Taxation Overview in India

The tax structure in India is divided into direct and indirect

taxes

While direct taxes are levied on taxable income earned by individuals and corporate
entities, the burden to deposit taxes is on the assessees themselves. On the other hand,
indirect taxes are levied on the sale and provision of goods and services respectively
and the burden to collect and deposit taxes is on the sellers instead of the assesses
directly.
The taxation system in India is such that the taxes are levied by the Central
Government and the State Governments. Some minor taxes are also levied by the local
authorities such as the Municipality and the Local Governments. 
Over the last few years, the Central and many State Governments have undertaken
various policy reforms and process simplification towards great predictability, fairness
and automation. This has consequently lead to India’s meteoric rise to the top 100 in the
World Bank’s Ease of Doing Business (EoDB) ranking in 2019 as India jumps 79
positions from 142nd (2014) to 63rd (2019) in 'World Bank's Ease of Doing Business
Ranking 2020'. The Goods & Services Tax (GST) reform is one such reform to ease the
complex multiple indirect tax regime in India.

Major Central Taxes

 Income Tax
 Central Goods & Services Tax (CGST)
 Customs Duty
 Integrated Goods & Services Tax (IGST)

Major State Taxes

 State Goods & Services Tax (SGST)
 Stamp Duty & Registration

Major tax reform in India

GST is one of the biggest indirect tax reforms in the Country.

GST is a comprehensive indirect tax levied on manufacture, sale and consumption of
goods as well as services at the national level. It has replaced all indirect taxes levied on
goods and services by the Central and State Governments.
GST regime was implemented from 1  July 2017, and India has adopted the dual GST
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model in which both the Centre and States levy taxes

GST Collection Update: The gross GST revenue collected in the month of July 2021 is INR 1,16,393 cr of
which CGST is INR 22,197 cr, SGST is INR 28,541 cr, IGST is INR 57,864 cr.
Note: The GST is applicable on all goods other than the following:
• Alcoholic liquor for human consumption
• Five petroleum products (Petroleum crude, high-speed diesel, motor spirit, natural gas and aviation
turbine fuel). GST on these to be levied post notification about the effective date.

TAXATION ON FOREIGN ENTITIES

Liaison Office
 A Liaison Office (LO) is generally not subject to Income Tax in India, as it cannot
conduct business activities and earn profits on account of Indian exchange control
regulations.
 It is required to obtain an Indian tax registration number (PAN) and a withholding tax
registration number (TAN).
 It is required to file an annual statement of its financial affairs and an annual activity
certificate (AAC).
 As an LO cannot generally earn any profits, no repatriation taxes are applicable. Even if
there are any unutilized funds available at the time of its closure, they can be repatriated
without any exit taxes.

KEY TAX INCENTIVES IN INDIA

Export Promotion
Applicability: SEZ units operational before 1 April 2020
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Incentive: Deduction of 100% of profits and gains derived from export business for first 5
years of commencement, 50% of profits and gains derived from export business for next
5 years, 50% of ploughed-back profits and gains from export business for next 5 years. 

Research & Development

Applicability: Companies in respect of any expenditure on R&D in an approved in-house
facility
Incentive: Weighted tax deduction of 200% granted to companies
Validity: 31  March 2020
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Investment-linked
Incentive: To incentivise investment in certain sectors, any capital expenditure incurred
for specified businesses is allowed as a deduction in the year in which it is incurred.

Startup India Scheme

Incentive: Tax incentives granted to eligible start-ups are the tax holiday for any
consecutive 3 years (from initial 5 years) in respect to 100% of their profits, including
fast-tracking of patent applications with 80% rebate.
International Financial Services Centre
Applicability: Caters to customers outside the jurisdiction of the domestic economy.
Such centres deal with flows of finance, financial products and services across borders.
Incentives: Tax concessions on capital gains, Minimum Alternate Tax and Dividend
Distribution Tax.

TAX COMPLIANCES & DISPUTE RESOLUTION

Tax compliances
Every taxpayer is required to undertake certain compliances, such as:
 Annual filing of:
o Return of income
o Report of audit under the ITA (if applicable)
o Transfer pricing certificate (if applicable)
 Monthly deposition of withholding taxes
 Quarterly deposition of advance tax
 Quarterly filing of withholding tax return

COMMON TAX CONCERNS OF EXPATRIATES

 Double Taxation Avoidance Agreement (DTAA)
Signed b/w India and another country so that taxpayers can avoid paying double taxes on
their income earned from the source country as well as the residence country.
 Social Security
All employees are required to contribute towards statutory social security contribution
funds. Withdrawal from such funds is possible at the time of termination of employment.
o To exempt international workers from the contributing towards Indian social
security funds, India has entered into Social Security Agreements (SSA) and
Bilateral Comprehensive Economic Agreements (BCEA) with various countries.
o As a result, inbound assignees from countries that have entered into an SSA with
India and hold a Certificate of Coverage (COC) issued by their home-country can
claim exemption from Indian social security contributions.

There are three types of Central Excise duties raised in India particularly:
1. Basic Excise Duty
This is the duty imposed under section 3 of the Central Excises and Salt Act,1944 on
all excisable goods other than salt which are produced or produced in India at the
 rates outlined in the schedule to the Central Excise Tariff Act,1985.
 

2. Additional Duty of Excise

Section 3 of the Additional Duties of Excise (goods of special importance) Act, 1957
empowers the levy and collection in respect of the goods described in the Schedule
to this Act. This is levied instead of Sales Tax and shared between Central and State
Governments. These are levied following different enactments like medicinal and
toilet preparations, sugar etc. and other industries development etc.
 

3. Special Excise Duty

As per the Section 37 of the Finance Act, 1978 Special excise Duty was brought 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 applicable provisions of the
Finance Act defines that the Special Excise Duty shall be or shall not be levied and
collected during the relevant financial year.

Excise Duty
Central Excise duty is an indirect tax levied on goods created in India. Excisable goods have
been defined as those, which have been defined in the Central Excise Tariff Act as being
subjected to the duty of excise.

There are three types of Central Excise duties raised in India particularly:
1. Basic Excise Duty
This is the duty imposed under section 3 of the Central Excises and Salt Act,1944 on
all excisable goods other than salt which are produced or produced in India at the
rates outlined in the schedule to the Central Excise Tariff Act,1985.
 

2. Additional Duty of Excise

Section 3 of the Additional Duties of Excise (goods of special importance) Act, 1957
empowers the levy and collection in respect of the goods described in the Schedule
to this Act. This is levied instead of Sales Tax and shared between Central and State
Governments. These are levied following different enactments like medicinal and
toilet preparations, sugar etc. and other industries development etc.
 

3. Special Excise Duty

As per the Section 37 of the Finance Act, 1978 Special excise Duty was brought 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 applicable provisions of the
Finance Act defines that the Special Excise Duty shall be or shall not be levied and
collected during the relevant financial year.

the ten main features of Indian tax structure

The Scientific Division of Tax Powers:

India being a federation, there is the existence of a multi-level fi-
nance system.

The constitution of India forms the basis of division of

powers into:
(a) Union,

(b) State, and

(c) Concurrent.

Based on this the constitution has also made a provision for division
of tax powers between the centre and the states.

The area and sphere of taxation of centre and state is clearly

demarcated as per constitutional provision. Taxes which are in the
purview of central government accounted for 50 percent of its
revenue. Some taxes are again levied by the Central government and
the proceeds of such taxes are divided between the centre and the
state governments.

Feature # 2. Multiplicity of Tax Structure:

India is having a broad based and extensive tax structure. Its main
feature is the existence of multiplicity of taxes. There are both union
government taxes and state government taxes. The tax structure
includes both dried and indirect taxes

Feature # 3. Larger share of Indirect Taxes:

In India in the total tax revenue there is the domination of indirect
taxes over direct taxes. Indirect taxes shared 63% in 1950 – 51
where it increased to 77% in 2001-02. If shows that because of the
undeveloped character of the economy and glaring inequality in in-
come, the scope of direct taxes is limited.

Feature # 4. Insufficient Tax Revenue:

In-spite of rising trend in tax revenue, the total revenue remained
small when compared to developed countries. The tax GDP ratio
generally remained in the range of 8 percent to 9 percent in India
(E. Survey 2005-06) where as it is very high in countries like
Sweden, France, West Germany, UK, USA, etc. where the share
ranges between 30 to 40 percent.

Feature # 5. Greater Importance to Sate Government in

Federal Fiscal System:
In Indian fiscal federalism much importance is assigned to state
governments. The field within which tax revenue, are raised and
spend regularly is very wide in India when compared to many
federal governments.

This reflects the importance of state government in our federal

system. This is because of the growing responsibilities of the state
government in the discharge of developmental activities.

Feature # 6. Incidence of Taxation:

In India the incidence of taxation is much higher in urban areas
than in rural areas this is because of the predominance of
agriculture in rural area and low income of rural households.

The urban population depends more on service and business sector

and enjoys comparatively higher income and tax paying capacity.

Feature # 7. Progressiveness in Tax Structure:

Indian tax structure is framed in such a way that all indices of
ability to pay is taxed. The direct tax is framed in such a way that as
tax base increases, tax rate also rises sharply. Excise duties are
levied and collected discriminately, depending on the type of com-
modity and the class of consumers.

Feature # 8. Narrow Base:

Fiscal experts opine that the tax base is very narrow in India in the
case of both direct and indirect taxes. A planning commission esti-
mate shows that only one percent of working population comes un-
der the preview of direct tax.

In 2000 – 01, total income tax on the corporate income was only
2.6 percent GDP. Out of a population of more than 100 crores,
around 10 million are coming under the Income tax belt. The
indirect tax to GDP ratio is only 5.4 percent in 2003- 04. The
service sector, though contributing the largest share in GDP was not
subject to tax till 1993-94.

Service tax was introduced in the year 1994-95. Service sector, even
though accounts for more than 50 percent of GDP, contributed Rs.
14200/- Crores as tax in 2004- 05. This is a small share when
compared to the vast potential from this sector.

Feature # 9. Complexity of Indian Tax Laws:

With the intension of broad based tax system, a plethora of changes
have been introduced in the tax structure.

However both direct and Indirect tax laws are highly complex, with
a lot of loopholes which enable the people to avoid as well as to
evade taxes. In this context Prof. Kaldore observes “there are
definitional defects in India’s tax system, which gives elaborate
power to tax authorities to interpret tax laws according to their
whims and fancies. This has generated wide spread corruption in
tax departments”.

Feature # 10. Integration between Centre and Sate

Revenue:
After independence concrete efforts were made to organize the tax
structure scientifically in tune with the requirements of a federal set
of government. At present there is well-organized machinery for the
collection distribution and expenditure of the revenue.

Now the tax system is well structured to generate sufficient revenue

to meet the requirements of development objectives.
However we can point out a number of short comings in Indian tax
structure. It is usually argued that Indian tax system is unscientific
because it doesn’t provide any stimulation for production invest-
ment and saving activities of the government.

Many tax laws are stringent and rigid which punishes prudence and
virtue, but rewards corruption and evasion. This unscientific base of
tax system is pin pointed as a factor responsible for generating black
money and encouraging tax evasion. Compared to developed
countries like Japan, Australia USA etc.

Where 70 – 80 percent of revenue is generated by direct taxes; in

India major portion of revenue is flowing from indirect taxes. This
is not a healthy sign of developed tax structure. The main objective
of taxation is to reduce glaring inequality in income distribution.

But in-spite of having a multiplicity of taxes covering different

income source base, the tax machinery failed to reduce the income
inequality considerably. This is a serious short comings of our tax
system.

The accumulated tax arrears, the parallel economy nourished by

black money shows the flows in our tax system. The un-coordinated
inefficient and corrupt tax machinery pin-point to the deficiency in
our tax system.

To overcome these defects the government of India over time

appointed different taxation commissions. These commissions were
appointed to detect and analyses the defects and to suggest suitable
recommendations.

The Taxation Enquiry commission Report (1953), Prof Kaldors

proposal for tax reforms (1956), The Mahavir Tyagi Committee
Report (1958), Wanchoo Committee Report (1970) Raj Committee
Report on Agricultural taxation (1972), Indirect Tax Enquiry
Committee Report (1976), Chokshi Direct Taxation Committee Re-
port (1977) are some important measures adopted by the central
government to rationalize and revitalize the Indian tax structure.
After 1990, in lieu with the economic reforms and structural adjust-
ment programmes, the central government initiated concrete efforts
to rationalize the tax structure. The appointment of Dr. Raja J.
Chelliah committee, popularly called the Tax Reform Committee,
was a bold step to reform the Indian Tax structure in tune with the
changing economic scenario.