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Saturday, 23 July 2016

Tax System in India - Banking and Financial Awareness Study Notes for Bank Exams

Dear Readers. Here we are with Tax System in India - Banking and Financial Awareness Study Notes for Bank Exams. These study notes are very useful for all upcoming bank exams and competitive exams.

Central Governments can levy the following taxes:

Income Tax: 

Income tax is that percentage of your income that you pay to the government to fund infrastructural development, pay the salaries of those employed by the state or central governments, etc. All taxes are levied based on the passing of a law, and the law that governs the provisions for our income tax is the Income Tax Act, 1961.
Income tax is only of the direct means of taxation like capital gains tax, securities transaction tax, etc., and there are many other indirect taxes that we pay like sales tax, VAT, Octroi, service tax, etc.
The income tax you pay every month or upon every contractual earning is what forms a large part of the revenue for the Government of India. These revenue functions are managed by the Ministry of Finance, which has delegated the responsibility to managing direct taxes (like income tax, wealth tax, etc.) to the Central Board of Direct Taxes (CBDT).

Income Tax Slab Rates:

Income tax slab rates are for different categories of taxpayers, who are taxed progressively higher based on their earning. The income tax slab rates can be broadly classified into the following categories:
  1. Individuals and Hindu Undivided Families (HUF):
    These are the slab rates as of financial year 2014-2015, i.e. assessment year 2015-2016 and FY 2015-2016 and assessment year 2016-2017.
    On all the tables listed below, Education Cess of 2% and SHEC of 1% will be levied on the tax computed using the rates given below.
    Under Section 87(A), an Income Tax Rebate of Rs.2,000 is provided for all individuals earning an income that’s less than Rs.5,00,000 per annum.
  • For male individuals below the age of 60 and HUF:
Income Tax Slabs
Income Tax Rates
Total income less than Rs.2,50,000.
-NIL-
Total income greater than Rs.2,50,000 but less than Rs.5,00,000.
10% of the amount by which it exceeds Rs.2,50,000.
Total income greater than Rs.5,00,000 but less than Rs.10,00,000.
20% of the amount by which it exceeds Rs.5,00,000.
Total income greater than Rs.10,00,000.
30% of the amount by which it exceeds Rs.10,00,000.
  • For female individuals below the age of 60:
Income Tax Slabs
Income Tax Rates
Total income less than Rs.2,50,000.
-NIL-
Total income greater than Rs.2,50,000 but less than Rs.5,00,000.
10% of the amount by which it exceeds Rs.2,50,000.
Total income greater than Rs.5,00,000 but less than Rs.10,00,000.
20% of the amount by which it exceeds Rs.5,00,000.
Total income greater than Rs.10,00,000.
30% of the amount by which it exceeds Rs.10,00,000.
  • For all individuals above the age of 60 – Senior Citizens:
Income Tax Slabs
Income Tax Rates
Total income less than Rs.3,00,000.
-NIL-
Total income greater than Rs.3,00,000 but less than Rs.5,00,000.
10% of the amount by which it exceeds Rs.3,00,000.
Total income greater than Rs.5,00,000 but less than Rs.10,00,000.
20% of the amount by which it exceeds Rs.5,00,000.
Total income greater than Rs.10,00,000.
30% of the amount by which it exceeds Rs.10,00,000.
  • For all individuals above the age of 80 – Super Senior Citizens:
Income Tax Slabs
Income Tax Rates
Total income less than Rs.5,00,000.
-NIL-
Total income greater than Rs.5,00,000 but less than Rs.10,00,000.
20% of the amount by which it exceeds Rs.5,00,000.
Total income greater than Rs.10,00,000.
30% of the amount by which it exceeds Rs.10,00,000.
  1. Businesses:
The following tables indicate the tax slabs for businesses.
  • Co-operative societies:
Income Tax Slabs
Income Tax Rates
Total income less than Rs.10,000.
10% of the income.
Total income greater than Rs.10,000 but less than Rs.20,000.
20% of the amount by which it exceeds Rs.10,000.
Total income greater than Rs.20,000.
30% of the amount by which it exceeds Rs.20,000.
  • Firms, Local Authorities, Corporates and Domestic Companies:
    Income tax slab rates do not apply for these, as they are taxed at a flat rate of 30% on the total income declared.
    A surcharge of 5% is levied on the total income tax of domestic companies if their income exceeds Rs.1 crore. This surcharge does not apply to firms and local authorities.

Income Tax Return (ITR):

There is a prescribed form through which the particulars of income earned by a person, and the taxes paid thereon, are communicated to the Income Tax Department. There are different forms for the filing of returns based on different status and heads of income. This is called the return of income.
It’s basically just you telling the government how much you’ve earned, from where you’ve earned it, and how much tax you’ve paid on it.
Tax Forms:
The different forms which have been prescribed for different classes of taxpayers are as follows:
ITR Form Name
Description of Taxpayer
ITR – 1
This is applicable to all individuals having salary or pension income or income from one house property, or income from other sources (which aren’t income from lottery winnings and income from race horses). This is also known SAHAJ.
ITR – 2
This is for Hindu Undivided Families that have income from sources other than “Profits and Gains of Business or Profession”.
ITR – 3
This is for Hindu Undivided Families or individuals who are partnered in a firm. The income here is either by the way of interest, salary, bonus, commission or remuneration that’s due or received from the partnered firm. The head of income should be “Profits and Gains of Business or Profession”.
ITS – 4S
This is for individuals and Hindu Undivided Families who’ve opted for the presumptive taxation scheme of Section 44AD / 44AE. This is also called SUGAM.
ITR – 4
This is for individuals or Hindu Undivided Families who carry on a proprietary business or profession.
ITR – 5
This is for firms, LLPs, AOPs, BOIs, artificial judiciary persons, co-operative societies and local authorities. This does not apply to trusts, political parties, colleges, etc. who are required to instead file return of income under Sections 139(4A), 139(4B), 139(4C) and 139(4D) and do not use this form.
ITR – 6
This for companies that don’t claim exemptions under Section 11. Charitable and religious trusts can claim exemptions under Section 11.
ITR – 7
This is for persons and companies who are required to furnish returns under Sections 139(4A), 139(4B), 139(4C) and 139(4D).
ITR – V
This is the acknowledgement of filing of return of income.
One can acquire these forms from http://www.incometaxindia.gov.in.
You can also file your return electronically through a free software that the Income Tax Department has provided on www.incometaxindiaefiling.gov.in.

Income Types or Taxable Heads of Income:

Income from different sources is taxed differently. These sources are called heads of income and are as follows:
  1. Income From Salaries:
    All income received from an employer by an employee is taxed under this heading. Employers are bound to withhold tax compulsorily under Section 192 if the income of their employees falls under a taxable bracket. Employers must also provide a Form 16, which contains details of tax deductions and net paid income.
  2. Income from House Property:
    Income here is taxable if the assesse is the owner of a property that’s been given out on rent. The property should not be used for business or professional purposes. Individuals and HUFs can claim one property as “self-occupied”, which means you and your family live there, and do not have to pay taxes on this. (Learn more about calculating income from house property)Income from house property is calculated as under:
    Gross Annual Value (GAV) = x
    Less: Municipal Taxes Paid = (y)
    Net Annual Value = x-y
    Less: Deductions under Section 24 = z
    Income from House Property = (x-y) – z
  3. Profits and Gains Of Business or Profession:
    These are the taxes that will be applicable for income from business or professional services rendered. The provisions for computing the tax on this type of income is in accordance with Sections 30 to 43D.
  4. Income from Capital Gains:
    This is for the taxes applicable on income that arises when capital assets are transferred. Capital assets are property of any value that’s held by the assesse like land, buildings, equity shares, bonds, debentures, jewellery, art, assets, etc. (Learn more about calculating capital gains)
  5. Income from Other Sources:
    Basically, any source of income that cannot be classified under the above heads of income falls under this heading. There are also some specific and pre-determined incomes which fall under this heading, like:
    • Income by way of dividends.
    • Winnings from horse races / lotteries.
    • Employee’s contribution towards staff welfare schemes, any fund set up under the ESIC Act that’s received by the employer from the employees.
    • Interest on securities like debentures, government securities and bonds.
    • Gifts.
    • Interest on compensation.
    • Rental income other than house property.
    • Family pension received after the death of the pensioner.
    • Interest income that is earned other than by way of securities.

Customs duties: Duties on import and export of goods 

Central excise: Taxes on Manufacturing of dutiable goods 

Service tax: Taxes on provision of services

State Governments can levy the following taxes:

Value Added Tax (VAT)

This is tax on sale of goods. While intra-state sale of goods are covered by the VAT Law of that state, inter-state sale of goods is covered by the Central Sales Tax Act. Even the revenue collected under Central Sales Tax Act is done so by the State Governments themselves and actually the Central Government has no role to play so.


Stamp duties and Land Revenue

Since land is a matter on which only State Governments can govern, thus the Stamp duties on transfer of immovable properties are levied by State Governments. State Excise on Liquor and certain agricultural goods. Apart from the above, certain powers of taxation have been devolved in the hands of local bodies. These local governing bodies can levy taxes on water, property, shop and establishment charges etc.

Direct Taxes:

They are called so as the burden of taxation falls directly on the tax payer. Under the Income Tax Act, 1961 The Central Government levies direct taxes on the income of individuals and business entities as well as Non business entities also. The taxation level depends on the residential status of individuals. The thumb rule of residential status is that an individual becomes resident in India if he has remained in India for more than 182 days in a particular residential year. If he becomes resident in India, then his global income i.e. income earned even outside India is taxable in India. This has to be noted very carefully by Expatriates on deputation to India. They need to plan their stay in such a manner as to avoid becoming a resident in India. The following para explains this in a slightly more detailed manner:

Corporate  Taxation:

The rate at which Corporates are taxed in India is 30% plus a 3% cess. Thus the total comes to 30.9%. Further if the taxable income is more than Rs. 10 million, then there is an additional surcharge of 12% on the base tax rate.

Dividend Distribution Tax (DDT)

Under Section 115-O of the Income Tax Act, any amount declared, distributed or paid by a domestic company by way of dividend shall be chargeable to dividend tax. So if a company declares divided, it has to pay an effective rate of 16.995% on the dividends declared. This is apart from the 30.9 % taxes mentioned above. The rationale for this tax is that after paying this tax, the dividend so declared becomes tax free in the hands  of the recipient of dividend.

Minimum Alternative Tax (MAT)

Normally, a company is liable to pay tax on the income computed in accordance with the provisions of the income tax Act, but many a times due to exemptions under the income tax Act, there is huge actual profit as shown in the profit and loss account of the company but no taxable income. To overcome this issue, and in order to bring such companies under the income tax act net, the concept of Minimum Alternate Tax (MAT)  has been introduced. The present rate of MAT is 19.05%.
Another aspect which must be looked into is the concept of Witholding Taxes; also called as Tax Deduction at Source (TDS).

Tax Deduction at Source (TDS)

This point is being specifically mentioned because the penalties of non-compliance are very stringent. As per the provisions of the Indian tax laws, certain payments are covered under tax withholding norms. Under this, the person responsible for making any payment is required to withhold a certain specified percentage of the payment amount as taxes and deposit it with the Government treasury. In addition, the person is required to prepare a certificate of tax deduction and provide it to the person on whose behalf the deductions are made. Every quarter i.e. 3 months, returns have to be filed by the deductor and credit must be given to the deducted in the returns.

Professional Services

Payments made for professional and technical fees to Doctors, Chartered Accountants, Lawyers, Management Consultants, Engineers, Architects and other professionals would fall under this section and tax would be required to be withheld from their payments. Such withheld tax shall be deposited with the Government.

Rentals

Payments for rentals would attract tax deduction at source.

Indirect Taxes

Simply we can say that a tax levied on goods and services rather than on income or profits.

Indirect tax is a type of tax collected by the government from an intermediary such as manufacturer or retailer. The eventual burden of the tax falls on to consumers who buy goods and services from the intermediary, as the intermediary applies indirect taxes on the product in the form of Value Added Tax (VAT), service tax, sales tax etc.

Indirect taxes are called so because they are collected indirectly from consumers by the government through intermediaries, who are the first payers of the tax to the government. These taxes are different from direct taxes such as income tax which is collected directly from taxpayers. Indirect taxes include taxes such as sales tax, service, tax, VAT etc. whereas income tax, wealth tax, corporation tax etc. fall under the ambit of direct taxes.

Unlike direct taxes, indirect taxes are levied on goods and services rather than individuals. Individuals pay the taxes indirectly in the form of higher prices on their purchases. A retailer selling a product to you has already levied indirect taxes on the product, which is then passed on to the relevant tax-collection authorities.

In India, indirect taxes is a vast ocean as there are number of taxes to be paid on manufacture, import, sale and even purchase in certain cases. Further the law is governed less by the Acts and more by day to day notifications, circulars and orders by the Governing bodies. So an explicit understanding is very much essential. A simplistic way to understand Indirect taxes is as follows:

News About Indirect Tax-
Below we are giving some updates regarding Indirect Tax.

(I) : Indirect Tax Collections Rise By 41%

Indirect Tax collections shot up by 41 per cent during April 2016 on the back of a major rise in excise collections. Collections to the tune of Rs 64,394 crore were recorded in the same month, showing an increase by 17 per cent after the exclusion of collections via additional resource mobilisation measures. Central excise collections also showed a sharp upturn, rising by 70 per cent to Rs 28,252 crore in comparison to Rs 16,546 crore in April last year. A tweet by Revenue Secretary Hasmukh Adhia stated that provisional revenue figures for indirect tax showed a 41% growth in April 2016 as compared to revenue figures during the same time last year. Customs collections for April 2016 also saw a 22 per cent rise from Rs 14,286 crore last year to Rs 17,495 crore, while service tax collections witnessed an increase of 27 per cent, shooting up from Rs 14,585 crore last year to Rs 18,647 crore this April. However, no details on direct tax collections were forthcoming.

(II) : Raised monetary limits for appeals in Indirect Tax cases

Central Board of Excise and Customs has raised limits for appeals made in case of indirect taxes. In appellate tribunals the limit is now Rs.10 lakhs and it is Rs. 15 lakhs for high courts. The earlier limits were Rs.5 lakhs and Rs.10 lakhs. Detailed information about the issuance of Show Cause Notice have been rolled out by the department.

CBED is also organizing workshops and various sessions to strengthen the quality of SCNs issued. This is also in order to minimize dispute as well as litigation.

Types of Indirect Taxes:

Indirect taxes is a broad category under which different kinds of indirect taxes fall. There are 4 basic sub-categories with further sub-divisions according to goods and services.

  • List of Indirect Taxes or Examples of Indirect Taxes:
  • Service tax
  • Excise duties
  • VAT


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