All About Tax Structure In India

Tax Structure In India: Learn Indian Tax System & Taxation

India's tax system funds national development through direct (income tax) and indirect (GST) taxes managed by central, state, and local bodies.

Written by : Rishabh Jain

Reviewed by : Lalit Lata

Lalit Lata

2022-05-01

3779 Views

11 minutes read

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ShapeTaxes are the government's largest source of income. The money collected from taxes is used for various projects for the nation's development. The Indian tax system is well structured and has a three-tier federal structure.

The tax structure in India consists of the central government, state governments, and local municipal bodies. When it comes to taxes, there are two types of taxes in India - Direct and Indirect tax. The direct tax includes income tax, gift tax, capital gain tax, etc., while indirect tax includes value-added tax, service tax, goods and services tax, customs duty, etc.

The Central Government of India imposes taxes such as customs duty, central excise duty, income tax, and service tax. The state governments impose income tax on agricultural income, state excise duty, professional tax, land revenue, and stamp duty. The local bodies can collect octroi, property tax, and other taxes on various services like water and drainage supply.

Table of Content

Types of Taxes in India

Taxation in India is majorly divided into Central and State Govt taxes with two types of taxes:

  • Direct Taxes
  • Indirect Taxes

While direct taxes are levied on earnings in India, indirect taxes are levied on expenses. The responsibility to deposit the direct tax liability lies with the earning party, whether an individual, HUF, or company.

Indirect taxes are collected mainly by corporations and businesses that provide services and products. Thus, these entities are responsible for depositing indirect taxes.

What is Direct Tax?

Direct taxes are imposed on corporate entities and individuals. These taxes cannot be transferred to others. For individual taxpayers, the income tax is the most important type of Direct tax. This tax is levied during each assessment year (1st April to 31st March). As per the Income Tax Act, 1961, you must make income tax payments if your annual income exceeds the minimum exemption limit. You can get tax benefits under various sections of the Act.

What are the Different Types of Direct Tax?

Direct taxes account for almost 50% of the government’s revenue in India. However, income tax is not the only direct tax. Here are the types of direct taxes applicable in India:

  1. Income Tax
  2. Capital Gains Tax
  3. Corporate Tax

Income tax applies to any income of an Individual and HUF except capital gains and profits from business and profession.  Income tax is calculated as per the applicable slab rates for the Assessment Year.

The central government announces the slab rates in the annual budget.

You also have the provision to reduce your taxable income using the tax-saving investments and expenses under section 80C.

What other Taxes come under Direct Tax?

Individuals in India earn income in a diverse range. Therefore, it is important to levy a tax on you based on your income, and if someone earns more, the tax percentage should be different. The Income Tax Act segregates the income range and charges different rates as per the segregation. The different groups are known as tax slabs. Your income tax slab can vary not only based on your income but also your age. During the Central Government’s Budget Session, amendments are made to the income-tax slabs daily.

1. Capital Gains Tax

Capital gains tax applies to the profits from the sale of a capital asset only. The tax rate on capital gains depends on the type of capital gain. Income Tax Act, 1961 divides the capital gains tax into the following two types:

  1. Short-Term Capital Gains Tax
  2. Long-Term Capital Gains Tax

Short-term capital gains are when the assets are sold within a specified period, for example:

  1. Equity stocks sold within 12 months of purchase
  2. Debt mutual fund units sold within 36 months of purchase
  3. Real estate property or gold sold within 36 months of purchase

If the asset is sold after the specified period, the gains or losses will become long-term capital gains or losses.

Depending on the type of asset, your gain may receive indexation benefit on long-term capital gains. Indexation allows you to benefit from inflation in your capital gains, reducing your tax liability.

2. Corporate Tax

Corporate tax in India is levied on the taxable income of companies registered under the Companies Act, 1956. The tax rate structure has undergone significant changes in recent years, with the government aiming to simplify the system and incentivise domestic manufacturing. Tax Slabs for Domestic Company for AY 2024-25:

ConditionIncome Tax Rate (excluding surcharge and cess)
Total Turnover or Gross Receipts during the previous year 2020-21 does not exceed ₹400 crores25%
If opted for Section 115BA25%
If opted for Section 115BAA22%
If opted for Section 115BAB15%
Any other Domestic Company30%

 

  • 7% - Taxable income above ₹ 1 crore– Up to ₹ 10 crore
  • 12% - Taxable income above ₹ 10 crore
  • 10% - If Company opting for taxability u/s 115BAA or Section 115BAB

Did you know?

According to Section 115BAB, new domestic manufacturing companies may choose to avail themselves of a concessional tax rate of 15% (resulting in an effective tax rate of 17.16%)

Claim Settlement Ratio

What are the Different Types of Indirect Taxes in India?

Indirect taxes in India  have been the government's most consistent and largest revenue source. The Indian tax system has had multiple indirect taxes, some of which are still operational:

  • Service Tax
  • Indian Excise Duty
  • Value Added Tax (VAT)
  • Customs Duty
  • Securities Transaction Tax (STT)
  • Stamp Duty
  • Entertainment Tax

A few of the indirect taxes in India, like service tax, value-added tax, and excise duty have been removed for a large number of goods and services. These taxes have been replaced by a single Goods and Services Tax.

Customs duty tax applies to goods imported into India from other countries and, in a few cases, to goods exported from India.

Securities Transaction Tax or STT applies to the transactions involving an exchange of financial securities. For example, equity stocks, mutual fund units, and future and options contracts. This tax is necessarily applied to securities exchange transactions. However, you can also pay stamp duty and STT on securities changing hands outside the exchange or over the counter.

STT allows the buyers and sellers of securities to benefit from lower short and long-term capital gains taxes on the exchange.

Stamp duty is a State Government levy on the transfer of assets within their territory. It acts as legal proof of ownership of the asset or security.

Entertainment tax in India is also a state subject and applies to transactions involving the entertainment business in the country. Such businesses and activities include movie releases, sporting events, concerts, amusement parks, and theatres.

What is Goods and Services Tax?

The Goods and Services Tax (GST) has consolidated India's complex web of indirect taxes. The tax system in India can have three layers of levies: Centre, State, and Local Authority or Municipalities.

Before GST introduction in the Indian taxation system, the following indirect taxes could apply to the goods and services in India:

  1. Excise Duty
  2. Entertainment Tax
  3. Value Added Tax (VAT, State)
  4. Octroi
  5. Service Tax
  6. Central Sales Tax (collected by State)
  7. Purchase Tax
  8. Entry Tax (State)
  9. Luxury Tax (State)

These interconnecting and often overlapping taxes posed many disadvantages and conflicts for suppliers, manufacturers, and government bodies.

Disadvantages of Indirect Taxes before GST

A complex web of multiple tax points and returns for suppliers

  1. Incidents of double taxation and cascading effect
  2. Difficult web legal conditions for exporters
  3. The difficulty of market entry due to varying rules and regulations
  4. Very high after-tax prices for goods and services

The introduction of GST removed the complexity and hurdles to participate in nationwide markets for businesses. GST made goods and services cheaper for individuals and end consumers while making taxation transparent and easy for sellers.

The Present State of GST

GST has simplified the indirect taxation for goods and services in India. With GST, instead of five or six different taxes, you only need to consider the following three (out of which only two will apply):

  • Central Goods & Services Tax (CGST)
  • State Goods & Services Tax (SGST)
  • Integrated Goods & Services Tax (IGST)

CGST and SGST apply when the sale occurs within the state. IGST applies to goods sold between states.

The Rate of GST

Under the Central Board of Indirect Taxes and Customs (CBIC), the GST Council announces GST rates for different commodities and services. The average rate of GST in India is about 12%.

The rates are lower than those of the other countries and economies worldwide using GST.

Difference between Direct and Indirect Tax

Taxation in India has been divided into direct and indirect taxes based on their application. Key differences between the two tax methods are as follows:

Direct TaxesIndirect Taxes
Applicable on income receiptsApplicable on expenses or sale of goods and services; i.e., adds to the outflow rather than reducing inflow, unlike direct taxes
Investment in specified instruments or spending on specified activities allows you to reduce direct tax on incomeNo rebate for the consumer. However, it could apply to the sellers, with turnover being the basis of it
Paid by the person receiving money directly from the GovernmentPaid by the person paying the money but collected by the supplier
Three types of Direct Tax in India - Income Tax, Corporate Tax, and Capital Gains TaxIndirect Taxes in India include - GST, excise duty, customs duty and VAT

Exemptions on Tax Deduction

The tax deduction is a reduction of income that eventually lowers your tax liability. Deductions are expenses you incur during the year, which can be subtracted from your total income to calculate how much tax you need to pay. There are many deductions that you can use to reduce your total income. Here are some of the most commonly used ways for the tax deduction:

  • House Rent Allowance: You can get the tax benefit under HRA if you have rented accommodation. The amount exempted can be totally or partially exempted from income tax.
  • Medical Insurance Deduction: If you have brought a medical policy, the premium you paid for the policy could save your tax as the amount is deducted from gross income (up to a limit).
  • Food Coupons: Some employers, such as Sodexo, may provide you with food coupons. Such meal coupons are tax-exempt up to a certain limit. The yearly exemption for food coupons is up to ₹26,400.
  • Section 80C, 80CC, and 80CCD(1): This is the most popular option, and you must already be using it to reduce your taxes. Under this, you can reduce your taxable income by investing your money in tax-saving investments.
Section 80C - Deductions on InvestmentsYou can claim a deduction of ₹1.5 lakh from your total income under section 80C
Section 80CCC – Insurance PremiumDeduction for Premium Paid for Annuity Plan of LIC or Other Insurer
Section 80CCD – Pension ContributionDeduction for Contribution to Pension Account
Section 80GG – House Rent PaidDeduction for House Rent Paid Where HRA is not received
Section 80 TTA – Interest on Savings AccountDeduction from Gross Total Income for Interest on Savings Bank Account
Section 80E – Interest on Education LoanDeduction for Interest on Education Loan for Higher Studies
Section 80EE – Interest on Home LoanDeductions on Home Loan Interest for First Time Home Owners
Section 80D – Medical InsuranceDeduction for the premium paid for Medical Insurance

Summing Up

When you buy term insurance, not only does it offer your loved ones financial security, but it also reduces your taxable income. When you buy a term insurance plan from insurers like Canara HSBC Life Insurance, you pay a nominal sum of money as a policy premium every year. This is equivalent to the amount to be deducted from your total income to bring down your taxable income. You can enjoy tax benefits up to a limit of ₹1.5 Lakhs.

Glossary

  • Tax Slab: A system where income is divided into ranges, each subject to a different tax rate, varying by income level and age.
  • Section 80C: A section of the Income Tax Act that allows deductions up to ₹1.5 lakh on certain investments and expenses, reducing taxable income.
  • Public Provident Fund (PPF): A long-term investment option under Section 80C, offering tax benefits and stable returns backed by the government.
  • Indexation: An adjustment to capital gains to account for inflation, reducing tax liability on long-term capital gains.
  • Octroi: A local tax collected on goods brought into a city for consumption, sale, or use, typically levied by municipal bodies.
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FAQs on Tax Structure in India

India has a variety of taxes, with five key ones being income tax, Goods and Services Tax (GST), customs duty, excise duty, and corporate tax. Each tax serves distinct purposes, targeting income, consumption, and business profits.

For the financial year 2023-24, income up to ₹2.5 lakh per annum is tax-free for individuals under 60, while higher exemptions apply for senior and super senior citizens.

Sikkim offers significant tax exemptions for its residents, particularly on income from salaries and dividends, making it one of the most tax-friendly states in India.

Individuals with annual incomes below the minimum exemption limit, agricultural income, and those eligible for specific exemptions, like certain categories of senior citizens and residents of tax-free states, do not pay income tax.

You can save income tax by investing in tax-saving instruments like Public Provident Fund (PPF), National Savings Certificate (NSC), Equity Linked Savings Schemes (ELSS), and claiming deductions under Section 80C, 80D, and other relevant sections of the Income Tax Act.