What is Tax?

Taxes are levied by governments on their citizens to generate income for undertaking projects to boost the economy of the country and to raise the standard of living of its citizens. The authority of the government to levy tax in India is derived from the Constitution of India, which allocates the power to levy taxes to the Central and State governments. All taxes levied within India need to be backed by an accompanying law passed by the Parliament or the State Legislature.

Benefits of taxes

The purpose of taxes is to provide the government with funds for spending without inflation. Taxes are used by the government for a variety of purposes, some of which are:

Funding of public infrastructure
Development and welfare projects
Defense expenditure
Scientific research
Public insurance
Salaries of state and government employees
Operation of the government
Public transportation
Unemployment benefits
Pension schemes
Law enforcement
Public health
Public education
Public utilities such as water, energy, and waste management systems

Advantages of Paying Taxes

1. Loan approvals:

When applying for a loan, especially home loans, vehicle loans, etc., major banks can request a copy of your income tax returns. This can be ITR from the last 2 to 3 years. Having ITR can even help to get a higher loan amount or to get your loan application reconsidered in case it was rejected at first. This is because banks calculate your ability to repay the loan based on your income. Income tax returns provide a clear picture of the income and the taxes that were paid on it in the previous years.

2. Visa applications:

Many foreign consulates require you to furnish your income tax returns of the previous years during the visa interview. While for some the most recent one will be sufficient, others require up to 2-3 years’ worth of returns to be furnished. This is mandatory for the UK, US, Europe, and Canada, but not so much for South East Asian countries and the Middle East. This is because income tax returns are a proof that you are not trying to leave the country to evade taxes. Even when traveling abroad for leisure or business, it is always prudent to carry your ITR receipts as this will come in handy in the case of any emergency when you have to seek the help of a consulate.

3. Self-employed individuals:

Freelancers, consultants, entrepreneurs, and partners of firms are not eligible for the Form 16. If their annual income exceeds the basic exemption limit, then ITR receipts can be furnished as proof of income. It is also proof of taxes paid. This will come in handy during any financial or business transaction.

4. Government tenders:

This depends on the individual government department with no specific strict rules, yet ITR receipts are sometimes requested to be furnished when applying for any government tenders. This is to ensure that you have sufficient income and can support the payment obligations.

5. Carrying forward of losses:

Short-term or long-term capital losses are usually carried forward to be adjusted against the capital gains made in the subsequent years. For example, the long-term capital loss of one year can be carried forward for up to 8 consecutive years that immediately succeed the year in which the loss had occurred. However, a long-term capital loss can be adjusted only against a short-term capital gain of that year. Short-term capital gains, however, can be adjusted against both short-term and long-term gains. However, this can only be availed if income tax returns have been filed.

6. Claiming tax refunds:

Any refunds that are due from the IT Department can only be claimed if income tax returns have been filed. Even if income is below the tax exemption bracket, there could be refunds from different savings instruments that can be claimed if ITRs are filed. An example is fixed deposits, on which there is tax deducted at source at 10%.

7. High-cover life insurance:

Life cover or a term policy with sum insured that ranges from Rs.50 lakh to Rs.1 crore can be availed only by furnishing income tax returns which helps in the verification of annual income. Such a high insurance cover is only given when there is a high income for which income tax return receipts are necessary.

8. Compensation:

For self-employed individuals, ITR receipts may have to be furnished in order to claim compensation in the event of a motor vehicle accident that results in a disability or accidental death. This is because, in order to arrive at the appropriate compensation, income of the person is to be established first.

Types of Taxes

There are two main categories of taxes, which are further sub-divided into other categories. The two major categories are direct tax and indirect tax. There are also minor cess taxes that fall into different sub-categories. Within the Income Tax Act, there are different acts that govern these taxes.

Direct Tax

Sub-categories of Direct Taxes

1. Income tax:

This is the tax that is levied on the annual income or the profits which is directly paid to the government. Everyone who earns any kind of income is liable to pay income tax. For individuals below 60 years of age, the tax exemption limit is Rs.2.5 lakh per annum. For individuals between the age of 60 and 80, the tax exemption limit is Rs.3 lakh. For individuals above the age of 80, the tax exemption limit is Rs.5 lakh. There are different tax slabs for different income amounts.

Apart from individuals, legal entities are also liable to pay taxes. These include all Artificial Judicial Persons, Hindu Undivided Family (HUF), Body of Individuals (BOI), Association of Persons (AOP), companies, local firms, and local authorities.

1. Prerequisite:

These are taxes that are levied on the different benefits and perks that are provided by a company to its employees. The purpose of the benefits and perks, whether it is official or personal, is to be defined.

2. Corporate tax:

The income tax paid by a company is defined as the corporate tax. It is based on the different slabs that the revenue falls under. The sub-categories of corporate taxes are as follows:

1. CDividend distribution tax:

This tax is levied on the dividends that companies pay to the investors. It applies to the net or gross income that an investor receives from the investment.

2. Fringe benefit tax:

This is tax levied on the fringe benefits that an employee receives from the company. This include expenses related to accommodation, transportation, leave travel allowance, entertainment, retirement fund contribution by the employee, employee welfare, Employee Stock Ownership Plan (ESOP), etc.

3. Minimum Alternative Tax (MAT):

Companies pay the IT Department through MAT which is governed by Section 115JA of the IT Act. Companies that are exempt from MAT are those that are in the power and infrastructure sectors.

3. Securities transaction:

This tax is levied on stock market and securities trading. The tax is levied on the price of the share as well as securities traded on the ISE (Indian Stock Exchange).

4. Capital gains:

Capital gains tax is levied on the sale of a property or money received through an investment. It could be from either short-term or long-term capital gains from an investment. This includes all exchanges made in kind that is weighed against its value.

Indirect tax

Taxes that are levied on services and products are called indirect tax. Indirect taxes are collected by the seller of the service or product. The tax is added to the price of the products and services. It increases the price of the product or service. There is only one indirect tax levied by the government currently. This is called GST or the Goods and Services Tax.

GST: This is a consumption tax that is levied on the supply of services and goods in India. Every step of the production process of any goods or value-added services is subject to imposition of GST. It is supposed to be refunded to the parties that are involved in the production process (and not the final consumer).

GST resulted in the elimination of other kinds of taxes and charges such as Value Added Tax (VAT), octroi, customs duty, Central Value Added Tax (CENVAT), as well as customs and excise taxes. The products or services that are not taxed under GST are electricity, alcoholic drinks, and petroleum products. These are taxed as per the previous tax regime by the individual state governments.

Other taxes

Other taxes are minor revenue generators and are small cess taxes. The various sub-categories of other taxes are as follows:

Property tax:

This is also called Real Estate Tax or Municipal Tax. Residential and commercial property owners are subject to property tax. It is used for the maintenance of some of the fundamental civil services. Property tax is levied by the municipal bodies based in each city.

Professional tax:

This employment tax is levied on those who practice a profession or earn a salaried income such as lawyers, chartered accountants, doctors, etc. This tax differs from state to state. Not all states levy professional tax.

Entertainment tax:

This is tax that is levied on television series, movies, exhibitions, etc. The tax is levied on the gross collections from the earnings.

Registration fees, stamp duty, transfer tax:

These are collected in addition to or as a supplement to property tax at the time of purchasing a property.

Education cess:

This is levied to fund the educational programs launched and maintained by the government of India.

Entry tax:

This is tax that is levied on the products or goods that enter a state, specifically through e-commerce establishments, and is applicable in the states of Delhi, Assam, Gujarat, Madhya Pradesh, etc.

Road tax and toll tax:

This tax is used for the maintenance of roads and toll infrastructure.

Tax FAQs

1. How do I know how much income tax I should pay?

The various income tax slabs are mentioned here. You can also visit the website of the Income Tax Department, www.incometaxindia.gov.in., to know more about your income tax liability.

2. What should be kept in mind when filling up the ITR form or challan?

The following details are to be clearly mentioned:

Amount of tax
Mode of payment of tax
Head of payment (other than for companies), ie., whether it is corporation tax or income tax
Assessment year
Permanent Account Number (PAN)
Type of payment (whether it is self-assessment tax, advance tax, tax on dividend, tax on regular assessment, surtax, tax on distributed income to the unit holders, etc.)

3. What is the difference between taxable income and exempt income?

Taxable income is that which is chargeable for tax. Exempt income is income which is granted exemption from tax by the Income Tax Department.

4. Should a record of all earnings made be maintained?

You are required to maintain records and proof of earning for all the income earned by you as prescribed by the Income Tax Act. In case there are no records prescribed, then you should maintain any kind of reasonable record that can support your income claims.

5. What is the meaning of ‘Profession’ as defined under the Income Tax Act?

Profession refers to vocation or the use of one’s technical knowledge and skills on an independent basis. Some examples of professional fields are as given below:

What is the meaning of ‘Profession’ as defined under the Income Tax Act?

Profession refers to vocation or the use of one’s technical knowledge and skills on an independent basis. Some examples of professional fields are as given below:

Engineering
Medical
Legal
Accountancy
Architecture
Interior decoration
Technical consultancy
Writers
Artists

7. For how long should the books of accounts of a business be maintained?

From the end of the relevant year, the books of accounts should be maintained for a maximum of 7 financial years or a minimum of 6 years from the end of the Assessment Year.

8. What is the difference between assessment year and financial year?

The year in which you earn an income is the assessment year. The year following the assessment year, in which the income is evaluated, is called the financial year.

9. What are the different ways in which income tax returns can be filed?

There are basically four different ways in which you can file your income tax returns. These are:

Electronic transmission of data under the electronic verification code
Electronic transmission of data and afterwards submission of verification in Return Form ITR-V
Paper form
Electronic returns with digital signature

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TAX

What is Tax?

Benefits of taxes

Advantages of Paying Taxes

1. Loan approvals:

2. Visa applications:

3. Self-employed individuals:

4. Government tenders:

5. Carrying forward of losses:

6. Claiming tax refunds:

7. High-cover life insurance:

8. Compensation:

Types of Taxes

Direct Tax

Sub-categories of Direct Taxes

1. Income tax:

1. Prerequisite:

2. Corporate tax:

1. CDividend distribution tax:

2. Fringe benefit tax:

3. Minimum Alternative Tax (MAT):

3. Securities transaction:

4. Capital gains:

Indirect tax

Other taxes

Property tax:

Professional tax:

Entertainment tax:

Registration fees, stamp duty, transfer tax: