PROJECT

ON
Taxation System
ON India
Submitted to: Submitted by:
Ranjani matta Mohinder Singh
PG20095688
 ACKNOWLEDGEMENT

The satisfaction that accompanies the accomplishment of any

task would be short-lived without the mention of the people who
are instrumental in it being a success, through constant
encouragement and guidance which has been a source of
inspiration throughout the course of this project.
I take this opportunity to express my gratitude to all those who
have helped me in the completion of this project.
I express my sincere prenames to All mighty God who has
bestowed his blessing on us.

I am thankful to Ms. RANJANI MATTA, for helping us

on each and every step of the project work and guiding us
towards the right path, so that, we were able to understand the
topic and thereby complete the project more efficiently.

We are also very thankful to all the respondents who

contributed their precious time to fill the questionnaire and
complete our survey.
 Brief Overview

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), (Sales tax in States where VAT is not
yet in force), 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. The process of
rationalization of tax administration is ongoing in India.

The Central Board of Direct Taxes (CBDT) is a part of the

Department of Revenue in the Ministry of Finance, Government
of India. The CBDT provides essential inputs for policy and
planning of direct taxes in India and is also responsible for
administration of the direct tax laws through Income Tax
Department.
The CBDT is a statutory authority functioning under the Central
Board of Revenue Act, 1963.

WHAT IS TAX?

To tax (from the Latin taxo; "I estimate") is to impose a

financial charge or other levy upon a tax payer (an
individual or legal entity) by a state or the functional
equivalent of a state such that failure to pay is punishable
by law.
Important Source of Revenue of the government.
Compulsory contribution from a person to the expenses
incurred by the state in common interest of all without
reference to specific benefits conferred on any individual.
TYPES OF TAXES

Taxes are of two types:

Direct Taxes
Indirect Taxes

Direct Taxes :

Direct Taxes are the taxes which are not shifted i.e., the
incidence of which falls on persons who pay them to the
government. For example income tax and wealth tax.

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 its control and management is situated entirely in India.
RATES & SURCHARGE:

Domestic corporations are subject to tax at a basic rate

of 35% and a 2.5% surcharge.
Foreign corporation have a basic tax rate of 40% and a
2.5% surcharge.
An education cess at the rate of 2% on the tax payable
is also charged.
Corporates are subject to wealth tax at the rate of 1%,
if the net wealth exceeds Rs.1.5 million.
Indirect Taxes:

Indirect taxes are the taxes in which the burden of paying Tax is
shifted through a change in price. For example, Custom duty,
Excise Duty, etc.

Indirect Taxes are not levied on individuals, but on goods and

services. Customers indirectly pay this tax in the form of higher
prices. For example, it can be said that while purchasing goods
from a retail shop, the retail sales tax is actually paid by the
customers. The retailer eventually passes this tax to the
respective authority.

Merits And Demerits Of Direct Taxes:

MERITS:
Imposed according to the ability of the person to pay.
Revenue is Income Elastic as progressive character
Revenue increases faster than the increase in Income.
Create better civic consciousness.
Serves the purpose of transference of the income from the
rich to the poor.
DEMERITS:
The ability to pay is difficult to determine; only a rough
idea is formed.
Because of Undeclared Sources of Income or Evasion, the
actual payment may not be strictly according to the pay.
Necessitate Proper maintenance of accounts which some of
the tax payers may not able to do.

Merits And Demerits Of Indirect Taxes:

MERITS:
Convenience in assessment and relative difficulty in
Evasion.
Inclusion of tax in the price.
Difficult in Evade.
Taxes on drinks, narcotics, and tobacco , serve a social
purpose by discouraging their consumption.

DEMERITS:
Regressive Character.
Do not create social Consciousness as payment of tax is not
felt by the payer.
Government is not certain about the proceeds of these
taxes.
 Burden of Indirect taxes can be shifted forward or
backward as such consumers have to bear the ultimate
burden of taxes.

ABOUT INDIAN TAXATION SYSTEM:

According to the Constitution of India, the government has the

right to levy taxes on individuals and organizations. However,
the constitution states that no one has the right to levy or charge
taxes except the authority of law. Whatever tax is being charged
has to be backed by the law passed by the legislature or the
parliament.

Indian Tax system is characterized by:

A high dependence on Indirect taxes.
Low average effective tax rates and tax productivity.
High marginal effective tax rates and large tax- induced
distortions on investments and financing decision.

INDIAN TAXATION SYSTEM

TAX

Direct tax Indirect tax

Income tax Custom duties

Wealth tax Excise duties
Gift tax Sales tax
Service tax

Direct tax

Companies residents in india are on their worldwide income

arising from all sources in accordance with the provision of the
income tax act. Non resident corporations are essentially taxed
on the income earned from a incorporated in india.
Domestic corporations are subject to tax at a basic rate of 35%
and 2.5% surcharge. Foreign corporations have a basic tax rate
of 40% & 2.5 surcharge . an education cess at the rate of 12.5% .
Corporations also have to pay for minimum alternative tax at
7.5% (plus surcharge and education cess at the rate of 2% on the
tax payable is also charged.Corporations also have to pay
dividend distributions tax at the rate of 12.5%.Tax is payable on
the capital gains of sale assets.
Long term capital gains tax is charged .
Capital assets are held for more than three years.
In case of shares, securities listed on a recognized stock
exchange In india , units of specified mutual funds, the
period for one year holding.
Long term capital gains taxed at a basic rate of 20%

Personal income tax

Personal income tax is levied by central government and is
administrated central board of direct tax.
The rates of personal income tax are as..
0 to 100000 nil
100000 to 150000 10%
150000 to 250000 20%
250000 to above 30%

Surcharges of 10% on total tax is levied if income exceeds Rs.

8,50,000
Rates of Withholding Tax
Current rates for withholding tax for payment to non-residents
are:-
(i) Interest 20%
(ii) Dividends Dividends paid by domestic companies: Nil
(iii) Royalties 10%
(iv) Technical Services 10%
(v) Any other services Individuals: 30% of the income
Companies: 40% of the net income
The above rates are general and are applicable in respect of
countries with which India does not have a Double Taxation
Avoidance Agreement (DTAA).
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.

Corporate income tax The companies and business

organization in india are based on the income from their
worldwide transaction. In case of the resident or domestic
organization, a tax of 35% and 2.5% surcharge is levied. In case
of foreign corporate organizations, a basic tax rate of 40% and
2.5% surcharge is levied.

Rationle for the corporation tax is that a joint stock

company has a separate entity & thus should be
taxed separately.
Until 1960-61 corporations were taxed in a partial
since.
A corporation was required to pay income tax on
behalf of shareholders on dividends paid to them
and each shareholder got a credit to this effect.

Personel income tax It is administered and supervised by the

Central Board of Direct taxes as per the provisions of the
Income Tax Act.

The personel income becomes more than INR 850000 a

surcharge of 10% of the total tax of amount.

Incomes from all sources are added.

Certain rebates, deductions, expenditure etc. on account of

life insurance, medical insurance, savings in PPF, etc are
allowed.

Whole income into different slabs and taxed on the basic of

slab into which it falls.
 Progressive income taxation i.e.as income increases, the
rate of tax also increases.

0 100000 No
100000 150000 10%
150000 250000 20%
250000 Above 30%

Tax salbs are different for men, women & senior citizen .
For women there is no tax for income below Rs. 1.80 lakh.
Senoir citizens need not pay tax for income below Rs. 2.50

Capital gains tax The central government also charges tax on

the capital gains that is delivered from the sale of assets.

The capital assets are kept for more than three years
If the securities and shares are listed under any recognized
Indian stock exchange.

Income Tax

Income tax is tax on the income of an individual or an entity.

Introduced in india in the year 1860.
Discounted in the year 1873.
Reintroduced in the year 1886.

Wealth Tax

Taxes which are levied on wealth and capital are mainly

estate duty, annual tax on wealth and duty tax.
Estate duty was first introduced in the year 1953.
Estate duty is levied on the total property passing to the
heirs on the death of a person.
Estate duty was abolished in the year 1985.

Gift tax

Gift tax was introduced in 1958

Gift tax was livable on all donations to recognized
charitable in situations , gifts to women dependents & gifts
to wife.
Gift tax was aaolshed in the year 1998.

Indirect tax
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. Most of the
products attract excise duties at the rate of 16%. Some products
also attract special excise duty/and an additional duty of excise
at the rate of 8% above the 16% excise duty. 2% education cess
is also applicable on the aggregate of the duties of excise. Excise
duty is levied on ad valorem basis or based on the maximum
retail price in some cases.

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:-
Delivery base transactions in equity shares or buyer and seller
each units of an equity-oriented fund 0.075%
Sale of units of an equity-oriented fund to the seller mutual
fund 0.15%
Non delivery base transactions in the above 0.015%
Derivatives (futures and options) seller 0.01%
Sales Tax Acts of various State Governments and Central Sales
Act governed the application of Sales Tax/VAT.
Sales Tax/VAT
Sales tax is levied on the sale of movable goods. Most of the
Indian States have replaced Sales tax with a new Value Added
Tax (VAT) from April 01, 2005. VAT is imposed on goods only
and not services and it has replaced sales tax. 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% on bullion and precious stones
4% on industrial inputs and capital goods and items of mass
consumption
All other items 12.5%
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 and would be eliminated gradually.
Municipal/Local Taxes
Octori/entry taxS: Some municipal jurisdictions levy
octori/entry tax on entry of goods
Other State Taxes
Stamp duty on transfer of assets
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
good

Excise duty The Central Excise act of 1944 and the Central
Excise Tariff Act of 1985. around 16% excise duty is charged
and in some cases, an additional excise duty of around 8 % is
also charged. Due to the recent budget amendments, an
educational cess of around 2 % is also charged.
An excise duty is levied on production and has absolutely
on connection with its actual sales.
These are levied by the central government in a number of
forms.
Taxation on inputs such as raw materials components has a
number of limitations.
Since it amounts to excise duty only on additions in value
by manu facturer at each satge, it is called value added tax
MODAVT differs from vat.
Basic excise duty is 16%and some special excise duties
which are levied in addition to cenvat.
 The basic excise paid on excisable goods can be deducted
from the excise collected on the output so that only tax on
value added is paid.
Cenvant reduces cascading effect of input taxation.
System has certain shortcomings such as cumbersome
procedures , inadequate coverage of cenvant, scope of tax
evasion.

Customs Duty The Customs Act 1962 and Customs Tariff Act
of 1975. Usually, the goods that are imported to the country are
charged customs duty along with educational cess. For industrial
goods, the rate has been slashed to 15%. The customs duty is
evaluated on the value of the transaction of the goods.

The Central Board of Excise and Customs under the Ministry of

Finance manages the customs duty process in the country.

Service Tax 10 % service tax is levied on various services that

are provided in the country. In the recent budget, the tax
exemption limit in case of the small service providers has been
raised to Rs.800, 000 from Rs.400, 000. Tax relief has also been
provided to the services of the Resident Welfare Associations
whose members contribute monthly Rs 3000 for the services.
Sales Tax/VAT Sales taxes are charged on the sale of movable
goods. In most of the states, from April 1, 2005, the sales taxes
have been replaced with Value Added Tax (VAT). In case of
VAT, taxes are only levied on the goods and not the services.
VAT comprises 4 slabs:
0% for essential commodities
1% levied on bullion and valuable stones
4% on industrial inputs and capital goods of mass
consumption
All other items 12.5%
The VAT rates of petroleum tobacco, liquor and so on are higher
and differ from state to state.

In addition, there are some other state and local taxes that are
applicable. They are:
Octroi/entry tax
Stamp duty on asset transfer
Property/building tax
Agriculture income tax