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With the union budget presented yesterday and the Aam Aadmi (common man) feeling peeved at their expectations not addressed fully by the Finance Minister, especially, in the aftermath of de-monetization, I felt like writing this short article on Taxes.
In the global scenario, India is listed amongst one of the highly taxed countries. If my knowledge holds me good, there are 26 different types of taxes that we, the people of India, pay - either directly or indirectly.
While we live in a world of uncertainties, one thing is certain in India - taxes. Taxes are here to stay, and right from the day you are born until you leave this world, taxes are not going to leave you. So enough of tech talks on this blog, for a change let me talk about taxes.
Taxes in India come in many avatars, to name a few income tax, sales tax, service tax, municipal tax, corporate tax, etc. There are so many different types of taxes an average Indian pays that many a times you do not even know that you paid a tax. So let us try to find out what are the various types of taxes we end up paying in our day to day lives - whether knowingly or unknowingly.
Broadly taxes in India are classified under two categories. This classification is based upon who collects the taxes from the tax payer.
Direct Taxes, as the name suggests, are taxes that are directly paid to the government by the tax payer. It is a tax applied on individuals and organizations directly by the government. Examples are Income tax, Wealth tax, Corporate tax, Municipal tax, etc.
Indirect Taxes are levied on the manufacture and sale of products and services. These are essentially collected from consumers by private entities such as companies/businesses and paid to the government by the latter. For example when a shop keeper sells a product to you, to the value of the product he/she adds a certain percentage as sales tax, thus billing you a higher value. When you seek the services of a designer to design your dream home, he/she bills you after applying a certain percentage as service tax - coupled with a couple of cesses. Effectively, as a common man, you end up paying indirect taxes nearly on anything and everything - even on the basic essentials of life.
Let us look at the entire gamut of taxes we Indians pay in our daily lives. The listing below is not in any particular order.
Income Tax is paid by an individual based on his/her total income in a financial year. According to the Income Tax Act, the term individual could even imply - HUF (Hindu Undivided Family), a Cooperative Society, or a Trust. Certain deductions and exemptions are applied on your total income, to arrive at a taxable income, and it is on this taxable income that you end up paying income tax.
The tax percentages are based on the slab of income you fall in, giving more benefit to the lower income slabs by charging them a lower percentage of tax. It is this income tax that is the talk of the town during the budget sessions. Though, in my opinion this is the least impacting tax category. We often tend to overlook the more impacting indirect tax categories, where we actually end up paying far more money to the government each year than income tax. For instance, if you bought a budget car in a particular year, you would have indirectly paid Rs.4-5 lakhs to the government in the form of excise duty and sales tax. While you might have only paid a few thousand rupees in the form of income tax.
The profits made on sale of assets/property are taxable under Capital Gains Tax. Assets includes stocks, bonds, residential property, precious metals, etc. This tax is applied at two different rates depending on how long the property was owned by the tax payer, viz. Short Term Capital Gains Tax and Long Term Capital Gains Tax. The determining period of ownership varies for different types of property.
If you are an earning professional you need to pay professional tax. Professional tax is imposed by respective Municipal Corporations. Most of the States in India charge this tax. This tax is paid by every employee working in Private organizations. The tax is deducted by the Employer every month and remitted to the Municipal Corporation and it is mandatory like income tax.
Wealth tax (a direct tax) is applicable on individuals, HUFs or companies on the value of the assets they hold on the date of valuation. It is taxed @1% of the Net Wealth of the assessee. The Net Wealth even includes, unproductive assets like cash in hand above Rs 50,000, second residential property not rented out, cars, gold jewellery or bullion, boats, yachts, aircrafts, urban land, etc. It does not include productive assets like commercial property, stocks, bonds, fixed deposits, mutual funds, etc.
Thankfully, last year our Finance Minister abolished this tax type completely, as the Government's cost of ensuring this tax compliance did not justify this tax collection. Instead, he increased the surcharge on individuals earning more than Rs.1 crore.
Municipal Corporations in towns and cities impose a variety of taxes on property owners. These include - property tax, cleaning tax, water tax, street light tax, education cess, health cess, etc. This is a state level tax instrument and rates vary considerably from one city to another.
Prior to the Perquisite Tax we used to pay another tax called Fringe Benefit Tax (abolished in 2009). This tax is levied on benefit given by employers to their employees. For example, if your company provides you a perk such as company car with driver, or a club membership, or free accommodation, you are liable to pay perquisite tax on the notional value of these perks and privileges.
The Dividend Distribution tax is imposed on the dividend paid by a public limited company to its share holders. This tax is thus borne by the dividend distributing company. Needless to mention that this burden will be discounted for by the company before releasing the dividend to its share holders and hence the net dividend paid would be less than it would have been otherwise.
Introduced in the 2016 Budget 2016, this tax is applied on an individual's dividend income. A rate of 10% tax is levied on dividend income above Rs 10 Lakhs.
Many tax evaders do not declare their profit from sale of shares and mutual funds, to avoid paying capital gains tax. To deal with such a situation Securities Transaction Tax was introduced. This tax is applicable on every transaction done at the stock exchange. This means that when you buy or sell equity shares, derivative instruments, equity oriented mutual funds, etc. you pay securities transaction tax.
Corporate Tax is paid by Companies and Businesses operating in India. It is paid on the Income earned in a given financial year. The rates of taxation vary based on whether the company is incorporated in India or abroad.
Excise duty is applicable on the manufacture of goods sold in India. Once goods are manufactured, it is originally paid by the manufacturer directly to the Central Government. When the goods change hands from the manufacturer to the buyer, this tax is bundled by the manufacturer along with the cost of goods and passed on to the buyer. If you are producer or manufacturer of goods or you hire labour to manufacture goods you are liable to pay excise duty.
Sales Tax is charged on the sale of movable goods. It is collected by the Central Government in case of inter-state sales (Central Sales Tax or CST) and by the State Government for intra-state sales (Value Added Tax or VAT). The rates of taxation vary depending on the product type. VAT rates too vary from one state to another.
As mentioned above, this form of sales tax is collected by state governments on intra-state sale of goods. It is the most important source of revenue for state governments. Every state has their own charter of tax rates.
Service tax is applicable on all services provided in India except a specified negative list of services that are exempt. It is paid by the service provider to the government. The service provider, in turn, collects this tax from the end user at the time of rendering the service.
The Finance Ministry since last few years have been working on the idea of merging CST, VAT and Service Tax under one umbrella called GST - Goods & Services Tax. Hopefully, this year the GST should come into effect. Don't be too happy - GST will not reduce your effective burden on indirect taxes that you pay on a daily basis.
Custom Duty is a type of indirect tax charged on goods imported from a foreign country into India. This tax is generally payable at the port of entry (such as Airport or Sea port). The rate of import duty varies based on classification of imported items.
Certain foreign countries tend to dump their goods into India at illogically low rates. To prevent such unfair trade practices and to provide a level playing field, Government often levies Anti Dumping duty on specified goods so as to bring the dumped imported goods at par with the local manufactured ones.
Octroi is a tax levied on goods entering a municipal area or jurisdiction either for direct consumption or for sale to another consumer. In simple language you can call it an Entry Tax.
This entry tax is levied by state governments of Gujarat, Madhya Pradesh, Assam, Delhi and Uttarakhand. The tax rate is around 5.5-10% depending upon the state. This tax is applied on all items entering the state boundaries that were ordered online at an e-commerce website.
This tax is now becoming quite prevalent. Despite collecting so many taxes from us, Government is unable to fund infrastructure projects. Hence they build infrastructure on a BOOT (Build-Own-Operate-Transfer) basis, where, after the infrastructure facility is ready, a private agency is deployed to collect toll tax. This is normally paid while availing such facilities such as roads, bridges, etc. The toll tax is used to pay up for the investment in the infrastructure facility and also for its upkeep.
If you receive gift from someone it is clubbed with your income and you need to pay tax on it. This tax is called as gift tax. This tax is applicable if gift amount or value is more than Rs 50,000 in a year.
Even after collecting taxes in so many ways, the Government has not spared us on personal entertainment. Entertainment tax is levied normally by state government on entertainment related expenses such as purchase of movie tickets, major commercial shows/exhibition, broadcasting service, DTH service, cable service, etc.
when you purchase a property, in addition to money paid to the property seller, you have to pay a significant sum of money in the form of stamp duty, registration fees and property transfer tax.
Over and above the numerous types of taxes we pay, there are a few taxes which are levied as a surcharge/cess. This surcharge is an extra tax that is added to your base tax applicable under a given tax category, and is applied on the base tax value. Here are a few ongoing cesses.
Education Cess is a surcharge on applied on a main tax category, and is used solely for the exclusive purpose of providing education for the poor. Most of the taxes in India are subject to an education cess, which is 3% of the total tax payable. The education cess is mainly applicable on Income tax, Excise duty and Service tax.
Swachh Bharat Cess is a recent imposition after the commencement of the Modi era. This cess is applied on all taxable services at a rate of 0.5%. It is a pity that we Indians cannot keep our surroundings clean, as a result the government has to collect a cess from us to keep our environs clean.
This is also a new introduction. In the 2016 Budget finance minister introduced the Krishi Kalyan Cess. This cess is introduced in order to extend welfare to the farmers. The effective rate of Krishi Kalyan Cess is 0.5% and is applied on all taxable services.
A new Infrastructure Cess has been imposed recently on Cars & Utility Vehicles. A 1% infrastructure cess is applicable on Petrol/LPG/CNG-driven motor vehicles of length not exceeding 4 meters and engine capacity not exceeding 1200cc. 2.5% cess on diesel motor vehicles of length not exceeding 4 meters and engine capacity not exceeding 1500cc, and 4% cess is applicable on big sedans and SUVs.
So, in total you pay 26 different taxes in direct or indirect way. As a citizen of India, you are buried deep under the burden of the above taxes. Effectively, as a consumer of goods and services, the burden of all of the above taxes (directly or indirectly) is loaded on you. It is interesting to note that the present government is trying to do away with some of the above taxes. Wealth tax was abolished last year. GST is planned to be launched this year which will consolidate many of the taxes, such as CST, VAT, State Sales Taxes, Service Tax, etc. But, be aware that this will in no away reduce your tax burden. The compensation may be done by increasing the GST rates.
On a lighter note... I have lived in Saudi Arabia for some time and I recall what a heaven it was, with no income tax and tax on goods and services at very low rates. People out there would indeed think of life beyond merely eating and surviving. Whereas, in India, we, the common men and women, are so heavily burdened by all kinds of taxes that we are all the time struggling to survive. Perhaps, even the British did not levy so much of taxes on us when they ruled us.
While the justification given by the Government is that taxes are collected to provide infrastructure to us, the irony and the stark reality is that despite paying direct taxes, you end up paying separately for the infrastructure facilities you avail. For instance, if you get water supply or electric supply in your home, you pay their bills; if you drive on good roads, you pay toll tax; if you stay in a hotel you pay luxury tax - even if you were compelled to stay in a hotel to get your near and dear ones treated in an out station hospital; the list is endless.
Don't you think our governments (state as well as central) should find other sources of revenue, instead of taxing people and products? The governments can invest more in core sectors such as Power & Energy, Oil & Gas, Mining, Insurance, Telecom, Transportation services, etc. and generate revenue from these activities to run the country, instead of taxing people. If the government invested in these sectors, it will generate enough employment for all and there would be no need to provide subsidies and freebies. We pay the taxes and politicians unilaterally decide to doll out freebies to woo voters - how justified is this?
Do share your thoughts on what you think is the best way out of this situation. I am sure our government is listening.
If you have any related article, please send it across to me at rkumar@ctsindia.com. I will be happy to post it here for the benefit of all readers.
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Rajeev Kumar is the primary author of How2Lab. He is a B.Tech. from IIT Kanpur with several years of experience in IT education and Software development. He has taught a wide spectrum of people including fresh young talents, students of premier engineering colleges & management institutes, and IT professionals.
Rajeev has founded Computer Solutions & Web Services Worldwide. He has hands-on experience of building variety of websites and business applications, that include - SaaS based erp & e-commerce systems, and cloud deployed operations management software for health-care, manufacturing and other industries.