The government of India has introduced a very elaborate and user-friendly tax system called Goods and Service Tax. This system replaces all major indirect business taxes. It is a comprehensive tax system
Different Types of Business Tax: The citizens of India have to pay mandatory financial charges to the government. This money collected by the people is an income to the government and is used for social welfare, building infrastructure, working on various projects, etc.
There are two types in the Indian business tax system, Direct Tax, and Indirect Tax. Let’s find out more about them below.
What are Direct Taxes?
When you pay taxes directly to the government, it is called Direct Tax. Direct taxes are levied directly on a company or a person. You cannot transfer the liability to a third person. The Central Board of Direct Taxes is the responsible body to see the functioning of the department of Revenue. The CBDT has to help the Revenue department perform its duties with the support of various acts that govern various aspects of direct taxes. You have to pay the Direct Tax on a periodical basis with some exceptions on certain direct taxes.
Types of Direct taxes
The financial earnings in terms of salary, profit, commission, fees, etc., will come under income tax. There are many versions of income tax, like the tax slabs, taxable income, tax deducted at source (TDS), reduction of taxable income, etc. Income tax applies to all individuals and companies in India. Tax calculation is done based on the slab provided by the government for different individuals and business organizations. Income tax has to file once a year.
It is a direct tax. You have to pay professional tax if you earn an income from salary or by practicing a profession. Different states have different rates and methods of collection. The entity collects this tax from its employees and pays the government.
Capital Gains Tax
Income received from the sale of investments like property, gold, mutual funds, fixed deposit, bonds, and government certificates is called capital gains. It can be either Business tax or Individual tax. There are two types of capital gains, short-term capital gains, and long-term capital gains. Investments made for less than 36 months are called short-term capital, and investments made for more than 36 months are called long-term capital. Tax rates are different for each term. The longer the capital period, the lower the tax rate.
You pay the wealth tax yearly on your properties on the market value. It is compulsory to pay wealth tax by an individual or company irrelevant of whether you earn income from the property or not. Tax exemption is allowed if you rent the property for more than 300 days. Property used for business or professional use is also exempt from wealth tax.
After the death of an individual, his Legal heir needs to pay tax for the property of wealth inherited. This tax is called Estate or Inheritance tax.
The companies registered under the companies act of 1956 have to pay this tax. You pay the corporate tax on the profit you earn in one year. The income tax act of India gives various tax benefits and rebates under many clauses. There are different slabs to deciding on the rate of tax. International companies which have branches in India fall under the corporate tax preview. Below are a few taxes included in the corporate tax.
Securities Transaction Tax (STT)
Income generated from the sale of shares and securities is taxable. You have to declare it in tax planning.
Dividend Distribution Tax (DDT)
A dividend or profit share declared by the Indian company to its investor will attract tax. It is called Dividend Distribution Tax. Foreign companies are exempt from the Dividend Distribution Tax.
Fringe Benefits Tax
The company provides benefits to its employees that are called Fringe Benefits. These benefits are taxable under Fringe Benefits Tax. Some of them include Employer’s expenses on travel (LTA), employee welfare, accommodation, and entertainment. Any regular commute or commute-related expense provided by an employer. Employer’s contribution to a certified retirement fund. Employer Stock Option Plans (ESOPs).
Minimum Alternate Tax (MAT)
The CBDT levies MAT for zero tax companies that prepare accounts according to the Companies Act.
What are Indirect Taxes?
The taxes paid to the seller of goods and services are called indirect taxes. Tax is not levied on a person or company but on products and services collected by the person selling. The most common examples of Indirect tax can be VAT (Value Added Tax), Taxes on Imported Goods, Sales Tax, etc. The price of the service or product includes these taxes.
This type of Business tax affects your daily business performance. There are various types of indirect taxes in India. All these taxes now come under the tax format, GST (Goods and Services Tax)
Any business establishment or professional will have to collect tax on services provided.
Services like housekeeping, internet, courier agency, transport, and health services charge the customers.
Value Added Tax
Every point of value addition on goods and services requires you to pay a tax. From the raw material stage to the sale of finished goods, you pay the taxes at all those points where you add value.
The central government of India imposes customs duty on all goods imported into India. You have to pay customs duty to export some products included in the list of custom duties.
Excise duty is a tax imposed on the production, sales, and licensing of some products in India. You pay excise duty if your company produces goods like petroleum, tobacco, and alcohol.
A state collects the sales tax when you sell products and services within that state. The Central government collects it for an inter-state sale. Sales tax applies to the state where you sell your goods.
A person or a business entity selling goods and services of entertainment is taxable. The state government charges this as entertainment tax. Movie theatres, Amusement Parks, Video Games, Arcades, Exhibitions, Celebrity Stage Shows, Sports Activities, etc., are some of the services that come under entertainment tax.
Goods and Services Tax (GST)
It is the new system of indirect tax or consumption tax. It gives away all indirect taxes except for a few state taxes. You calculate GST on every stage of production. The final consumer has to pay the tax, and all the other parties get the refund. It is the best Business tax system adopted by the country. Bringing all indirect taxes into one has helped the business in many ways. It is much easier to calculate the taxes and cost of maintaining different records books as reduced drastically.
Business tax in India is made very simply by the policy and decisions of the central government. Hassles of maintaining records for different kinds of business tax are not required. Bringing all indirect business taxes under one taxation will reduce the cost of running logistics and operations. For any help regarding this, get in touch with Vakilsearch.