Kara Sears
Taxation law in India is a complex system that has evolved over the years, with the first Income Tax Act introduced in 1860. The country's tax laws are derived from the Constitution of India, which allocates taxation powers to the Union Government, State Governments, and Local Bodies. India's tax system includes both direct and indirect taxes, with income tax being one of the most significant sources of revenue for the central government. The tax laws cover various aspects, including income tax, corporate tax, capital gains tax, customs duty, and goods and services tax (GST). While farmers, who constitute a significant portion of the workforce, are generally exempt from income tax, tax evasion remains a significant issue in the country.
| Characteristics | Values |
|---|---|
| Basis of tax law | The authority to levy a tax is derived from the Constitution of India, which allocates the power to levy various taxes between the Union Government, State Governments, and Local Bodies. |
| Restrictions | Article 265 of the Constitution states that "No tax shall be levied or collected except by the authority of law", meaning each tax must be backed by an accompanying law passed by Parliament or the State Legislature. |
| Tax types | Direct and Indirect taxes. Direct taxes include corporate income tax, capital gains tax, and personal income tax. Indirect taxes include excise duty, customs duty, service tax, and securities transaction tax. |
| Income tax | Income is divided into five categories: income from salary, other sources, house property, capital gains, and business/profession. Farmers, who make up 70% of the workforce, are generally exempt. |
| Goods and Services Tax (GST) | GST is a comprehensive indirect tax that helps eliminate the flowing effect of tax. It includes Central GST, State GST, and Integrated GST for interstate sales. |
| Customs duty | A tax on the import and export of goods, with specific rates for certain types, such as liquor and cigars. |
| Local body tax (LBT) | A tax imposed by local civic bodies on the entry of goods into a local area for consumption, use, or sale. |
| Property tax | A local tax on buildings and appurtenant land, resembling a wealth tax. |
| Alternate Minimum Tax (AMT) | For partnership firms, if tax payable is less than 18.5% of adjusted total income, AMT is charged at 18.5% plus applicable cess. |
| Tax rates and slabs | Multiple tax rates and slabs exist, depending on factors such as age, income level, and type of income. |
| Tax exemptions and rebates | Various exemptions and rebates are available, such as for agricultural income, COVID-19-related payments, and income below certain thresholds. |
| Tax evasion | A significant problem in India, with negative consequences for the country. |
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What You'll Learn
Income tax
India's taxation system is divided into three tiers: the Union Government, the State Governments, and the Local Bodies. The authority to levy taxes is derived from the Constitution of India, which allocates the power to levy various taxes between the Union and State Governments. The Constitution also restricts the power to levy taxes, stating that "No tax shall be levied or collected except by the authority of law". This means that each tax must be backed by an accompanying law passed by Parliament or the State Legislature.
For the assessment year 2013-25, individuals earning up to ₹2.5 lakh (US$3,000) were exempt from income tax. The upper class, about 1% of the population, falls under the 30% slab. The majority of taxpayers, the "common man", fall under the 10% and 20% slabs. Resident individuals aged 60-79 with a total income of less than INR 500,000 are eligible for a tax rebate of the lower of the income tax or INR 12,500. If their income exceeds INR 5 million, a surcharge is levied, and a health and education cess is charged at a rate of 4% of the income tax and surcharge.
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Customs duty
India's tax laws are derived from the Constitution of India, which allocates taxation powers to the Union Government, the State Governments, and Local Bodies. An important restriction on this power is Article 265, which states that taxes can only be levied or collected by the authority of law.
The amount payable in customs duty is determined by factors such as the value, weight, and dimensions of the goods. Each product has a specific duty rate, influenced by factors such as origin and composition. Customs authorities are responsible for checking the accurate details of exported or imported items, including their origin and validated rates and structures. The duty is payable at the time of import, while exports generally enjoy duty-free status with a refund of duties paid on inputs.
The Government of India levies customs duty on all imports and some exports. Certain goods are exempt from customs duties, including specific cancer medications and exports of goods and services, which are considered zero-rated supplies. The specific duty rates are subject to change, with the Union Budget 2025 proposing the reduction of seven tariff rates.
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Service tax
The authority to levy tax in India is derived from the Constitution of India, which allocates the power to levy various taxes between the Union Government, the State Governments, and the Local Bodies. An important restriction on this power is Article 265 of the Constitution, which states that "No tax shall be levied or collected except by the authority of law".
Budget 2012 revamped the taxation provisions for services by introducing a new system of taxation of services in India. In the new system, all services except those specified in the negative list are subject to taxation. The term "Negative List", per clause (34) of section 65B of the Finance Act of 1994, means the services that are listed in section 66D.
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Capital gains tax
India's tax laws are derived from its constitution, which allocates taxation powers to the Union Government, State Governments, and Local Bodies. The country has abolished and imposed new taxes over time, such as inheritance, interest, gift, and wealth taxes.
One such tax in India is the capital gains tax, which is levied on profits from selling capital assets like property, stocks, or mutual funds. These gains are classified as short-term or long-term, each with its own tax implications:
- Short-Term Capital Gains (STCG): Assets held for less than 12 months, taxed at 20% or slab rates.
- Long-Term Capital Gains (LTCG): Assets held for more than a year, taxed at 12.5%.
There are exemptions and special considerations for capital gains tax. For instance, agricultural land in rural areas may be exempt from capital gains tax, and gains from the sale of a property can be exempt if the proceeds are reinvested into a new property or specific bonds. Additionally, “grandfathering" provisions allow individuals to be exempt from certain taxes if their decisions were made under a previous tax regime.
The calculation of capital gains tax involves determining the taxable capital gain amount, considering factors like the nature of the asset, duration of holding, and applicable tax rates.
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$32.45
Local body tax
India's taxation system is divided into three tiers: the Union Government, the State Governments, and the Local Bodies. Local Body Tax (LBT) is a tax imposed by local civic bodies on the entry of goods into a local area for consumption, use, or sale. The tax is based on Entry 52 of the State List from Schedule VII of the Constitution of India, which allows for the taxation of goods entering a local area. LBT is paid by traders to the civic bodies, and the rules and regulations vary across different states.
Traders whose annual turnover from the purchase and sales of taxable goods is 5,000 Indian rupees or more, and whose annual turnover from the purchase and sales of all goods is 100,000 Indian rupees (one lakh) or more, must register with the local municipality or civic body. The tax is to be paid within 40 days via online portals, demand draft, cheque, or cash to a designated bank account or special counter. If goods that have been taxed through LBT are exported outside the city, 90% of the LBT paid can be refunded, subject to certain conditions. For example, if the goods are exported outside India, or if they are rejected by the purchaser within 6 months from the date of export.
Dealers must maintain their business records and file half-yearly returns. Penalties are charged for late payments, failure to register, failure to state correct liability, and failure to present required documents.
LBT was introduced in Maharashtra in March 2013, and various protests were organised by traders' associations, who feared that the tax would increase harassment and corruption from local authorities. As of August 2015, LBT has been partially abolished. Maharashtra is currently the only state that imposes LBT.
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Frequently asked questions
Tax laws in India are derived from the Constitution of India, which allocates the power to levy various taxes between the Union Government, the State Governments, and Local Bodies.
There are two main types of taxes in India: Direct and Indirect taxes. Direct taxes include taxes on corporate income, capital gains tax, and personal income tax. Indirect taxes include excise duty, customs duty, service tax, and securities transaction tax.
The first Income-tax Act was introduced in February 1860 by British India's first finance minister, James Wilson. The current income-tax law is governed by the Income-tax Act, 1961, which replaced the Indian Income Tax Act, 1922.
Income is divided into five categories: Income from Salary, Income from Other Sources, Income from House Property, Income from Capital Gains, and Income from Business and Profession. Agricultural income is generally exempt from tax.
Yes, there are certain tax exemptions and rebates available in India. For example, resident individuals who are 60 years of age or older may be eligible for a tax rebate if their total income does not exceed a certain threshold. Additionally, income from agricultural activities is typically exempt from taxation.
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