Taxation is always a confusing field for someone who is not from finance. It is because of not knowing the types of taxes and how they are imposed on us. There are numerous types of taxes in India that are imposed for various reasons and on various types of individuals and entities in the country. It is important to learn about all types of taxation in India to know the taxes that you are imposed with and the types that does not cover you. Tax is generally defined as a financial charge imposed on an individual or an entity by the central or state government for the welfare of the country and its citizens.
There are different types of taxes in India according to the type of individual it is imposed on, type of government imposing it and so on. This article focuses on 25 different types of taxes in India, in detail. Primarily, the taxation in India can be classified into three main types of taxes namely, direct taxes, indirect taxes and other taxes.
Direct taxes in India
Table of Contents
- 1 Direct taxes in India
- 2 Indirect taxes in India
- 3 Other/miscellaneous taxes
- 3.1 Professional tax
- 3.2 Dividend distribution tax
- 3.3 Municipal tax
- 3.4 Entertainment tax
- 3.5 Stamp duty, transfer tax, registration fee
- 3.6 Education cess and surcharge
- 3.7 Gift tax
- 3.8 Wealth tax
- 3.9 Toll tax
- 3.10 Swachh Bharat cess
- 3.11 Krishi Kalyan cess
- 3.12 Dividend tax
- 3.13 Infrastructure cess
- 3.14 Entry tax
These types of taxes are imposed on an individual or entity directly by the government. Over the recent years, the direct taxes collections have increased over time which is considered as a healthy sign towards national development.
Out of all the taxes in India, this is the most commonly known one. This is a tax that is imposed on people upon their annual income. Those who have an annual income more than a slab only are imposed with this tax.
As the income per annum increases, the tax value also increases. This is one of the few types of taxes in India that are paid per year. Investing money into certain schemes like insurance and others would reduce income tax to certain extent. The income tax concession is provided for individuals who are above the age of 60 years.
Capital gain tax
It is the very common of all commercial taxes in India. It is imposed on gains achieved through any investment or transaction. It is not just imposed on entities. It is also imposed on anyone who obtained a gain by selling an asset more than the price he bought it
This tax is again classified into short term and long term capital gain tax. Any gains that one enjoys by selling the asset within a year from buying it or within three years in case of property will be imposed with short term capital gain tax. For period more than the one mentioned above, long term capital gain tax is applied.
Securities transaction tax
Many taxes in India can be imposed only when an individual declares it. One of such taxes in India is the capital gain tax. Thus, the people hide their transactions to avoid taxes. To fight this, many different taxes in India are introduced and one among them is Securities transaction tax.
STT (securities transaction tax) is applied on every transaction made in the stock exchange. STT value is very low that people usually do not notice it. For futures and options, the current rate of STT is 0.017%. for capital market delivery, the tax is 0.125% and for intra-day capital market, the rate is 0.025%. This rate is not a permanent one and it changes with time.
FBT or Fringe benefit tax was in use before 2009. It was abolished and introduced as perquisite tax. If you are an employee with monthly income, you need not worry about this tax. This tax is imposed on an entity for every benefit that it gives to the employee. For instance, starting from club membership to ESOP, every monetary and non-monetary benefits that is provided to the employee will be considered in this tax.
In case of stock options, the company has to pay tax on the difference in money between the fair market value and the price paid to him by the employee.
As the name indicates, this is one of the different types of taxes that are imposed on companies that function in India and not on individuals. Foreign based companies that are functioning in India will have a higher tax than local companies. Companies with more than 10 million rupees turnover in a year will have additional surcharge on their profit.
For domestic companies, the tax for companies that have more than 10 million rupees profit is 30% with surcharge and education cess. For foreign companies that fall under the same category, it is 40% with surcharge and education cess. For companies within 10 million rupees profit, the surcharge is not imposed. We will about surcharges and education cess later in this article with other miscellaneous taxation in India.
Indirect taxes in India
Indirect tax is a type of taxation that is not directly imposed on the individual or entity. On the other hand, it is imposed on products and services and in turn should be paid by the person or entity, who buys or uses it.
Sales tax and VAT
The sales tax is the very common of all indirect taxation in India. This tax is charged on the sale of any movable and tangible product. This tax is imposed by the union government of India. There are three types of taxes under sales tax namely, the inter-state tax, intra state tax and export sale tax. The inter-state tax is imposed on sale of products between two states in the country. The intra state tax or the VAT is charged by the state government for the sale of tax within the state. The export sale tax is imposed on products sold out of country. CST is a type of taxation in India that is paid on the inter-state sales which includes C form. CST is paid to the state government.
VAT is the most important of all taxes in India for state government. Each state has its own VAT. The tax imposed by the central government on sale of good (sales tax) is also imposed by the state government on the same product. This leads to double taxation in many cases. This tax of state government is called as VAT. Not all products would be imposed with VAT. About 220 items are covered in the VAT category. Some states or union territories in the country do not have VAT.
Every intangible service that is sold in the country is imposed with service tax. This tax includes use of telephone, interior decorator, beauty parlor, advertisement companies, banks and other financial service, maintenance service and many others. The tax is passed on by the service provider to the customer. It is 15 % at the present and can change in the future. The actual service tax is 14% but it is added with other miscellaneous taxation in India and now accounts to 15%. We will see about those additional taxes later in this article.
This is a tax that is imposed on goods that are bought from foreign countries. This tax is imposed on the user at the point of entry into the country like airport. The duty varies based on the item. Not all item that an individual brings into the country from a foreign country would be imposed with this tax.
A similar kind of tax is called Octroi tax. This tax is payable to municipality upon entry for certain products. It is also called as entry tax in some areas of the country. Do not confuse it with entry tax that has been introduced for online shopping recently. We will talk about the online shopping tax later.
This tax is imposed on the goods that are produced in the country. It goes by a different name too, CENVAT or Central VAT. If you are a manufacturer who hires people to manufacture goods for sales, this tax is applicable on you.
Anti dumping duty
This has nothing to do with waste dumping. Dumping is a term used for buying a large amount of product from another country at a very low price. This low price dumping of goods would destroy the balance of market in the country. To prevent this, anti dumping duty is imposed on the goods that are about to be sent out of the county; whose price does not meet the margin denoted by the government. This tax is imposed by the central government.
There are numerous types of taxes in India that do not fall under the above stated classification of taxation in India. For simplification, these taxes are classified as other taxes. There is no common factor in these taxes.
This tax is imposed on professionals in the country. If you are a professional and are earning through that skill in the country, you need to pay this tax to the municipal corporation.
Not all states in the country have this tax. This tax is also paid by people working in private organization. This tax is automatically deducted by the salary before paying to the employees by the employer and sent to municipal corporation. It is similar to that of the income tax. The rate of this taxation in India is not the same in every state.
Dividend distribution tax
The security tax is imposed on gains incurred during selling of shares. But, people dealing with share market would incur gains without selling shares. This is through dividends gained through certain shares that they hold. This dividend distribution tax is imposed on the companies that provide dividend.
From investors point of view, dividends are tax-free if your earnings is less than 10 lakh per year. We will see in detail about the tax for dividend gains for investor later in the article. Currently, dividend distribution tax is 15%.
This tax is imposed by the municipality in each city. This is called as property tax or wealth tax. Any individual or entity owning a piece of land or property in that city should pay a tax in accordance to the value of the land to the municipality. Tax percentage changes from one city to another.
This tax is imposed on financial transactions that are made in regards to entertainment. This includes commercial shows, broadcasting, cable services, movie tickets, live shows and others. This tax is payable by the individual who is buying the entertainment service.
Stamp duty, transfer tax, registration fee
When you buy a property, you need to pay a cost to transfer the said property to your name over and above the cost that you pay to the seller for the property. This cost includes the stamp duty, transfer tax and registration fee. These are required for preparing the document for signing the legal transfer of the property. The tax percentage varies based on the amount of the property.
Education cess and surcharge
These two types of taxes are seen in corporate tax. The corporates are imposed with educational cess and surcharge. Education cess is used for educating poor people in the country. Almost all taxes in India is subjected to include education cess in certain cases. It accounts to 3% of total tax paid. Education cess is included mainly in service tax, income tax, corporate tax, excise duty and other types of taxes.
Surcharge is a tax applied on the amount of tax that you pay. This is an extra tax and is usually found in taxes implied on people or entity in higher slabs of taxation in India.
Any property or amount that you gain as a gift will be subjected to gift tax. Amount or property gained as gift from friends, families, game shows and others would be subjected to gift tax. This tax is applicable only if the amount and property received as gift exceeds 50,000 rupees per year. This tax is paid by the individual receiving the gift. A father/mother can gift any amount of property to his/her daughter once in his/her lifetime without any tax.
Wealth tax is considered to be one of the type of taxes that falls under direct tax category. It is charged on the net wealth of the individual or entity. This tax is chargeable on the net wealth that an individual possess o the valuation date. Net wealth is the term used for the amount of wealth possessed by an individual or entity more than the loan and debt he or it has. This tax is 1% for those whose net wealth exceeds 30 lakhs.
Though this tax was legally abolished in 2015, this tax is added to surcharge and 12% surcharge is applicable on an individual earning more than one crore per year.
This is a very practical tax that you see every day. This tax should be pay by anyone who uses bridge, roads or other infrastructure. This tax gets its name from that toll that we pay for using any highways in the toll gate. This is a very small amount collected as tax for the sole purpose of maintenance of the road or other infrastructure.
Swachh Bharat cess
It is one of the recent taxation in India. It was introduced in 2015. It is applicable on all taxable services. It accounts to 0.5%. This is added to service tax and because of this addition, the service tax accounts to 14.5%. This is one of the few new taxes in India brought into action in 2016. This tax money is used for cleanliness of the country.
Krishi Kalyan cess
In 2016, this tax was introduced in favor of all the farmers. This tax is imposed on all taxable service and it accounts for 0.5%. This tax would increase the service tax to 15% (14% + 0.5% from KKS and 0.5% from SBC). This tax is used for the welfare of farmers in the country. This cess is put in action from June of 2016.
From 2016, 10% tax is imposed on traders who gain more than 10 lakh gains through dividends in share markets. Though this tax is a tax imposed on a product, it is not currently classified along with the other indirect types of taxes.
This cess is imposed on utility vehicles and cars. This cess is imposed on cars that run of petrol, CNG or LPG whose motor is less than 4 meter in length. The vehicles whose engine capacity is less than 1200cc are imposed with this tax. This tax is charged at 1%.
For diesel motor with same specification as mentioned above, 2.5% infrastructure cess is imposed. For diesel engines, the engine capacity should be less than 1400 cc for this taxation. For big sedan and SUVs, 4% cess is imposed.
This taxation in India is imposed on online shopping. Online shopping is booming in today’s world and the government has imposed a tax on the online sellers. This tax is imposed on the goods that are entering into the country for e-commerce.
This tax is not imposed in all states. As of now, Gujarat, MP, Assam, Delhi and Uttarakhand have imposed this tax. This tax would vary between 5.5% to 10% depending on the state rule. This tax would increase the cost of products that we find in online markets. This tax has been introduced to curb the growth of online markets and make way for brick and mortar companies in the country.
There are 25 different types of taxes in the country. Those who are earning more have to pay more number and amount of taxes in India. Though these taxes are for the welfare of the nation and the citizens, the concept of taxation in India has been a main cause of confusion during tax filing and returns for many.
There are proposals for introducing GST tax which is called as Goods and Service Tax. This is a common tax for goods and services. If this tax is introduced, many different types of taxes can be clubbed into one thereby eliminating confusion to some extent. This will also reduce taxes since double taxing would be removed from the system. Double taxation in India is a process where an individual is taxed for the same process or product twice in the life cycle of the product.
During every annual budget of the country, the government adds, removes, increases or decreases different types of taxes for the welfare of different sectors of citizens. Though there are numerous types of taxes in India, there are many tax free incomes in the country like income through agriculture, bank interest income, income for a firm’s partner, travel concession, rent, long term capital gain, returns from life insurance policies, government securities and bonds, scholarship money, awards from government, retrenchment, retirement, commutation of pension, relief funds, PF and superannuation.
There are ways to reduce the amount of tax imposed on us by the government by investing the income gained in certain investment field. If you are interested in increasing your tax returns, talk to an auditor to learn more about tax-free investment fields.
Watch this detailed video on taxation in India: