The word tax is derived from the Latin word taxo which means to estimate. Levying tax means imposing a financial liability upon a taxpayer, failure to which might lead to punishment under the law.
Taxes are most important source of revenue for any government in nearly everywhere in the world. The government levy taxes on individuals as well as corporates and then uses the collected money for the development of the country.
The Central and State Government plays a vital role in determining the tax structure. Taxation structures are different in developed and developing countries. In today’s time, developed countries collect huge share of their national output whereas, governments of developing countries rely more on income taxation to do so.
In today’s article, we will discuss about the taxation structure of world’s biggest democracy where the constitution itself provides powers in the hands of government to collect taxes from its citizens. Article 256 of the Indian Constitution states “No tax shall be levied or collected except by the authority of law.”
Tax Structure in India consists of three federal parts, that is,
- Central Government
- State Government
- Local Authorities
In India, taxes are determined by the Central Government, State governments and local municipal bodies. Apart from this, no one has powers to levy tax on any person apart from this no one can levy taxes expect the authorities of law.
The Tax structure is India is mainly categorised mainly in two categories:
- Direct Taxation
- Indirect Taxation
The Department of Revenue works under the supervision and guidance of Secretary of Revenue who exercises control in matters relating to direct and Indirect Taxes. In 1924, Central Board of Revenue Act was passed and Department of Revenue became the part of Ministry of Finance. Initially the Central Board of Revenue was in charge of both direct and indirect taxes. Presently, the Board is split up in two parts, the Central Board of Direct Taxes (CBDT) and Central Board of Indirect Taxes and Customs (CBIC).
Central Board of Direct Taxes (CBDT)
The Central Board of Direct Taxes provides guidance in policy making and planning of Direct Taxes in the country and it is also responsible for the enforcement of direct tax laws through Income Tax Department.
Central Board of Indirect Taxes and Customs (CBIC)
The Central Board of Indirect taxes and Customs deals with the policy formation regarding levy of Goods and Services Tax and Customs. It also prevents the smuggling and administers the matters relating to Narcotics, Customs and GST.
Direct taxes are levied on a person’s income or an organisation’s income which they are liable to pay directly to the Income Tax Authority of the Central Government. The concerned person or organisation cannot transfer their liability to pay tax on some other person.
For Example, Income Tax and Corporate Tax
Advantages of Direct Tax
- Based on principles of equity, certainty and economy
- Convenient to taxpayers
- Acts as automatic stabiliser
Disadvantages of Indirect Tax
- Discourages investment
- Not suitable for poor country
Indirect taxes, as the name suggests are not directly payable but are levied on goods and services which are collected by intermediaries and paid by the taxpayer who has rendered goods or services. Indirect taxes are transferrable and liability to pay tax is shifted from one individual to another.
For Example, Goods and Services Tax and Custom Duty
Advantages of Indirect Tax
- High Revenue Production
- No Evasion
- Wide Coverage
Disadvantages of Indirect Tax
- Regressive in effect
- Uncertainty in collection
- Discourage savings
- Increase inflation
INCOME TAX SLABS IN 2020-2021
|Income Tax Slabs||New Regime Income Tax Slab Rates for FY 2020-21|
(Applicable for All Individuals & HUF)
|Up to Rs 2.5 Lakhs||NIL|
|Rs 2.5 lakhs- Rs 3.00 Lakhs||5% (tax rebate under section 87A)|
|Rs. 3.00 lakhs – Rs 5.00 Lakhs|
|Rs. 5.00 lakhs- Rs 7.5 Lakhs||10%|
|Rs 7.5 lakhs – Rs 10.00 Lakhs||15%|
|Rs 10.00 lakhs – Rs. 12.50 Lakhs||20%|
|Rs. 12.5 lakhs- Rs. 15.00 Lakhs||25%|
|> Rs. 15 Lakhs||30%|
EXEMPTION AND DEDUCTIONS UNDER INCOME TAX ACT, 1961
Chapter VI A of the Income Tax Act 1961 includes deductions for such savings, income, payments and other deductions from gross total income under Section 80C to 80U. Such deductions allow a taxpayer to lower his taxable income. The amount of the deduction, however, varies on the basis of the deduction reported, and is only applicable to assessees where the overall gross income is positive. However, if the gross total income is zero or negative, there is no question of deducting any amount from the gross total income.
|Section||Nature of Deduction||Who can claim|
|80C||Life insurance premiumSum paid for annuity plan of LIC or other insurerContributions towards EPF Scheme, PPF Account, a recognised provident fund, an approved superannuation fund, notified ULIPs of LIC Mutual FundSubscription to any notified security, notified deposit scheme of the Central Government, notified savings certificates, notified pension fund set up by National Housing BankTuition fees paid to any university, college, school or other educational institution in India, for full time education of up to 2 childrenExpenses incurred for purchase/construction of residential house propertySubscription to notified schemes of:PSUs engaged in providing long-term loans for purchase/ construction of residential houses, orAuthority formed under any law for housing accommodation or development or improvement of cities, towns and villages.Subscription to equity shares or debentures of any approved eligible public company or public financial institutions, any mutual fund or bonds issued by the NABARD. Fixed Deposit not less than 5 years with a scheduled bank or post office||Individual/HUF|
|80CCC||Contributions to pensions funds of LIC or other insurer up to Rs. 1.5 lakhs||Individual|
|80CCD||Contribution to pension scheme up to 10% of the salary.Contribution made by employer. However, amount of deduction could not exceed 10% of salary of the employee.||Individual|
|80CCG||50% of amount invested by resident individuals in equity savings scheme.||Specified resident individuals|
|80D||Amount paid except cash by to LIC or other insurer to effect or keep in force insurance on the health.Payment towards health scheme and or on preventive health check-up.||Individual/HUF|
|80DD||Deduction of Rs. 75,000 or Rs. 1,25,000 in case of severe disability where:any expenditure incurred for the medical treatment or training and rehabilitation of a dependant, being a person with disability, orany amount paid or deposited under an approved scheme by the LIC or any other insurer for the maintenance of a dependent, being a person with disability||Resident Individual/HUF|
|80DDB||Expenditure incurred for medical treatment of specified diseases subject to certain conditions||Resident Individual/HUF|
|80E||Interest on loan for pursuing higher education borrowed from financial institution or approved charitable institution||Individual|
|80EE||Interest payable on loan for acquisition of a residential house property||Individual|
|80EEA||Tax incentives for affordable housing||All Assesses|
|80EEB||Tax incentives for electric vehicles||All Assesses|
|80G||Donations made to approved funds, trusts, charitable institutions or donations for renovation or repairs of notified temples, etc.||All Assesses|
|80GG||Rent paid in excess of 10% of total income for furnished/unfurnished residential accommodation (a maximum of Rs. 5,000 p.m. or 25% of total income, whichever is less)||Individuals not receiving any house rent allowance|
|80GGA||Certain donations for social or statistical research or rural development programme or scientific research||All assesses not having any income chargeable under the head ‘Profits and gains of business or profession’|
|80GGB||Amount donated to any political party||Indian company|
|80GGC||Amount contributed to any political party||All assesses, other than local authority and artificial juridical person wholly or partly funded by Government|
|For Certain Incomes|
|80-IA||Profits from industrial organisations engaged in activities such as infrastructure facility, telecommunication services, industrial park, development of Special Economic Zone, power undertakings, etc.||All Assessees|
|80-IAB||Profits and gains by developing a Special Economic Zone after April 2015.||Assessee being Developer of SEZ|
|80-IB||Profits and gains from cold storage plant, hotel, scientific research & development, mineral oil concern, housing projects, cold chain facility, multiplex theatres, convention centres, ships, etc.||All Assessees|
|80-IC||Profits and gains from an enterprise in special category States such as, Himachal Pradesh, Uttaranchal, Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland and Tripura||All Assessees|
|80-IAC||Deduction in eligible Start-Up||All Assessees|
|80-IBA||Deductions in profits and gains from projects of Housing||All Assessees|
|80-IC||Special provisions for certain enterprises in certain special category States||All Assessees|
|80-ID||Profits and gains from business of hotels and convention centres in specified areas||All Assessees|
|80-IE||Deduction for certain undertakings in North Eastern States||All Assessees|
|80-JJA||Entire income from business of collecting and processing or treating of bio-degradable waste for generating power, or producing bio-fertilizers, bio-pesticides or other biological agents or for producing bio-gas, making pellets or briquettes for fuel or organic manure||All Assessees|
|80JJAA||Additional wages paid to new regular workmen employed in the previous year for 3 assessment years||Indian company having profits and gains derived from manufacture of goods in a factory|
|80LA||Certain incomes of Scheduled banks/banks incorporated outside India||Scheduled banks/banks incorporated outside India having Offshore Banking Units in a Special Economic Zone/ Units of International Financial Services Centre|
|80P||Specified incomes||Co-operative societies|
|80PA||Specified incomes||Producer Company|
|80QQB||Royalty income of author of certain specified category of books (up to Rs. 3,00,000)||Resident Individual – Author|
|80RRB||Royalty on patents up to Rs. 3,00,000||Resident individuals who is a patentee and receives royalty from a patent registered after April 2003|
|80TTA||Interest on deposits up to Rs. 10,000 p.a. in savings bank accounts||Individuals/HUFs|
|80TTB||Interest on deposits up to Rs. 50,000 in case of senior citizens||Senior Citizen Individuals|
|80U||Deduction of Rs. 75,000, in the case of a person with severe disability, allowable deduction is Rs. 1,25,000||Resident individuals who, at any time during the previous year, is certified by the medical authority to be a person with disability|
|87A||Rebate of Rs. 12,500 or the income tax whichever is less||Resident individuals whose total income does not exceed five lakh rupees|
HOW TO CALCULATE INCOME TAX?
The estimation of income tax may either be performed manually or by using an online tax calculator. The amount of tax that must be paid depends on which tax slab an individual fall under. Salary income includes the regular salary, House Rent Allowance (HRA), Housing Allowance, Special Allowance and all other allowances for salaried workers. Certain components of an individual’s income, however, are tax free, like Leave Travel Allowance (LTA), reimbursement of telephone bills, etc. An individual is entitled to claim exemption if HRA is part of his income and he lives in a rented home. There is a mandatory deduction of up to Rs.50,000, apart from these exemptions,
INCOME TAX COLLECTION BY GOVERNMENT
In India, the government collects taxes in three major ways::
- Voluntary deposit, including advance tax and self-assessment tax, by taxpayers into designated accounts.
- Taxes Deducted at Source (TDS) which is deducted from your monthly salary, before a taxpayer receive it.
- Taxes Collected at Source (TCS).
Under the Ministry of Finance’s Department of Revenue, the Department of Income Tax (IT Department) is responsible for regulating the collection in the Union Budget of income tax, expenditure tax and various other financial acts that are passed every year. The Direct Taxes Central Board (CBDT) manages tax policy and planning. CBDT is also responsible, through the Income Tax Department, for enforcing the direct tax laws. The IT department is also active in the prevention and detection of tax evasion, in addition to collecting taxes.
INCOME TAX RETURNS FORMS
If a taxpayer wants to claim income tax refunds, he will have to file the income tax return first. The person will need to apply one of the ITR forms listed below, depending on the income assessment group:
|ITR-1||For Individuals having income from salaries, one house property, income from other sources|
|ITR-2||For Individuals and HUFs not having Income from Business or Profession|
|ITR-2A||For Individuals and HUFs not having Income from Business or Profession and Capital Gains and who do not hold foreign assets|
|ITR-3||For Individuals/HUFs being partners in firms and not carrying out business or profession under any proprietorship|
|ITR-4||For individuals and HUFs having income from a proprietary business or profession|
|ITR-4S||Presumptive business income tax return|
|ITR-5||For persons other than individuals, HUF, company and person filing Form ITR-7|
|ITR-6||For Companies other than companies claiming exemption under section 11|
|ITR-7||For persons including companies required to furnish return under sections 139(4A) or 139(4B) or 139(4C) or 139(4D) or 139(4E) or 139(4F)|
|ITR-V||The acknowledgment form of filing a return of income|
In order to file the ITR, a taxpayer would need to produce a bank statement, Form 16, and a copy of the return from previous years.
Advance tax is the calculation of tax liabilities before-hand and the payment of taxes to the government accordingly. For advance tax payments, there are certain deadlines. Such deadlines are set out below:
|Due Date||Advance Tax Payable|
|On or before 15th June||15% of advance tax|
|On or before 15th September||45% of advance tax|
|On or before 15th December||75% of advance tax|
|On or before 15th March||100% of advance tax|
Calculation of Advance Tax
STEP 1: By figuring out the amount of all the invoices received along with the future payments an individual will receive before the end of the financial year, i.e. 31 March, an individual will be required to find his approximate total income.
STEP 2: The direct expenditures relevant to the business and the investments referred to in Section 80C shall be excluded from the gross revenue in order to derive the total taxable revenue.
STEP 3: The next step is to assess, for the financial year, the overall tax liability.
STEP 4: It is necessary to deduct the overall tax liability the TDS or tax deducted at source.
STEP 5: If the amount of tax liability after deducting the TDS is greater than Rs.10,000 on or before the due dates listed above, the person would be allowed to pay advance taxes.