TAXES IMPOSED IN INDIA

The Finance Ministry of India imposes & governs certain taxes on the citizens. Tax revenues form a major chunk of the total revenue for the Exchequer. Given below are the main taxes that are levied: Income Tax: Income Tax, for individuals, is levied on all income other than agricultural income and is collected by the central government and shared with the states. According to Income Tax Act 1961, every person, who is an assessee and whose total income exceeds the maximum exemption limit, shall be chargeable to the income tax at the rate or rates prescribed in the finance act. Such income tax shall be paid on the total income of the previous year in the relevant assessment year. The total income of an individual is determined on the basis of his residential status in India. Residence Rules an individual is treated as resident in a year if present in India for 182 days during the year or for 60 days during the year and 365 days during the preceding four years. Individuals fulfilling neither of these conditions are nonresidents. (The rules are slightly more liberal for Indian citizens residing abroad or leaving India for employment abroad.) A resident who was not present in India for 730 days during the preceding seven years or who was nonresident in nine out of ten preceding yeas I treated as not ordinarily resident. In effect, a newcomer to India remains not ordinarily resident. For tax purposes, an individual may be resident, nonresident or not ordinarily resident. Non-Residents and Non-Resident Indians Residents are on worldwide income. Nonresidents are taxed only on income that is received in India or arises or is deemed to arise in India. A person not ordinarily resident is taxed like a nonresident but is also liable to tax on income accruing abroad if it is from a business controlled in or a profession set up in India. Capital gains on transfer of assets acquired in foreign exchange are not taxable in certain cases. Non-resident Indians are not required to file a tax return if their income consists of only interest and dividends, provided taxes due on such income are deducted at source. It is possible for non-resident Indians to avail of these special provisions even after becoming residents by following certain procedures laid down by the Income Tax act. Taxability of individuals is summarized in the table below

Status Resident and ordinarily resident Resident but not ordinary resident Non-Resident

Indian Income Taxable Taxable Taxable

Foreign Income Taxable Not Taxable Not Taxable

The Income Tax Act is amended every year through the Union Budget proposals. Corporate Tax: A company has been defined as a juristic person having an independent and separate legal entity from its shareholders. Income of the company is computed and assessed separately in the hands of the company. However the income of the company which is distributed to its shareholders as dividend is assessed in their individual hands. Such distribution of income is not treated as expenditure in the hands of company, the income so distributed is an appropriation of the profits of the company. Residence of a company: A company is said to be a resident in India during the relevant previous year if: it is an Indian company if it is not an Indian company then, the control and the management of its affairs is situated wholly in India A company is said to be non-resident in India if it is not an Indian company and some part of the control and management of its affairs is situated outside India. The taxability of a company's income depends on its domicile. Indian companies are taxable in India on their worldwide income. Foreign companies are taxable on income that arises out of their Indian operations, or, in certain cases, income that is deemed to arise in India. Royalty, interest, gains from sale of capital assets located in India (including gains from sale of shares in an Indian company), dividends from Indian companies and fees for technical services are all treated as income arising in India. Domestic Corporate Income Taxes Rates Tax Rate Domestic Corporations 30% Effective Tax Rate with surcharge 30%1

A surcharge of 10% of the income tax is levied, if the taxable income exceeds Rs. 1 million . Foreign Companies Tax Rates Withholding Tax Rate for non-treaty foreign companies Tax Rate for US companies under the treaty

Dividends Interest Income Royalties Technical Services Other Income

20% 20% 30% 30% 55%

15%1 15%2 20%2 20%2 55%

Inter-corporate rates where there is minimum holding. 10% or 15% in some cases. Withholding tax is charged on estimated income, as approved by the tax authorities. There are other favorable tax rates under various tax treaties between India and other countries. Assessing taxable income In ascertaining taxable income, all expenditure incurred for business purposes are deductible. This includes interest on borrowings paid in the financial year and depreciation on fixed assets. Certain expenses are specifically disallowed or their quantum of deduction is restricted. These include: Entertainment expenses Interest or other amounts paid to a non-resident without deducting without tax Corporate taxes paid Indirect general and administrative costs of a foreign head office. Sales Tax: Sales Tax is a tax, levied on the sale or purchase of goods. There are two kinds of Sales Tax i.e. Central Sales Tax, imposed by the Centre and State Sales Tax, imposed by each state. Central Sales tax is generally payable on the sale of all goods by a dealer in the course of inter-state Trade or commerce or, outside a State or, in the course of import into or, export from India. A sale or purchase shall be deemed to take place in the course of interstate trade or commerce in the following cases: when the sale or purchase occasions the movement of goods from one State to another; when the sale is effected by a transfer of documents of title to the goods during their movement from one State to another. Where the goods are delivered to a carrier or other bailee for transmission, the movement of the goods for the purpose of clause (b) above, is deemed to start at the time of such delivery and terminate at the time when delivery is taken from such carrier or bailee. Also, when the movement of goods starts and terminates in the

same State, it shall not be deemed to be a movement of goods from one State to another. To make a sale as one in the course of interstate trade, there must be an obligation to transport the goods outside the state. The obligation may be of the seller or the buyer. It may arise by reason of statute or contract between the parties or from mutual understanding or agreement between them or, even from the nature of the transaction, which linked the sale to such transaction. There must be a contract between the seller and the buyer. According to the terms of the contract, the goods must be moved from one state to another. If there is no contract, then there is no inter-state sale. There can be an interstate sale even if the buyer and the seller belong to the same state; even if the goods move from one state to another as a result of a contract of sale; or, the goods are sold while they are in transit by transfer of documents. Sales tax is payable to the sales tax authority in the state from which the movement of goods commences. It is to be paid by every dealer on the sale of any goods, effected by him in the course of inter-state trade or commerce, notwithstanding that no liability to tax on the sale of goods arises under the tax laws of the appropriate state. Excise Duty Central excise revenue is the biggest single source of revenue for the Government of India. The Union Government tries to achieve different socio-economic objectives by making suitable adjustments in the scope and quantum of levy of Central Excise duty. The scheme of Central Excise levy is suitably adapted and modified to serve different purposes of price control, sufficient supply of essential commodities, industrial growth, and promotion of small scale industries and like Authority for collecting the Central Excise duty. Article 265 of the Constitution of India has laid down that both levy and collection of taxes shall be under the authority of law. The excise duty is levied in pursuance of Entry 45 of the Central List in Government of India Act, 1935 as adopted by entry 84 of List I of the seventh Schedule of the Constitution of India. Charging section is Section 3 of the Central Excises and Salt Act, 1944. Liability to pay Central Excise Duty Section 3 of the Central excises and Salt Act, 1944 provides that there shall be levied and collected in such manner as may be prescribed, duties of excise on all excisable goods other than salt which are produced or manufactured in India at the rates set forth in the schedule to the Central excise Tariff Act, 1985. It is therefore clear that as soon as the goods in question are produced or manufactured, they will be liable to payment of Excise duty. However for convenience duty is collected at the time of removal of the goods. While Section 3 of the Central Excises and salt Act, 1944 lays down the taxable event, Rules 9 and 49 of the Central excise Rules, 1944 provides for the collection of duty. Types of Excise Duty There are three types of Central Excise duties collected in India namely

Basic Excise Duty This is the duty charged under section 3 of the Central Excises and Salt Act, 1944 on all excisable goods other than salt which are produced or manufactured in India at the rates set forth in the schedule to the Central Excise tariff Act, 1985. Additional Duty of Excise Section 3 of the Additional duties of Excise (goods of special importance) Act, 1957 authorizes the levy and collection in respect of the goods described in the Schedule to this Act. This is levied in lieu of sales Tax and shared between Central and State Governments. These are levied under different enactments like medicinal and toilet preparations, sugar etc. and other industries development etc. Special Excise Duty As per the Section 37 of the Finance Act, 1978 Special excise Duty was attracted on all excisable goods on which there is a levy of Basic excise Duty under the Central Excises and Salt Act, 1944. Since then each year the relevant provisions of the Finance Act specifies that the Special Excise Duty shall be or shall not be levied and collected during the relevant financial year. Liability to pay Excise Duty Goods themselves cannot pay duty so the person who creates the taxable event must discharge the liability which he had created. The liability to pay tax excise duty is always on the manufacturer or producer if goods. There are three types of parties who can be considered as manufacturersThose who personally manufacture the goods in question Those who get the goods manufactured by employing hired labour Those who get the goods manufactured by other parties The following have been held to be real manufacturers: In case where the factories are leased out, duty liability is on the lessee as he is the person who actually manufactures the said goods When goods are manufactured from others by supplying raw material, the duty liability will rest on the person who actually carried out the manufacturing activity and not on the person who supplied the material. In the manufacturer is a mere dummy of the customer or supplier of raw material, then the goods are said to be manufactured on behalf of the customers / suppliers and the latter is liable to duty. Customs Duty The Customs Act was formulated in 1962 to prevent illegal imports and exports of goods. Besides, all imports are sought to be subject to a duty with a view to affording protection to indigenous industries as well as to keep the imports to the minimum in the interests of securing the exchange rate of Indian currency. Duties of customs are levied on goods imported or exported from India at the rate specified under the customs Tariff Act, 1975 as amended from time to time or any other law for the time being in force. For the purpose of exercising proper surveillance over imports and exports, the Central Government has the power to notify the ports and airports for the unloading of the imported goods and loading of the exported goods, the places for clearance of goods imported or to be exported, the routes by which above goods may pass by land or inland water into or out of

Indian and the ports which alone shall be coastal ports. In order to give a broad guide as to classification of goods for the purpose of duty liability, the central Board of Excises Customs (CBEC) brings out periodically a book called the "Indian Customs Tariff Guide" which contains various tariff rulings issued by the CBEC. The Act also contains detailed provisions for warehousing of the imported goods and manufacture of goods is also possible in the warehouses. For a person who do not actually import or export goods customs has relevance in so far as they bring any baggage from abroad. Types of duties Basic Duty: This is the basic duty levied under the Customs Act. The rate varies for different items from 5% to 40%. Additional Duty (Countervailing Duty) (CVD): This additional duty is levied under section 3 (1) of the Custom Tariff Act and is equal to excise duty levied on a like product manufactured or produced in India. If a like product is not manufactured or produced in India, the excise duty that would be leviable on that product had it been manufactured or produced in India is the duty payable. If the product is leviable at different rates, the highest rate among those rates is the rate applicable. Such duty is leviable on the value of goods plus basic custom duty payable. For example, If the customs value of goods is Rs. 5000 and rate of basic customs duty is 10% and excise duty on similar goods produced in India is 20%, CVD will be Rs.1100/-. Additional Duty to compensate duty on inputs used by Indian manufacturers This Additional Duty is levied under section 3(3) of the Customs Act. It can be charged on all goods by the central government to counter balance excise duty leviable to raw materials, components and other inputs similar to those used in the production of such good. Anti-dumping Duty: Sometimes, foreign sellers abroad may export into India goods at prices below the amounts charged by them in their domestic markets in order to capture Indian markets to the detriment of Indian industry. This is known as dumping. In order to prevent dumping, the Central Government may levy additional duty equal to the margin of dumping on such articles, if the goods have been sold at less than normal value. Pending determination of margin of dumping, such duty may be provisionally imposed. After the exact rate of dumping duty is finally determined, the Central government may vary the provisional rate of dumping duty. Dumping duty can be imposed even when goods are imported indirectly or after changing the condition of goods. There are however certain restrictions on imposing dumping duties in case of countries which are signatories to the GATT or on countries given "Most Favoured Nation Status" under agreement. Dumping duty can be levied on imports on such countries only if the Central Government proves that import of such goods in India at such low prices causes material injury to Indian industry. Protective Duty: If the Tariff Commission set up by law recommends that in order to protect the

interests of Indian industry, the Central Government may levy protective antidumping duties at the rate recommended on specified goods. The notification for levy of such duties must be introduced in the Parliament in the next session by way of a bill or in the same session if Parliament is in session. If the bill is not passed within six months of introduction in Parliament, the notification ceases to have force but the action already undertaken under the notification remains valid. Such duty will be payable up to the date specified in the notification. Protective duty may be cancelled or varied by notification. Such notification must also be placed before Parliament for approval as above. Duty on Bounty Fed Articles: In case a foreign country subsidizes its exporters for exporting goods to India, the Central Government may import additional import duty equal to the amount of such subsidy or bounty. If the amount of subsidy or bounty cannot be clearly deter mined immediately, additional duty may be collected on a provisional basis and after final determination, difference may be collected or refunded, as the case may be. Export Duty: Such duty is levied on export of goods. At present very few articles such as skins and leather are subject to export duty. The main purpose of this duty is to restrict exports of certain goods. The Central Government has been granted emergency powers to increase import or export duties if the need so arises. Such increase in duty must be by way of notification which is to be placed in the Parliament within the session and if it is not in session, it should be placed within seven days when the next session starts. Notification should be approved within 15 days.