We should know that the Indian Tax system has two divisions that is, Indirect taxes and Direct taxes. The Budget, the Indian government's annual financial report, comprises a number of tax modifications that have an effect on individuals, companies, and the economy overall.
Indian Tax System and Structure
There is no economy without the Indian Tax system. It paves a framework for the government to support public spending and implement welfare projects. The federal and state governments apply both direct and Indirect Tax in India, which has a complex tax system. You must be aware of the fact that there will be a new budget announced at a specific time of the year. This affects the individual or the economy as a whole.
Let’s analyse the Indian tax system and structure before delving deeper into the direct and indirect tax reforms in Budget.
Firstly, Direct taxes are levied against individuals and organisations based on their income, including income tax, corporate tax, and wealth tax. On the other hand, indirect taxes are levied on goods and services at the point of consumption, including the goods and services tax (GST), customs charges, excise duties, and value-added taxes. (VAT). The Budget makes significant changes to direct and indirect taxes, which affect Indian taxpayers.
Eligibility of New Tax Regime for Direct and Indirect Tax
Direct Taxes: The new tax regime, which offers lower tax rates with reduced deductions and exemptions, is applicable to individual taxpayers, including resident individuals, Hindu Undivided Families (HUFs), and Association of Persons (AOPs) or Body of Individuals (BOIs). However, it is not mandatory, and taxpayers have the option to choose between the new tax regime and the existing tax regime.
Indirect Taxes: The new tax regime does not apply to indirect taxes as much, as it primarily pertains to direct taxes. Indirect taxes include Goods and Services Tax (GST), customs duty, excise duty, and other similar taxes.
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Eligibility Criteria: Taxpayers who wish to opt for the new tax regime need to meet certain eligibility criteria. As per the Income Tax Act, individuals or HUFs/AOPs/BOIs can choose the new tax regime if they do not have any business or professional income. Once a taxpayer opts for the new tax regime, they need to continue with the same regime for subsequent financial years as well.
Exemptions and Deductions: The new tax regime offers lower tax rates compared to the existing tax regime, but it restricts the use of exemptions and deductions. Taxpayers who opt for the new tax regime are not eligible for various exemptions and deductions, such as House Rent Allowance (HRA), Leave Travel Concession (LTC), standard deduction, deductions under Section 80C, 80D, 10(14), etc.
Tax Planning: Taxpayers need to carefully evaluate their income sources, investments, and deductions to determine whether the new tax regime or the existing tax regime is more beneficial for them. It is recommended to seek professional advice and do tax planning to make an informed decision based on individual circumstances.
Compliance Requirements: Taxpayers who opt for the new tax regime need to adhere to the compliance requirements as per the Income Tax Act. This includes timely filing of income tax returns, payment of taxes, and other relevant compliance obligations.
Clarity on Applicability: It is important to note that the eligibility of the new tax regime and its applicability may change over time, as per the updates and amendments made by the government. Taxpayers should stay updated with the latest tax laws and regulations to ensure compliance and avoid any potential penalties or legal issues.
What Are the Changes in Direct Taxes in Budget?
The Budget makes a number of direct tax reform recommendations that affect both businesses and individual taxpayers. The following changes are among the most important ones:
- Tax Slab Modifications: Now, the individual must take care of what their income slab is to know what their tax slab is. The new tax slabs on income up to a predetermined limit will result in lower tax payments for middle-class people.
- Exemptions and Deductions: The exemptions and deductions available to individual taxpayers are modified by the new Budget. To streamline the tax code and encourage compliance, some exemptions and deductions may be deleted or changed.
- Corporate Tax: The latest Budget plan considers adjusting the corporate company tax rates. The purpose of the higher tax rates is to promote investment, hasten economic growth, and raise India’s competitiveness as a trading hub.
New Tax Regime Income From Other Sources
Other types of income, such as interest income, rental income, and capital gains, are now subject to standard tax rates and are not eligible for any deductions or exemptions. This modification attempts to make tax computation simpler and less onerous for taxpayers. It is taxed as residuary income under the heading Income from Other Sources for any income that is not subject to taxation under any other heads of income and that is not to be subtracted from the total income. Charge Basis [Section 56]
Conclusion
Most of us await the budget discussion each year with a lot of hopes. Most of the time they end up debatable. This year, was not unusual as well because it mainly consisted of previous plans that received new financing. For salaried taxpayers, a significant tax advantage was announced though. Numerous tax relief programmes were part of the new tax structure. The administration seems to want taxpayers to switch over to the new tax system and gradually phase out the old one. All we can hope for is enough time to make the shift to the new system while still making use of the old one as much as we can. Contact Vakilsearch experts in case of any clarifications or requirements. We are happy to help!
FAQs: Indirect Tax
What is India's taxation system like?
The federal and state governments bring direct and indirect taxes. While direct taxes are levied on individuals and businesses based on their income, indirect taxes are levied on goods and services at the point of consumption.
What direct tax changes are proposed in the Budget 2023?
According to the proposed new system, the 37% surcharge rate will not be applicable to people, HUF, AOP (other than cooperative), BOI, and AJP. The highest surcharge, which applies to revenue beyond P2 crore, is 25%. As a result, the maximum rate would drop from roughly 42.7% to about 39%.
What indirect tax changes are outlined in the Budget 2023?
Reduced highest tax rate in the budget for 2023–24, from 37% to 25%. The Finance Minister proposed in Budget 2023 lowering the top marginal rate (personal income tax rate) under the new tax system from 42% to 39% by cutting the maximum surcharge rate under the system from 37% to 25%.
