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Taxation Laws In India - Processes And Changes

Taxation laws in India set the rules for how the government collects money from people and businesses. These laws cover taxes on income, company profits, and the sale of goods and services.

The money collected helps the government pay for public services like roads, schools, and healthcare. In recent years, India introduced a new system called the Goods and Services Tax (GST) to make it easier and fairer to pay taxes. The goal of these laws is to ensure everyone contributes their fair share and the country's economy runs smoothly.

The Indian taxation system is a structured framework governed by both central and state governments, comprising direct and indirect taxes. However, challenges remain, including issues of tax evasion, compliance burden, and the need for further debates on traditional tax rates and modernization to enhance efficiency and fair play.

DIRECT TAXES

Direct taxes are taxes that are directly taken from a person or company's money, assets, or property.

The main thing about direct taxes is that you gotta pay them straight to the government yourself, no passing the buck to someone else.

Direct taxes are progressive, which means that the more money you make, the more you'll generally have to pay. It's like a sliding scale, with higher earners paying a higher percentage.. Some common examples of direct taxes include:

Income Tax (Charged on income earned by individuals and businesses.)
Corporate Tax (Imposed on profits of corporations and businesses)
Wealth Tax (A tax on net wealth of individuals and companies. It has been abolished in India since 2016)
Capital Gains Tax (Levied on profits made from sale of assets like property, stocks etc)

In this Article, we will focus on major direct taxes like Income and Corporate Tax as these taxes contribute a much larger portion of the country’s economy to the development and infrastructure planning.

INCOME TAX: SCOPE OF LEVY AND RATES

Income Tax is charged under the Income Tax Act, 1961, which provides detailed provisions for determining taxable income, rates of tax, and the collection process. The Income Tax Department, under the Ministry of Finance, is responsible for the administration of this tax.

Scope of Levy:

In India, income tax is charged on the total amount of money you make in a year. This year is called a "financial year" and it lasts for 12 whole months. Businesses and governments use this time to keep track of their money and make reports about it.

It is not necessarily aligned with the calendar year. In simple terms, it's the year used to calculate annual financial statements and taxes.

In India, the money stuff starts on April 1st and runs through March 31st of the next year. We figure out how much tax you owe by taking away certain expenses (called deductions and exemptions) from your total income, as written in different parts of the Income Tax Act. The scope of income tax includes:

Income from Salary: Includes wages, pension, and other earnings from employment.
Income from House Property: Income derived from rental property.
Profits and Gains from Businesses and Profession: Income earned through business or professional activities.
Capital Gains: Money made from selling stuff like real estate, stocks, and other assets.
Income from Other Sources: Any other money you get that we haven't already talked about, like interest or dividends (part of the profit you make from mutual funds, investments, and other stuff).

Tax Rates:

The tax rates in India vary based on the type of taxpayer (individual, company, etc.) and the level of income. The government announces these rates annually in the Union Budget. The rates of tax according to the latest Budget of 2024 are:

Income up to ₹3 lakh: No tax
Income up to ₹3 lakh to ₹7 lakh: 5%
Income up to ₹7 lakh to ₹10 lakh: 10%
Income up to ₹10 lakh to ₹12 lakh: 15%
Income up to ₹12 lakh to ₹15 lakh: 20%
Income above ₹15 lakh: 30%

For corporate taxes, the rate for foreign companies has been reduced from 40% to 35%.

The budget also introduced other measures, such as the simplification of tax procedures and reduced TDS rates on various transactions. TDS (Tax Deducted at Source) is a system in India where tax is deducted at the point of income generation, such as salary, interest, or rent, and remitted to the government. It ensures timely tax collection.

NOTE: In addition to these rates, a surcharge and cess may also be applicable based on the total income. A surcharge is an additional tax levied on the income tax payable, usually applicable to higher income brackets. Cess, currently at 4%, is levied on the total tax payable, including surcharge, to fund health and education initiatives.

CORPORATE TAX STRUCTURE

Corporate tax in India is a tax levied on the profits of companies. It applies to both domestic and foreign companies operating in the country. The tax rate varies based on the nature of the company and its income.

1. Domestic Companies:

For the financial year 2024-25, the corporate tax rate in India remains unchanged. Domestic companies with an annual turnover of up to INR 400 crore are taxed at a rate of 25%. Corporate Tax Rates from Budget 2024.
For companies with a turnover exceeding INR 400 crore, the tax rate is 30%. Additionally, a surcharge and a 4% health and education cess are applicable, which can increase the effective tax rate depending on the income level and structure of the company.

2. Foreign Companies:

For the financial year 2024-25, the corporate tax rate for foreign companies in India has been reduced from 40% to 35%. This reduction is part of the government's efforts to attract more foreign investment and make India a more competitive destination for global businesses.
This rate applies to the total income earned by foreign companies from their operations in India. Additionally, a surcharge and a 4% health and education cess may be applicable depending on the company's income level.

INDIRECT TAXES: GST, CUSTOMS DUTY AND EXCISE DUTY

In India, indirect taxes are like a game of pass the parcel. They start with the retailer, who collects them, and then they get passed on to the consumer, who ultimately ends up paying for them.

Goods and Services Tax (GST):

GST is a comprehensive tax levied on the manufacture, sale, and consumption of goods and services. It has replaced multiple indirect taxes such as VAT, service tax, sales tax etc.
GST Rates vary depending on the type of goods and services, typically classified into slabs such as 5%, 12%, 18%, and 28%. Some essential items may be exempt or taxed at a lower rate, while luxury goods and services may attract a higher rate, that is, 28%.
GST in India is structured as a dual tax system, comprising:
1. Central GST (CGST): The central government collects taxes on sales made within the same state in India. These taxes are called intra-state sales taxes.
2. State GST (SGST): This is a tax that is collected by state governments when goods or services are sold within the same state.
3. Integrated GST (IGST): This is a tax that is collected by the central government when goods or services are sold between two different states or when goods are imported from outside the country.

The scope of GST is extensive and covers all goods and services, with a few exceptions such as petroleum products, alcoholic liquor for human consumption, and electricity. Similarly, certain supplies are exempt from GST, including basic food items, healthcare services, and educational services, to ensure affordability and access to essential services.

Customs Duty:

Customs Duty is a type of indirect tax levied on goods imported into and exported from India. It is primarily governed by the Customs Act, 1962 and the Customs Tariff Act, 1975. The duty is imposed to protect domestic industries, regulate the movement of goods, and generate revenue for the government.
Customs duty is applicable to all goods imported into or exported out of India, with certain exemptions for specific items like diplomatic baggage or goods under free trade agreements (FTAs).

Note: FTAs, or Free Trade Agreements, are like deals between countries to make it easier for them to buy and sell stuff to each other. They try to get rid of annoying barriers like taxes on imports, limits on how much you can bring in, and rules that make it hard to send things out.

Excise Duty:

Excise Duty is a form of indirect tax levied on the manufacture or production of goods within a country. In India, excise duty is governed by the Central Excise Act, 1944. This tax is imposed on goods manufactured or produced in India and is paid by the manufacturer, but the burden is ultimately passed on to the consumer.
Excise duty is levied on specific goods, typically known as excisable goods. These include petroleum products, alcohol, and tobacco products, among others. After the introduction of the Goods and Services Tax (GST), excise duty is primarily restricted to these goods.
Excise duty is applicable only on goods manufactured or produced within India. Goods imported into the country are subject to customs duties, not excise duty. The duty is charged at the point of production or manufacture. The liability to pay excise duty arises when the goods are removed from the place of manufacture.

FILING OF TAX RETURNS AND DOCUMENTATION

You know, every year, people, businesses, and other groups have to do this thing called filing their Tax Returns to the Income Tax Department. It's like a report where they tell the government how much money they made, how much they spent, and how much tax they paid. This helps determine if they have paid the correct amount of tax or if any refunds or additional payments are due.

Steps for Filing Returns:

Forms available for different categories of taxpayers: Different Income Tax Return (ITR) forms are available depending on the type of taxpayer (individual, company, etc.) and the nature of income. Common Forms include:
- ITR-1 (for Salaried Individuals).
- ITR-2 (for individuals with income from more than one house property).
- ITR-3 (for individuals running a business).
Gather Required Documents: Essential documents include:
- Form 16: Provided by employers, detailing salary paid and tax deducted.
- Form 16A: For other incomes like interest, detailing tax deducted at source (TDS).
- Bank statements and investment proofs for claiming deductions.
- Aadhaar card and PAN card for identity verification.

Calculate Taxable Income: This involves summing up all income sources and subtracting eligible deductions (Total Income–Deductions = Taxable Income) under various sections of Income Tax Act, 1961. Deductions under Income Tax Act. If there's any remaining tax payable after TDS, it must be paid before filing the return.
File the Return: You can file your tax returns online through the Income Tax Department's e-filing portal. After you file, you'll get an acknowledgment slip (ITR-V) that you need to check and make sure it's correct. You can do this electronically using Aadhaar OTP, net banking, or by sending a signed copy of the ITR-V to the Centralized Processing Center (CPC) in Bengaluru.

TAX EVASION AND LEGAL IMPLICATIONS

Tax evasion refers to the illegal practice of not paying taxes by individuals, companies, or other entities. It involves deliberately misrepresenting or hiding income, claiming illegal deductions, or hiding financial details to reduce tax liability. In India, tax evasion is considered a serious offense with significant legal implications.

Some of the provisions and legal implications under different tax laws are:

Income Tax Act, 1961:

Section 276C: This section deals with a wilful attempt to evade tax. It includes penalties such as imprisonment ranging from six months to seven years along with a fine, depending on the amount of tax evaded.
Section 277: Imposes penalties for making false statements in verification or delivering false accounts, with punishments including imprisonment from six months to seven years and a fine.

Goods and Services Tax (GST) Act:

Under the GST Act, tax evasion can lead to severe penalties, including imprisonment for up to five years and fines, depending on the amount of tax evaded and the nature of the offense. Penalties under GST

Prosecution and Penalty:

The law mandates strict prosecution for tax evasion cases, including the confiscation of property and heavy fines.
The Income Tax Department and the Central Board of Indirect Taxes and Customs (CBIC) are the primary authorities responsible for investigating and prosecuting tax evasion cases.

Prevention of Money Laundering Act (PMLA), 2002:

Tax evasion can also fall under money laundering (hiding financial assets and information) activities. The Prevention of Money Laundering Act (PMLA), 2002 provides for attachment and confiscation of property involved in money laundering and prosecution, which can result in imprisonment and fines.

Income Tax Department: It investigates and enforces income tax laws, including the detection and prevention of tax evasion.
The Central Board of Indirect Taxes and Customs (CBIC): Manages and enforces indirect taxes like GST and customs duties, ensuring compliance and addressing evasion.
Central Board of Direct Taxes (CBDT): Responsible for investigating and prosecuting cases of tax evasion and other violations of direct tax laws.
Enforcement Directorate (ED): Investigates offenses related to money laundering and makes sure individuals and companies comply with foreign exchange laws.
Special Courts: Established under the Income Tax Act and PMLA, these courts handle tax-related offenses and have the authority to prosecute and punish offenders.

Commissioner of Income Tax (Appeals) [CIT(A)]:

The CIT(A) is the first authority of appeal in the tax dispute resolution process. Taxpayers can file an appeal with the CIT(A) if they are dissatisfied with the assessment order passed by the assessing officer. The CIT(A) reviews the case and can confirm, reduce, enhance, or suspend the assessment. Commissioner of Income Tax (Appeals) [CIT(A)]

Income Tax Appellate Tribunal (ITAT):

The ITAT is a special court that handles appeals related to the Income Tax Act, 1961. It acts as the final authority for deciding on the facts of tax disputes. However, its decisions can only be challenged in higher courts on important legal questions. Taxpayers can go to the ITAT if they disagree with the decisions made by the Commissioner of Income Tax (Appeals) [CIT(A)].

Vivaad se Vishwas Scheme:

This is a recent scheme introduced to resolve tax disputes quickly. Under the scheme, taxpayers can settle their disputes by paying the disputed tax amount with a concession on interest and penalties. This mechanism aims to reduce the pending litigation and provide a hassle-free closure of cases. VIVAD SE VISHWAS SCHEME.

RECENT CHANGES IN TAX SUBJECT UNDER BUDGET 2024

The Union Budget 2024 introduced several important changes and updates in tax-related matters to simplify the tax regime and provide clarity to taxpayers.

Key Highlights:

No changes were made to the income tax slabs for both the old and new tax regimes. The new tax regime, which provides lower tax rates but without most deductions, remains the same. However, taxpayers can opt for the old regime if they prefer.
The government's got some new rules for who's gotta file their tax returns. They're cracking down on people who are ballin' out and spending big bucks. If you've deposited more than a cool ₹ 1 crore in your current account, jetted off on foreign trips that cost you over ₹ 2 lakh, or spent more than ₹ 1 lakh on electricity, you better get ready to fill out those tax forms.
The government announced the removal of the Angel Tax, a measure welcomed by the Indian start-up community. Angel Tax was applied to the money raised by unlisted companies(companies not listed on the stock market) when they sold shares for more than their fair market value. It affected all types of investors and aimed to stop the flow of black money. With this removal, start-ups now can attract more investments and capital from Angel Investors (individuals who provide financial backing to start-ups or small businesses in exchange for ownership).
The government has introduced faceless assessments to reduce physical interface and increase transparency. This involves the online assessment of tax returns without human interaction.

FREQUENTLY ASKED QUESTIONS (FAQs)

1. What is the due date for filing income tax returns for individuals?

The due date for filing income tax returns for individuals is typically July 31st of the assessment year. However, this date may be extended by the government.

2. What documents are required for filing an income tax return?

Key documents include Form 16 (for salaried employees), Form 16A (for other incomes), bank statements, investment proofs, PAN card, and Aadhaar card.

3. How has the Angel Tax been addressed in Budget 2024?

The Angel Tax, which was previously levied on capital raised by start-ups, has been abolished. This move is expected to encourage more investments in the start-up sector.

4. Who needs to file income tax returns?

Anyone whose income is above the basic exemption limit (a pre decided limit of not paying tax), as well as companies, firms, and other entities, must file income tax returns. Also, individuals who have spent more than ₹2 lakh on foreign travel or more than ₹1 lakh on electricity are required to file returns.

REFERENCES

Written by Shubhankar Krishnan

A Delhi University graduate and a 1st Year Law Student, Gaining experiences in Areas under General Corporate, litigation and Intellectual Property Rights.