Here we detail about the major direct and indirect taxes in India.
A. Direct Tax:
Income tax is an important direct tax levied by the central government but the proceeds obtained from it are shared between the centre and states according to the recommendations of the Finance Commission which decides about the sharing after every five-year period.
Income tax is levied on the personal incomes of the individuals and Hindu undivided families.
In order to ensure equitable distribution of the tax burden, income tax levied in India is a progressive tax, that is, individuals with higher income brackets have to pay a higher rate. According to the latest provisions, taxable income up to Rs. 200,000 is exempted from income tax.
In 1950s, rates of income tax were quite high (marginal income rates was even higher than 70 per cent) which served as a disincentive to work, save and invest more. In the new economic policy adopted since 1991 the rates of income tax have been greatly reduced. The maximum income tax rate is now 30 per cent on incomes above Rs. 10, 00,000.
At present (financial year2013-14) the tax rate on different income brackets are:
Up to Rs. 2,00,000 = NIL
Rs. 2, 00,000 to Rs. 500,000 = 10%
Rs. 500,001 to Rs. 10, 00,000 = 20%
Above Rs. 10, 00,000 = 30%
Super-rich to pay surcharge:
To augment revenues, a surcharge of 10 per cent has been levied on persons (other than companies) whose annual taxable income exceeds Rs. 1 crore, with effect from 2013-14. It is important to note that lower income tax rates have resulted in greater tax revenue because incentive to evade tax has become less and, therefore, there has been a greater tax compliance. Surcharges on income tax are also sometimes levied to meet certain contingencies.
These surcharges are only temporary and are withdrawn after some time. Now, a 2 per cent education cess on income tax was imposed with effect from the financial year 2004-05 which in the budget for 2007-08 was raised to 3 per cent. In order to give incentives to the individuals to save more, contribution to PPF, premium on life insurance, equity linked saving schemes (ELSS) of Mutual Funds, contribution by an employee to pension funds, and investment in fixed deposits in scheduled commercial banks (for a term of 5 years) are exempted from income tax subject to overall ceiling of Rs. 100,000.
In the budget for 2004-05 a major relief was provided in the form of abolition of income tax on long-term capital gains and reduction in tax on short-term capital gains from 30 per cent to a flat rate of 10 per cent on shares and securities transactions. In 2012-13, income tax other than corporation tax was estimated to yield Rs. 1, 90,000 crore (BE).
The corporation tax is the tax on the income (i.e. profits) of public limited companies. Initially, corporation tax rate was high which discouraged investment by the companies. Since the adoption of new economic policy in 1991, the corporation tax rate has been reduced in a phased manner to 30 per cent of the net profits of the companies. Thus, there is a single rate of corporation tax.
However, like that on personal income tax, surcharge is imposed on the corporation tax from time to time to meet some contingencies. With effect from 2007-08, a 3 per cent education cess on corporation tax has been levied to meet the expenses on promotion of education. In calculation of profits, rate of depreciation on plant and machinery permitted has been reduced from 25% to 15 per cent with effect from the financial year 2006-07.
Further, due to several exemptions about 40% of companies pay effective corporation tax of only 19% or even less though they make large profits. For them there is Minimum Alternative Tax (MAT) based on their book profits. In 2010-11 budget, rate of Minimum Alternate Tax was raised to 18.5 per cent of book profits of the companies. Further, long- term capital gains arising out of shares/securities have been included in calculating book profits.
The surcharge on domestic companies with taxable income exceeding Rs.10 crore has been increased from five per cent to 10 per cent with effect from 2013-14. For foreign companies, which pay a higher corporate tax, the surcharge will increase from two per cent to five per cent, with effect from 2013- 14 if the taxable income exceeds Rs. 10 crore.
Manufacturing companies that invest more than Rs.100 crore in plant and machinery during the period April 1, 2-013 to March 31,2015, have been permitted investment allowance at the rate of 15 per cent. Corporation tax was estimated to yield revenue of Rs. 3, 73,000 crore in 2012-13 (BE) which was about 40 per cent of gross tax revenue of central government.
In India, an expenditure tax was levied on the recommendations of a British economist, Prof. Kaldor in 1957, but because of small revenue receipts from it, it was withdrawn. Now, a new expenditure tax has been levied on expenditure incurred by the people on expenses in luxury hotels with residential accommodation of Rs. 400 or more per day for an individual and on bills of restaurants providing superior facilities of air conditioning.
Wealth tax is another direct tax imposed in India but revenue from it is very small. Wealth below Rs. 2.5 lakh is exempted from wealth tax since 1992-93. At one time rate of wealth tax was very high, namely 15 per cent of taxable wealth. In 1992-93 when Manmohan Singh was the Finance Minister, rates of wealth tax were reduced on the recommendation of Raja Chelliah Committee on tax reforms.
Now, the rate of tax ranges from 0.5 per cent to 2 per cent of taxable wealth levied on the basis of slab system. Assets such as shares, bank deposits and one residential house are exempted from wealth tax. Wealth tax yields only very small revenue for the Central government. But it is an important tax to achieve the objective of equity or social justice. In 2011 -12, wealth tax was estimated to yield Rs. 635 crores. To increase the revenue in the budget for 2013-14, tax deducted at source (TDS) has been levied at the rate of one per cent on the value of transfer of immovable properties where consideration exceeds Rs. 501akh. Agricultural land has been exempted.
Securities Transactions Tax (STT):
Securities Transactions Tax (STT) with effect from 2004-05, securities transaction tax (STT) has been levied, The STT is administratively simple and easy to enforce. For those presently paying capital gains tax, the rate of STT is 15 per cent of the value of transactions of equities delivered. In this case the tax has to be split up equally between buyer and seller. For unit holders holding units in equity- oriented mutual funds, rate of STT is 0.15 per cent of the value of transactions.
(a) Day traders and arbitragers of the equities/securities, and
(b) Traders of derivatives (futures and options) rate of STT is 0.017 per cent and 0.01 per cent respectively of the value of transactions made. In the budget for 2013-14 Securities Transaction Tax on equity futures has been cut from 0.017 per cent to 0.01 per cent. In 2013-14 security transaction tax (STT) was expected to yield Rs. 6,720 crore.
B. Indirect Taxes in India:
Receipts from indirect taxes are a very important source of tax revenue for the Central Government in India.
Three important indirect taxes levied by the central government in India are:
1. Union Excise Duties
2. Customs Duties
3. Service Tax
As economic growth takes place and production of commodities and services increases, revenue from indirect taxes will increase. Therefore, imposition of indirect taxes gives great buoyancy to tax system in India. We discuss below these indirect taxes in some detail.
1. Union Excise Duties:
Union excise duties are levied by the central government on the production of the commodities and they are the most important source of government revenue. Initially, excise duties on the production of few commodities, such as, sugar, matches, cigarettes, tobacco, cement were levied by the centre, but in recent years a very large number of commodities have been brought within the net of indirect taxes. Moreover, initially, the rates of excise duties were high but under the economic reforms since 1991 the rates of excise duties have been lowered to promote industrial growth by increasing their competitiveness.
On a number of commodities, at present Central Exercise Duty at the rate of 12% is levied on the basis of value added by a firm in the production of a commodity. Therefore, it is called CENVAT. Every year more commodities are brought under CENVAT. The revenue from Union excise duties are estimated at around Rs. 1,94, 000 crore in 2012-13 (BE) which amount to 15 per cent of total central revenue.
2. Customs Duties:
Customs duties are another important indirect tax which yields a good amount of revenue for the central government. Customs duties refer to the duties imposed on the commodities imported in India. These import duties on the import of foreign goods raise their prices and therefore, they provide protection to the domestic industries. Initially, the customs duties were very high and, in some cases, they were fixed at over 300 per cent of the value of imported goods.
Under new economic reforms undertaken since 1991 wherein import liberalisation is an important measure of reform, customs duties have been substantially reduced. In the budget for 2007-2008, the peak rate of customs duties for non-agricultural products was reduced from 12.5% to 10 per cent. Even in the budget for 2012-13, the peak rate of customs duty was retained at 10 per cent. Despite reduction in customs duties a higher revenue of Rs. 12,400 crores was estimated for 2012-13 (BE) due to the estimated increase in imports.
3. Service Tax:
Service tax is an indirect tax levied on services provided to the people, Services contribute about 51 per cent to Gross Domestic Product (GDP) but its contribution to the revenue of the government is much less. Initially, service tax was levied in 1994-95 on services provided by hotels, restaurants, telephone services etc. but in the budgets for the year 2001-2002 to 2010-11 service tax 2011-11 has been broadened by bringing more services within the net of service tax. Important new services on which service tax has been imposed are specialized banking and financial services, port services, telex services, video tape productive services, broadcasting services, services of authorized stations for servicing vehicles etc.
Thus, at present on more than 100 services, service tax is payable. In budget for 2012-13 rate of service tax has been raised to 12 per cent per cent and further education cess of 3 per cent has been imposed on it. Note that excise duty is levied on goods while service tax is levied on services. It is proposed that in the medium term a uniform integrated Goods and Service Tax (GST) will be levied on both goods and services. Service tax has become a good source of revenue for the government. In 2013-14 it was expected to yield Rs. 1.80 lakh crore (BE).