Taxation System in India
India has a well-developed tax structure with clearly demarcated authority between Central and State Governments and local bodies. Central Government levies taxes on income (except tax on agricultural income, which the State Governments can levy), customs duties, central excise and service tax.
Value Added Tax (VAT), stamp duty, State Excise, land revenue and tax on professions are levied by the State Governments. Local bodies are empowered to levy tax on properties, octroi and for utilities like water supply, drainage etc.
In last 10-15 years, Indian taxation system has undergone tremendous reforms. The tax rates have been rationalized and tax laws have been simplified resulting in better compliance, ease of tax payment and better enforcement. Goods and Services Tax (GST) regime shall be implemented soon.
Taxes Levied by Central Government
Direct Taxes
• Tax on Corporate Income
• Capital Gains Tax
• Personal Income Tax
• Tax Incentives
• Double Taxation Avoidance Treaty
Indirect Taxes
• Excise Duty
• Customs Duty
• Service Tax
• Securities Transaction Tax
Taxes Levied by State Governments and Local Bodies
• Sales Tax/VAT
• Other Taxes
Direct Taxes
Taxes on Corporate Income
Companies residents in India are taxed on their worldwide income arising from all sources in accordance with the provisions of the Income Tax Act. Non-resident corporations are essentially taxed on the income earned from a business connection in India or from other Indian sources. A corporation is deemed to be resident in India if it is incorporated in India or if it's control and management is situated entirely in India.
Domestic corporations are subject to tax at a basic rate of 30% and surcharge varying from 0-12 % depending on the total income.
Foreign corporations have a basic tax rate of 40% and surcharge of 0-5% depending on the total income. In addition, an education cess at the rate of 3% on the tax payable is also charged.
Domestic corporations have to pay dividend distribution tax at the rate of 16.995% (including a 12% surcharge and a 3% education cess)on dividends declared. However, such dividends received are exempt in the hands of recipients.
LLP’s are required to pay tax @30%+surcharge+education cess. There is no tax on profits distributed.
Corporations also have to pay for Minimum Alternative Tax (MAT).In cases where the tax payable according to regular tax provisions is less than 18.5% of their book profits, corporations must pay 18.5% (plus surcharges and cess as applicable).
Alternate Minimum Tax (AMT) for partnership firms, LLP etc. In cases where tax payable according to regular tax provisions is less than 18.5% of adjusted total income, then AMT on such total income at the rate of 18.5% (plus applicable cess) has to paid.
Branch Office/Project Office/Liasion Office or Permanent Establishment: The fixed place of business in India is treated as a permanent establishment an is required to pay tax @40%+surcharge+education cess. There is no tax on profits distributed.
For further details please visit the web site of Income Tax Department at
: www.incometaxindia.gov.in 
Capital Gains Tax
Tax is payable on capital gains on sale of assets.
Long-term Capital Gains Tax is charged if :
• Capital assets are held for more than three years and
• In case of shares, securities listed on a recognized stock exchange in India, units of specified mutual funds, the period for holding is one year.
Long-term capital gains are taxed at a basic rate of 20%. However, long-term capital gain from sale of equity shares or units of mutual funds are exempt from tax.
Short-term capital gains are taxed at the normal corporate income tax rates. Short-term capital gains arising on the transfer of equity shares or units of mutual funds are taxed at a rate of 10%.
Long-term and short-term capital losses are allowed to be carried forward for eight consecutive years. Long-term capital losses may be offset against taxable long-term capital gains and short-term capital losses may be offset against both long term and short-term taxable capital gains.
For further details please visit the web site of Income Tax Department at
Personal Income tax
Personal income tax is levied by Central Government and is administered by Central Board of Direct taxes under Ministry of Finance in accordance with the provisions of the Income Tax Act. The rates for personal income tax are as follows:-
Income range (Rupee) Tax Rate (%)(Age below 60 years)
0-250,000 Nil
250,000-500,000 10
500,000-1,000,000 Rs 25,000/- + 20% of the amount exceeding Rs 5,00,000
1,000,000 and above Rs1,25,000 + 30% of the amount exceeding Rs 1,000,000.
Surcharge of 12% on total tax is levied if income exceeds Rs. 100,00,000.
Education cess (total) : 3 percent of income tax and surcharge.
For further details please visit the web site of Income Tax Department at
www.incometaxindia.gov.in
Tax Incentives
Government of India provides tax incentives for:-
• Corporate profit
• Accelerated depreciation allowance
• Deductibility of certain expenses subject to certain conditions.
These tax incentives are, subject to specified conditions, available for new investment in
• Infrastructure,
• Power distribution,
• Certain telecom services,
• Undertakings developing or operating industrial parks or special economic zones,
• Production or refining of mineral oil,
• Companies carrying on R&D,
• Developing housing projects,
• Undertakings in certain hill states,
• Handling of food grains,
• Food processing,
• Rural hospitals etc.
Indirect Taxes
Excise Duty
Manufacture of goods in India attracts Excise Duty under the Central Excise act 1944 and the Central Excise Tariff Act 1985. Herein, the term Manufacture means bringing into existence a new article having a distinct name, character, use and marketability and includes packing, labeling etc.
Excise duty rates has been fixed at 12.5% applicable from March 01, 2015. Education cess and secondary and higher education cess has been subsumed in the Central Excise duty.
Recent budget initiatives in this regard are as follows:
• Education cess and Secondary and Higher education cess to be subsumed in the Central Excise duty.
• Online central excise and service tax registration to be done in two days.
Central Excise duty is administered by the Central Board of Excise and Customs.
For further information, please visit their website at: http://www.cbec.gov.in/
Customs Duty
The levy and the rate of customs duty in India are governed by the Customs Act 1962 and the Customs Tariff Act 1975. Imported goods in India attract basic customs duty, additional customs duty and education cess. The rates of basic customs duty are specified under the Tariff Act.
Custom duty rates depend on classification under the customs tariff.
Customs duty typically comprises the following components:
1. Basic Customs Duty
2. Additional Customs Duty
3. Education cess/ secondary and higher education cess
4. Special Additional Customs Duty
Customs duties in India are administrated by Central Board of Excise and Customs under Ministry of Finance.
For further information please visit: www.cbec.gov.in
Recent budget initiatives in this regard are as follows:
• Basic Custom duty on certain inputs, raw materials, intermediates and components in 22 items, reduced to minimise the impact of duty inversion.
Service Tax
Service tax is levied at the rate of 14% on certain identified taxable services provided in India by specified service providers. Service tax on taxable services rendered in India are exempt, if payment for such services is received in convertible foreign exchange in India and the same is not repatriated outside India. The Cenvat Credit Rules allow a service provider to avail and utilize the credit of additional duty of customs/excise duty for payment of service tax. Credit is also provided on payment of service tax on input services for the discharge of output service tax liability.
The Government of India has introduced a negative list-based taxation of services with effect from 1 July, 2012. Except the services enlisted in the negative list all other services are taxable unless these entail:
1. Sale or purchase of goods
2. Transfer or gift of immovable property
3. Transaction in money or actionable claim
4. Service provided by employee to employer in the course of employment.
Services provided outside India will not be liable to service tax. Such services will be deemed as exports, subject to the fulfilment of conditions.
Recent budget initiatives in this regard are as follows:
• Service-tax plus education cesses increased from 12.36% to 14% to facilitate transition to GST.
Website of Central Board of Excise and Customs relating to Service Tax
Securities Transaction Tax
Transactions in equity shares, derivatives and units of equity-oriented funds entered in a recognized stock exchange attract Securities Transaction Tax at the following rate:-
• Purchase or sale of equity shares (delivery based) - 0.1%,
• Sale of units of an equity-oriented fund to the seller mutual fund - 0.001%
• Non delivery base transactions in the above - 0.025%
• Sale of futures in securities - 0.01%
Value Added Tax/Sales Tax
Sales tax has been replaced with Value Added Tax (VAT) from April 01, 2005. VAT is imposed on goods only and not services. Other indirect taxes such as excise duty, service tax etc., are not replaced by VAT. VAT is implemented at the State level by State Governments. VAT is applied on each stage of sale with a mechanism of credit for the input VAT paid. There are four slabs of VAT:-
• 0% for essential commodities
• 1%-2% on bullion and precious stones
• 4%-5% on agricultural and industrial inputs and capital goods and items of mass consumption
• All other items 12.5%-15%
• Petroleum products, tobacco, liquor etc., attract higher VAT rates that vary from State to State
A Central Sales Tax at the rate of 2% is also levied on inter-State sales.
Other State Taxes
• Stamp duty on transfer of assets
• Profession tax
• Property/building tax levied by local bodies
• Agriculture income tax levied by State Governments on income from plantations
• Luxury tax levied by certain State Government on specified goods
Municipal Taxes
• Octroi/entry tax: - Some municipal jurisdictions levy octroi/entry tax on entry of goods
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