In this blog post, Ravi Prakash Shukla, a student at Amity Law School and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, analyses the taxation system in India.

Introduction

Taxes are the government’s way of earning an income and that income later on used for various public projects that is important for the country’s economy .In India taxes are decided by the central and state government with local governments like municipalities and also decides very minute taxes that can be levied within their limits. Government cannot impose any tax on the basis of their wishes all the taxes which is imposed by the government must be laws.

Types of Taxes:

There are two types of taxes, direct one and indirect taxes. The only difference between these two taxes is in the way of their implementation. Some taxes are paid directly by you like income tax, wealth tax, corporate tax etc. while some are indirect taxes ex. VAT, service tax, sales tax etc.

1. Direct Tax:  As the name suggests direct tax are those taxes that are paid directly by you. These taxes are levied directly on individual entity or person and cannot be transferred on someone else the bodies who overlooks these direct taxes is the CBDT( Central Board of Direct taxes) which comes under the department of revenue. This board perform their duty with the help of various acts those acts dealt with various norms of direct tax. Some of these act are:

• Income Tax Act:

This is commonly known as the IT Act of 1961 and makes the guidelines that govern tax on Income in India, Income can comes from different sources like business, owning a house or property, capital gains received through investment or salaries etc. this act also defines how much the tax benefit will be on fixed deposit or on life insurance policy. This also decides how much of your income can you save through investments and what the slab for the income tax will be.

 

• Wealth tax Act:

 

This act was implemented in 1951 and it is whole and sole responsible for the taxation related to someone net wealth like any individual person or any company or a HUF and the simplest calculation of wealth tax was that if the whole wealth crossed Rs. 30 lakhs, then 1%

Of that amount which exceeded 30 lakhs was payable as tax later on it is replaced with a surcharge of 12% on any individual that earn more than Rs. 1Cr per annum in 2015 budget. It is also applicable on those companies that have a income of 10Cr per year.

 

• Gift Tax Act

• Expenditure Tax Act

• Interest Tax Act
• Indirect Tax:

 

As the name suggest, Indirect taxes are those taxes that are levied goods or services. This is totally different from direct taxes because they are not charged on those people who pay them directly to the government. Taxes are levied on products and are collected by an intermediary, person who is selling the product. Mostly known example of indirect tax can be VAT, taxes on imported goods, sales tax etc. These taxes are levied by adding them to the price of the service which tends to push the cost of the product or service up.

• Income Tax:

This is the most common and least understood tax by so many people. It is the tax which is levied on your income in a financial year. There are so many facets that are available to income tax, such as the tax slabs, taxable income, tax deducted at source (TDS), this tax is applicable for both individual person and a company. For individuals, the tax depends on which tax bracket they fall in.

 

• Capital Gain Tax:

 

This tax is paid when someone receives a considerable amount of money. That money could be related from any investment or from the sale of any property. Basically it is usually of two types: first one is short term capital gain from those investments which is held for longer than 36 months and the other one is long term capital gain from that investment which is held for longer than 36 month taxes are different for both of them short term gain is calculated based in the income bracket in which someone falls and the tax on long term gains is 20%.

• Corporate Tax:

This type of tax is the income tax that is paid by companies from their earnings. This tax comes with its own slabs which tell how much tax the company has to pay ex. A domestic category company which has revenue of less than Rs. 1 Cr per year no need to pay tax but other has revenue above 1 Cr per entitled to pay tax. There is also a surcharge which is different for every revenue brackets and it is also different for international companies corporate tax are differ from domestic one because for international companies there are various other state and central taxes which also add certain other extra tax burden on these companies for international companies where corporate tax may be 41.2% if that international company has a revenue of less than Rs. 10 million and so on.

 

• Securities Transaction Tax

• Prerequisite Tax

• Wealth Tax

The Concept of Advanced Tax Ruling

An Advanced tax ruling is an instrument for corporations that operate on a multinational level and also for individual taxpayers for clarifying certain tax agreements. As per tax ruling, the tax authorities are bound by whatever is mentioned in the ruling.

Advanced tax is part payment of income tax liability in advance. Most investors have the myth that they have to pay the income tax in the end of the year, which is not true.  There are two conditions that have to be met for paying advance tax, there should exist some other income source apart from income, example rental income, interest on fixed deposit, shares etc.

The other criterion is that the income tax should exceed INR 1000. Hence, the salaried employee who does not have additional income, he does not have to pay the advance tax. The reason for that is because the employer deduct the TDS on his income

The advance tax is paid three times in a year, the first installment is on or before 15th September in which at least 30% of the tax is to be paid, the second installment is on or before 15th December, and 60% of tax should be paid by this date. The last date is 15th march by which the entire income tax is paid. The penalty for not paying advance tax is as per section 234(c ) , which is applicable if the required advanced tax is not paid on due dates, the penalty will be 1% per month for the outstanding balance till it is paid. And as per section 234 (b ), if the advance tax paid till march is less than 90% of the required amount of advance tax, In such a case, the penalty will be 1% per month for outstanding balance until it is paid.

The chapter XIX B of the income tax act talks about advance rulings. As per section 245 O, the authority for advance rulings is constituted; the authority consists of chairman and two members. The section also states that the authority shall be situated in Delhi. The applicant for advanced rulings shall be a non resident seeking clarifications about the tax implications or other related aspects in respect of transactions undertaken or to be undertaken in India. However, notified residents can also apply for advance rulings.

Notified Residents Eligible to Apply for Advance Ruling:
i) A public sector company as defined in section 2 (3A) of the Income Tax Act

ii).Person who have undertaken a transaction with a non resident seeking advance ruling in relation to tax.

Section 245Q also states that a person willing to obtain an advance ruling shall make an application in form 34C, 33D or form 34E whichever is applicable. The application is to be made with a fee consisting of two thousand and five hundred Indian Rupees.

The authority for advance ruling may also reject the application in the following cases :-

1. Where the question raised in the application is already in dispute and the decision is pending on it.
2. If it involves determining the fair market value of a property.
3. If it includes an issue that seeks avoidance of tax.

No application is rejected without it being heard, and in case of rejection of application, the reasons have to be given in the order. The advanced ruling may also be declared void if the authority discovers that the party has obtained advanced ruling though fraud or misconduct or other unscrupulous means. The authority also has all the powers of a civil court as per section 245U. It is as per the Code of civil procedure 1908. Hence, every proceeding by an advance ruling authority is a judicial proceeding within the purview of section 193, 228 and as per section 196 of the Indian Penal Code.