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India Taxation

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India Taxation

India has a well-developed tax structure and the authority to levy taxes is divided between the Central and state governments. This section summarizes various direct and indirect taxes levied in India.

Direct taxes

India has a well-developed tax structure and the authority to levy taxes is divided between the central and state governments. The Central Government levies direct taxes comprising income tax and wealth tax.

Administration, supervision and control in the area of direct taxes lie with the CBDT. The CBDT works under the MoF and exercises significant influence over the working of the country’s direct tax laws. The CBDT also ensures effective discharge of executive and administrative functions.

The Indian tax year extends from 1 April of a year to 31 March of the subsequent year. The tax year for a corporation also follows the same calendar.

Corporate tax liability needs to be estimated and discharged by way of advance tax in four instalments on 15 June, 15 September, 15 December and 15 March of every year.

The effective tax rate of domestic companies having income in excess of INR 10 crores goes up from 33.99% to 34.61% from AY 2016-17 onwards while effective tax rate for foreign companies having income in excess of INR 10 crores is 43.26%

The corporate tax rates are proposed to be reduced from 30% to 25% over the next four years in a phased manner starting from financial year 2016/17.

Indirect taxes

The Central Government levies indirect taxes comprising customs duty, excise duty, central sales tax and service tax. The states are empowered to levy profession tax and state sales tax apart from various other local taxes, including entry tax and octroi or local body tax.

Customs duty

Customs duty is levied by the GOI on the import of goods into India and is typically payable by the importer. It is also levi ed on the export of certain goods. Customs duty rates depend on classification under the customs tariff, which is aligned with the International Harmonized System of Nomenclature, with the generic rate being 28.85%.

Customs duty typically comprises the following components:

  •   Basic Customs Duty (BCD)

  •   Additional Customs Duty (CVD) — in lieu of excise duty

  •   Education cess/secondary and higher education cess

  •   Special Additional Customs Duty (SAD)

Excise duty

Excise duty is applicable on the manufacture of goods within India and is payable by the manufacturer.

Most products attract a uniform rate of 12% plus education cess at 3% of the excise duty, making the effective excise duty at 12.36%, i.e. excise duty of 12% and education cess of 0.36% (3% on excise duty).

Service tax

Service tax is applicable on the provision of services in India. It is also applicable on the import of services in India, where the service recipient is required to discharge service tax liability in cash (under the reverse-charge mechanism). The current rate of service tax is 14.50%, i.e., 14% service tax and swachh bharat cess of 0.5%.

Value added tax and Central sales tax

VAT is an intrastate multi-point tax system administered at the state level and is levied on the sale of goods at each stage of the sale. Currently, all of the states in India have replaced their erstwhile sales tax regime with VAT.

The basic rate slabs under VAT are as follows:

  •   Natural and unprocessed products and other essential goods are non-taxable under VAT

  •   Special goods such as gold, bullion, silver, etc are taxed at 1% to 2%.

  •   Agricultural and industrial input, IT products, capital goods and intangible goods, i.e., patents and others, as well as items of basic necessity are taxed at 4% to 5%
  •   All other goods that do not fall under any of the categories mentioned above are taxed at 12.5% to 15%.

Octroi or entry tax

Entry tax or octroi is levied by state/local authorities on goods that enter their jurisdiction for the purpose of use, consumption or sale. The tax/Octroi is levied on the purchase value of the goods. For this purpose, the state is divided into separate local areas. The value of the entry tax levied on different products can vary across states.

Research and development cess

The research and development cess is levied by the GOI at 5% on the import of technology by an industrial concern into India in terms of a foreign collaboration or other specified cases. This cess is to be paid by the importer of technology on payments made for such imports.

Other significant indirect taxes: They include the following.

  •   Stamp duty

  •   Profession tax

  •   STT

  •   Luxury tax

  •   Property tax

  •   Entertainment tax

GST legislation

The GOI has proposed the replacement of the indirect tax regime in India by a comprehensive dual GST, to be levied concurrently by the center (CGST) and the states (SGST). It is anticipated that the base for the GST will be comprehensive, including virtually all goods and services, with minimum exemptions. The GSTstructure will follow the destination principle, i.e., imports will be included in the tax base, while exports will be zero rated. In the case of interstate transactions within India, state tax will apply in the state of destination, as opposed to that of origin.

The following are the key taxes proposed to be subsumed under the GST:

Central taxes

State taxes

Central excise duty (including additional excise duties)

VAT or sales tax

Service tax

Entry tax not in lieu of Octroi

CVD

Entertainment tax (other than entertainment tax levied by local bodies)

SAD

Stamp duty

Surcharges and cesses

Taxes on vehicles

CST

Taxes on goods and passengers

 

Taxes and duties on electricity

 

Luxury tax

 

State cesses and surcharges

 

Taxes on lottery, betting and gambling

The following are the key taxes not to be subsumed under the proposed GST:

Central taxes

State taxes

Customs and export duties

Excise duty on alcohol

Duties of excise on specified petroleum products, natural gas and tobacco

 

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