How Tax Deductions System Works in India

The term “tax” is very common to us, but the “tax system” is indeed very complicated. There is different type of tax systems in different countries. Tax is generally a government’s income or a sum of money taken by a country’s government for its development. It’s not a donation but a fortified contribution to the authority. We are going to discuss about Indian tax system in this article and how does it effects on it.

Today we will mainly focus on how the different tax deductions process works in India. We will try to explain the whole method in simpler words so that even a novice can understand it with ease.

There are mainly two types of tax in India:  1) Direct tax and 2) Indirect tax.

Direct tax means which tax is collected by the government directly from taxpayers for different purposes, for an example we can say income tax in which taxpayers directly give the tax money to the government.

And the indirect tax is completely opposite of the direct tax in which the duty can be shifted to others, here the actual tax payer is not the actual tax bearer, such as sales tax in which seller include the tax money before selling the goods so the buyer of the goods actually pay the tax money.

List of direct tax in India:-

Income tax: the income tax act mainly passed in 1961 and it’s issued by the Central Board of Direct Taxes (CBDT), we can imagine what income tax by its name, it is generally a tax on the income of people or Hindu undivided families or firms or co-operative societies and trusts. But there is different type of charges on income, given below—

Income-tax charge:-

Rs. 200,000/-   :- NIL%

Rs. 200,001–500,000/- :- 10%

Rs. 500,001–1,000,000/- :-20%

Above Rs 1,000,000 /- :- 30%

Most of the government’s income comes from income tax in India, it’s also plays a big role in economic growth. There is much cause that India is facing huge economic problems recently one of them is that the tendency of avoiding income tax. India was ranked 8th among the 150 countries in the world with black money. Also the income tax law is very complicated like any other laws in India, so there is many ways to avoid income tax.

There is also a provision in income tax act which is the companies and business organizations in India have to give tax on their worldwide transactions which is called corporation tax.

There is another provision under income tax act which is known as gift tax. According to it, the gifts received by any individual or Hindu Undivided Family in above of Rs. 50,000 in a year would be taxable.

Property tax: property tax also known as house tax. It’s the most important source of income of local governments, development of the urban areas mostly dependent on property tax. This tax is mainly on assets of individual people like land & building, machinery etc. Indian property tax system actually the blend of US-type wealth tax and differs from the excise-type UK rate.

There are 7935 urban areas in India and three of the 10 largest metropolises situated in India Mumbai, Delhi and Kolkata also India’s urban population growth has been decreasing since 3 decades. But this decreasing level is not expected to continue in the years ahead, this means India is entering into the major structural transformation in favor of labor-intensive industry and services sectors in the years ahead. The urban sector contributed about two-thirds of GDP in 2009-10. So it seems that property tax deals with an important part of Indian economy.

The tax base is the annual rental value (ARV) or area-based rating, it’s usually 6%.

There is another tax in India known as Inheritance (Estate) Tax. The only difference between property tax and estate tax is that it’s on the estate, or total value of property, of a person who has died.

List of indirect tax in India:-

Custom duty: The custom act was composed in 1962. The main purpose of the act is to prevent illegal import and export of goods because import and export is the backbone of any economic system.

Custom duty surely is an indirect tax which is levied on import and export of the goods of international trades. It is also known as consumption tax in economic sense.

There are several purposes behind the act of custom, such as ----

1. Restricting Imports for maintaining foreign exchange.

2. Protecting Indian Industry from needless competition.

3. Prohibiting imports and exports of goods for accomplishing the policy aspiration of the Government.

4. Circulating export.

Central Excise Duty: central excise duty is one of the most important indirect tax in India. The Indian government passed the Central Excise Act in 1944 and the Central Excise Tariff Act in 1985.

It’s chiefly charged on such excisable goods that are manufactured in India and are meant for domestic consumption. An excise is considered an indirect tax because the producer or seller who pays the tax to the government is expected to try to recover or shift the tax by raising the price paid by the buyer.

The term “excisable goods” means that domestically manufactured petroleum fuel and products, tobacco and tobacco products, and alcohol and alcohol commodities on which excise is payable. Duty is not payable on the goods exported out of India.

Service Tax and Sales Tax: The service providers in India exclude those in the state of Jammu and Kashmir are mandate to pay a Service Tax under the provisions of the Finance Act of 1994. The provisions associated to Service Tax came into action on 1st July.

Sales Tax in India is a form of tax that is enforced by the Government on the sale or purchase of a particular commodity within the country. Sales Tax is enforced under both, Central Government (Central Sales Tax) and State Government (Sales Tax) Legislation. From 10th April, 2005, most of the States in India have supplemented sales tax with a new Value Added Tax (VAT). VAT is available in 31 States including Union Territories.