Wednesday, March 4, 2015

Taxation in India - Part II (All about taxes, Budget 2015-16)

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A.  Direct Taxes

1.  Income Tax - Every individual whose total income exceeds taxable limit is liable to pay income tax, according to income tax slabs and rates (no change in this year Budget 2015-16

E.g., Currently, general individuals with total income up to 2.5 lakh need not pay any income tax, whereas, if income exceeds 2.5 lakh limit then they need to pay income tax with rates according to slab. 

For example, if someone's income is Rs. 3.5 lakh, he needs to pay income tax of Rs. 3,50,000 x 10 % = Rs. 35,000 that year (10 % rate, because income falls in that tax slab)

Note that income tax is paid annually (financial year).

Tax rate
General (including women)
Senior citizens (60 to less than 80 years)
Senior citizens (80 years and above)
No tax
0 – 2.5 lakh
0 – 3 lakh
0 – 5 lakh
10 %
> 2.5 lakh – 5 lakh
> 3 lakh – 5 lakh
20 %
> 5 lakh – 10 lakh
> 5 lakh – 10 lakh
> 5 lakh – 10 lakh
30 %
> 10 lakh
> 10 lakh
> 10 lakh

2.  Corporate Tax - It is generally levied on the income of registered companies and corporations. In General Budget 2015-16, this tax is reduced by 5 % from previous 30 % to 25 %, to improve the investment environment and ease of doing business in India.

For example, if in a year company X makes total income of Rs. 5 crore, then it needs to pay corporate tax of Rs. 5,00,00,000 x 25 % (new rate) = Rs. 1.25 crore to the government.

3.  Wealth Tax - It was imposed on property or wealth of an individual, after assessing the value of it. In General Budget 2015-16, this tax is abolished.

4. Gift Tax - It is paid to the government by the recipient of a valuable gift, after assessing the value of the gift.

There are several other Direct Taxes (Estate Duty, Fringe Benefit Tax / Perquisite Tax, Expenditure Tax, etc.), which are directly levied from the taxpayer by the government

(Now try to justify the reason, why these are Direct taxes)

B.  Indirect Taxes

1.  Sales Tax - This tax is charged on the sales of movable goods or commodities. It is charged by both central and state governments as follows -
  • Inter-state sale of goods - Central government
  • Intra-state (within state) sale of goods - respective State governments
Currently, sales tax is only levied by central government, and is known as Central Sales Tax (CST), whereas, state-level sales tax is levied as Value Added Tax (VAT).

2.  Value Added Tax - VAT is almost similar to Sales Tax (except that tax is added in different stages of goods from producer to customer, for more information on calculation refer a Class X Maths book). It is imposed on purchase of goods and services, and is an Indirect Tax.

3.  Service Tax - This tax is levied on the customers who avail services provided by service providers. Over the past few years, service tax has been expanded to cover new services.

Following are some example on which service tax is levied - telephone, advertisement, beauty parlor, restaurant, health center, banking, maintenance services, consultancy services, etc. 

Note that the customer indirectly pays the service tax to the government (customer pays to the service provider, who in turn pays to the government) (as it is an indirect tax)

Government has increased the service tax in this years Budget to 14 % from earlier 12.36 %.

4.  Excise Duty - Excise Duty is levied on goods produced inside IndiaProducers or manufacturers of goods are liable to pay excise duty to the government. The rate is different for different type of goods.

5.  Customs Duty and Octroi - Customs Duty is levied on goods imported in India from foreign countries. The rate depends on the nature of goods. This duty is often payable at port of entry, like ports, airports, etc. 

Octroi is the entry tax which is levied on goods (for consumption, sale or use) entering a particular jurisdiction, generally a municipality.

6.  Entertainment Tax - It is charged from cinema owners, which in turn is charged to the viewers.

There are several other Indirect Taxes (Anti-Dumping Duty, Toll Tax etc.), which are not directly levied to the customer (taxpayer) by the government, but ultimately the customers bear the burden of tax (after availing the goods or services)

(Now try to justify the reason, why these are Indirect taxes)

Goods and Services Tax (GST) - 
In Union Budget 2015-16, government has planned to implement GST by April 2016It will simplify the current indirect tax structure by replacing multiplicity of taxes with a single tax for all goods and services. There will be a common GST compliance which will be done by all kinds of businesses including manufacturers, service providers, traders, etc.

For more information on GST, refer this post.

Cess and Surcharge
Some other taxes, you often hear about -

Education Cess - Most taxes (like Income tax, excise duty, service tax, etc) in India are subject to an education cess, which is generally 2 - 3 % of the total tax payable. Education cess is deducted and used for education of poor people in India.

Surcharge - It is an extra tax that may be added to the existing tax calculation. Note that surcharge is applied on the total tax amount.

Swacch Bharat cess - extra 2 % cess is proposed to be introduced on the value of services in General Budget 2015-16, which will effectively make the service tax as 14 % + 2 % = 16 %

Hope these posts on Taxation have helped you learn the concepts. If you have any query, feel free to comment or mail at

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Happy learning!

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