India is known to have a wide tax base, rendering almost around more than 20 taxes paid by the common man knowingly or unknowingly. This article will try to sum up some of the most important taxes which the common man pays in India today.
How the taxes are levied?
Before explaining the common taxes, it would be pertinent to understand how the tax system in India works. In India, there are two levels tax structure divided into direct and indirect taxes, which is further subdivided into various taxes therein.
Direct Tax –
Here the taxpayers are required to calculate and pay taxes as applicable on the income or asset or interest in the asset etc. whatever is liable to tax. For e.g. Income Tax where the taxpayer is required to pay tax on the taxable income.
Tax payer ————> Government
Indirect tax –
Here the final incidence is passed on to the ultimate consumer and is collected through the dealers or any intermediate sellers or service providers by the government. For e.g. service tax is levied on the taxable services by the service providers, which is paid by the end consumer.
Taxpayer Pays tax Dealer Pay tax Government
Structure and jurisdiction
Now that we know that there are direct and indirect taxes, we shall move forward with the jurisdiction and structure of whole of the tax structure.
Taxes such as Income Tax, Excise duty, service tax, customs duty etc. are governed by the central government. These tax collections and revenues go to central government and central government has the jurisdiction over these taxes.
VAT, Stamp duty, toll tax etc. all come under the jurisdiction of the state government.
Local government authorities like municipality will have jurisdiction over octroi, property tax etc.
Common taxes paid by common man
Income tax is the most important tax which impacts common man the most directly. Both salaried and self-employed persons are required to pay income tax on their taxable income. This tax is calculated on taxable income of the taxpayer which is the result after considering exemptions and deductions as allowed under the Income Tax rules and regulations. Income tax computation may look like this.
Computation of income and tax payable
Income under the head salaries xxxx
(this will consider your salary, DA, bonus, allowances etc.)
Income under the head profits and gains from business or profession xxxx
(this will contain business income or loss)
Income under the head capital gains xxxx
(it arises when you sell assets like land, shares, vehicle etc. and is either
Long term or short term capital gain, which depends upon the holding period)
Income under the head house property xxxx
(it is in nature of income from self-occupied and rental properties. In case of self-occupied
Property, interest on housing loan would be the only deduction, leading to negative income.
However, for let out and deemed let out properties would have standard deduction and
Deduction for housing loan interest)
Income under the head other sources xxxx
(any other income than above 4 heads like interest from bank account etc. will be
Gross total income xxxx
Less: deductions under section 80C. 80D, 80E etc. xxxx
Net taxable income xxxx
Tax applicable xx
Add: education cess x
Add: surcharge if applicable x
——— Total tax xx
Less: TDS xx
Relief and rebates as applicable xx
Tax payable / refundable xx
VAT (Value Added Tax)
VAT is an indirect tax which is charged on goods supplied and purchased within state and comes under state government jurisdiction. For e.g. if any dealer from Mumbai sells goods to any customer in Pune, then VAT is applicable.
Being an indirect tax, incidence or impact of this tax goes unnoticed (till you get an actual receipt or bill for the goods purchased). For e.g. if you go to a pizza store and buy your pizza, you may find VAT present in the bill.
Dealers levy VAT on the goods sold by them within state and collect this VAT from the ultimate consumers (common man) and pays it into government treasury. On the other hand, he gets to utilize the VAT input credit for the goods purchased by him within the state, to set off the VAT output liability (on goods sold by him).
This tax is set to be subsumed by the GST (Goods and Services Tax) which is expected to be rolled out from April 2017.
Service tax is levied on the services rendered by the service provider in any place in India. This tax covers all the service providers having turnover exceeding the threshold as per the Service tax rules and regulations (currently Rs.10 lakhs). Registration for Service Tax is required once the service provider crosses threshold limit of 9 lakh rupees in any financial year.
Service tax comes under central government’s jurisdiction and its revenues go to central government. There is provision for input credit of service tax paid on input services used by the service provider for rendering his taxable services, which can be availed adhering to restrictions as present in the rules and regulations.
Almost every service is now covered under service tax except for the negative list services & mega exemption list services, which contain services which are not taxable under service tax, like services provided by the government is totally exempt from service tax liability.
Service tax is also set to be subsumed by GST (Goods and Services Tax) expected to be rolled out by April 1st 2017.
Excise duty comes under the central government jurisdiction and is applicable on manufactured goods. If you manufacture or produce any goods, then excise duty is applicable over certain threshold (currently Rs.1.5 crores).
Excise duty is normally not seen on any bill or receipt, because the goods may pass through intermediaries to reach to the final consumer. In short, the manufacturer charges the excise duty as cost of goods manufactured, which will result in increase in the cost of the goods. Simply saying, common man unknowingly is made to pay for the excise duty, which is charged at the time of manufacturing.
This tax is also replaced by GST, becoming one and only indirect tax for the goods and services whether manufactured or just trading or rendering the services.
Customs duty is charged on the goods imported from overseas and on the goods exported out of India. For e.g. if you like a perfume on any E-commerce website which is produced in France, then your bill contains customs duty as a part of the cost, since it needs to be imported, to reach you.
There are certain exemptions for tourists and foreign residents under customs duty for personal effects. However, every imported item is otherwise liable to customs duty unless otherwise expressly stated.
Basic customs duty will not be subsumed by GST, however, additional customs duty in lieu of excise or VAT and Special Additional Duty (SAD) will be subsumed under import GST. Such import of services will be governed by Central GST and State GST, in reverse charge mechanism basis.