF and firms other than LLP, have business and profession under sections 44AD, 44ADA and 44AE of the Income-tax Act, 1961 (I-T Act) must file ITR-4.
- ITR-5 must be filed by everyone other than HUF, individuals and companies.
- Companies not claiming exemption under section 11 of the IT Act are required to file ITR-6
- Those who furnish return under section 139(4A), 139(4B) or 139(4D), they are required to file ITR-7
- If a person or company is required to furnish their income tax return under sections 139(4A), 139(4B), 139(4C), or 139(4D), they should file the ITR form that is appropriate based on their income and the nature of their business.
Income tax rate
The new tax rates were presented in Budget 2023. Income Tax Slab for FY 2023-2024 under new tax regime –
|Up to Rs. 3,00,000||NIL|
|Rs 3,00,000 to Rs 6,00,000||5%|
|Rs 6,00,000 to Rs 9,00,000||10%|
|Rs. 9,00,000 to Rs 12,00,000||15%|
|Rs. 9,00,000 to Rs 12,00,000||20%|
|Above Rs 15,00,000||30%|
- In the case of companies
Corporate tax is levied on a company’s net profits made during the financial year. Private and public companies registered in India under the Companies Act will be required to pay corporate tax.
Direct taxes are considered one of the most transparent forms of taxation, as they are easy to understand, and the tax burden is clearly visible to the taxpayer. However, direct taxes are often seen as more intrusive, as they require taxpayers to disclose personal financial information to the government. Additionally, direct taxes can be seen as having a more significant impact on individual taxpayers, particularly those with higher incomes or wealth.
What is Indirect Tax?
An indirect tax in India is levied on goods and services sold or consumed, and the tax burden is passed on to the end consumer.
Indirect taxes are not paid directly to the government but are collected by businesses on behalf of the government and added to the price of goods and services sold.
Indirect taxes currently prevalent in India are –
- Goods and Services Tax (GST)
- Customs duty.
GST as an indirect tax
For instance, if a business sells a product for Rs. 50,000, and the cost of production is Rs. 30,000, the value added by the business is Rs. 20,000. Under GST, the company would be required to pay tax on the value added, which is the difference between the selling price and the cost of production.
If the GST rate on this product is 12%, the business would be required to pay Rs. 2,400 (i.e., 12% of Rs. 20,000) as indirect tax to the government. The business would then pass this tax to the end consumer, who would pay Rs. 50,000 + Rs. 2,400 as the total price of the product. The end consumer ultimately bears the tax burden, even though the business collects and remits it to the government.
Such duty is levied on importing and exporting goods. It is an important source of revenue for the government and is imposed to protect domestic industries, control the flow of goods, and generate revenue.
Suppose a company in India wants to import steel sheets from China for use in its manufacturing process. The cost of the steel sheets is $10,000, which is equivalent to approximately Rs. 8,00,000 (assuming an exchange rate of Rs. 80 per dollar).
When the steel sheets arrive in India, the customs authorities will assess the customs duty for importing the steel sheets. The customs duty rates can vary depending on the type of product, its country of origin, and other factors. Let’s assume that the customs duty on the imported steel sheets is 20% of the value of the sheets.
The customs duty payable by the company would be 20% of Rs. 8,00,000, which is Rs. 1,60,000. The company must pay this amount to the customs authorities before the steel sheets can be cleared for use in India. Here, the company is responsible for paying the tax to the government, but it ultimately passes the tax burden to the end consumer.
Indirect taxes have a significant impact on the pricing of goods and services. Therefore, the effective management of indirect taxes is crucial to balance the interests of the government, businesses, and consumers and ensure economic growth and development in the country.
Frequently Asked Questions (FAQs)
What are foreign undisclosed income and assets?
Foreign undisclosed income and assets refer to income or assets you have earned or acquired outside your home country but have not reported to the tax authorities. This could include money in a foreign bank account, real estate, or other assets.
How do indirect taxes affect consumers?
Indirect taxes can increase the price of goods and services, making them more expensive for consumers. The impact of indirect taxes can be regressive, meaning that they have a greater impact on low-income households that spend a larger proportion of their income on goods and services subject to indirect taxes.
What are the GST rates applicable in India?
In India, multiple GST rates depend on the nature of the goods or services being supplied. The GST rates are divided into four main categories –
0% GST Rate: Certain goods and services are exempt from GST, such as fresh fruits and vegetables, unprocessed cereals, education services, and healthcare services.
5% GST Rate: This rate applies to essential items such as edible oil, milk, and mobile phones, etc.
12% and 18% GST Rates: This rate applies to most goods and services, including electronics, processed foods, and hotels.
28% GST Rate: This rate applies to luxury items such as cars, tobacco products, and high-end consumer goods.
Animesh Gupta is a Chartered Accountant by profession and a NISM certified Mutual Fund Expert. He has over 4+ years of experience working in the Financial Services Industry. In his role at Wintwealth, he is part of the Credit and Risk team and evaluates the risk of the bonds available on Wintwealth's platform.