Scheme of Taxation

The Scheme of taxation in India is comprehensive and multifaceted, encompassing various direct and indirect taxes levied by the central and state governments. The tax structure has evolved over the years to adapt to economic changes, promote fiscal discipline, and align with global best practices.

The scheme of taxation in India is a dynamic framework that undergoes continuous reforms to adapt to changing economic landscapes and global standards. The integration of GST, along with initiatives for digital transformation and dispute resolution, reflects the government’s commitment to creating a transparent, efficient, and business-friendly tax environment. Understanding the nuances of this comprehensive system is crucial for individuals and businesses to ensure compliance and navigate the complexities of the Indian tax landscape.

Direct Taxes:

Direct taxes are levied directly on individuals and entities. The primary direct taxes in India:

• Income Tax:

Governed by the Income Tax Act, 1961, income tax is levied on the income of individuals, Hindu Undivided Families (HUFs), companies, and other entities. The income is categorized into various heads, such as salary, house property, business or profession, capital gains, and other sources.

• Corporate Tax:

Corporate tax is levied on the income of companies operating in India. The Finance Act determines the corporate tax rates, and the Companies Act governs the taxation of companies.

• Wealth Tax (Abolished):

Wealth tax, which was levied on the net wealth of individuals and HUFs, was abolished in 2015. It was replaced by the additional surcharge on high-income individuals.

• Capital Gains Tax:

Capital gains tax is imposed on the profits earned from the sale of capital assets. The tax rates vary based on the nature of the capital asset and the holding period.

• Securities Transaction Tax (STT):

STT is levied on transactions involving securities, such as stocks and derivatives. It is collected by stock exchanges, and the rates vary based on the type of transaction.

• Dividend Distribution Tax (Abolished):

The Dividend Distribution Tax (DDT) was abolished in the Finance Act 2020. Previously, it was imposed on companies distributing dividends to shareholders.

• Goods and Services Tax (GST):

GST, introduced in 2017, is an indirect tax that replaced various central and state taxes. It is levied on the supply of goods and services and is governed by the Central Goods and Services Tax Act and State Goods and Services Tax Acts.

Indirect Taxes:

Indirect taxes are levied on the consumption or use of goods and services. They are collected by intermediaries (like businesses) but ultimately borne by the end consumer.

• Central Excise Duty (Abolished):

Central Excise Duty, which was imposed on the manufacturing of goods, was abolished with the introduction of GST in 2017.

• Customs Duty:

Customs duty is levied on the import and export of goods. The Customs Act, 1962, governs customs duties, and rates are specified in the Customs Tariff Act.

• Service Tax (Replaced by GST):

Service tax was levied on specified services until the introduction of GST. The Finance Act determined the applicable rates and services covered.

• Central Sales Tax (Abolished):

Central Sales Tax, imposed on inter-state sales, was abolished with the implementation of GST.

• Value Added Tax (VAT) (Replaced by GST):

VAT was a state-level tax imposed on the sale of goods. It was replaced by the state GST component under the GST regime.

• Excise Duty on Alcohol and Tobacco:

Excise duty is levied on the production and sale of alcohol and tobacco products. State governments determine rates and regulations.

International Taxation:

India follows the principles of international taxation to avoid double taxation and prevent tax evasion.

• Double Taxation Avoidance Agreements (DTAA):

India has entered into DTAA with various countries to provide relief from double taxation on income arising in one country and paid to residents of the other.

• Transfer Pricing Regulations:

Transfer pricing regulations aim to ensure that transactions between related entities are conducted at arm’s length to prevent the shifting of profits to low-tax jurisdictions.

• Equalization Levy:

Introduced to tax specified digital services provided by non-resident entities, the Equalization Levy addresses challenges in taxing the digital economy.

Tax Administration:

Tax administration in India involves various authorities:

• Central Board of Direct Taxes (CBDT):

CBDT is responsible for administering direct taxes, and it formulates policies and procedures for their collection.

• Central Board of Indirect Taxes and Customs (CBIC):

CBIC administers indirect taxes, including GST, and formulates policies for their implementation.

• Goods and Services Tax Network (GSTN):

GSTN is a technology platform that facilitates the implementation of GST, enabling registration, return filing, and compliance.

Tax Dispute Resolution:

Disputes related to taxation are addressed through various forums:

• Income Tax Appellate Tribunal (ITAT):

ITAT is an independent tribunal that hears appeals against orders passed by tax authorities.

• High Courts and Supreme Court:

High Courts and the Supreme Court adjudicate on tax matters, providing legal remedies and interpretations.

• Alternative Dispute Resolution Mechanisms:

Dispute Resolution Panel (DRP) and the Advance Ruling Authority provide alternative avenues for resolving tax disputes.

Recent Reforms:

• Goods and Services Tax (GST) Reforms:

Continuous efforts are made to simplify GST procedures, introduce e-invoicing, and enhance compliance through technology-driven measures.

• Faceless Assessment and Appeal:

Faceless assessment and appeal schemes were introduced to reduce direct interface between taxpayers and tax authorities, ensuring transparency and efficiency.

• Taxpayers’ Charter:

The Taxpayers’ Charter outlines the rights and responsibilities of taxpayers and is aimed at fostering a more taxpayer-friendly environment.