Indian taxation system

SARBJEET KAUR Lecturer in Economics

GCCBA-42, Chd

• Tax is a compulsory payment made to Government Authorities by Individuals

• Types of Tax • Direct • Indirect

Features of Indian taxation System

• Multiple taxation System• Share of Direct and indirect Tax• Dependence of tax structure on a few

selected taxes• Progressive• Less coverage• Tax Evasion

• Non Economical• Complicated• More revenue From central taxes

Defects of Indian Taxation System

• Unscientific• Inadequate• Lack of Equity• Lack of uniformity• Inter State Inequality• Defects of Personal Income Tax

• Less coverage• Tax Evasion• Non Economical• Adverse effect on Foreign Capital• Complicated

Suggestions

• Wider Scope• More direct taxes• Reduction in tax evasion• Tax on Agricultural Income• Flexibility• Rationalization of Taxation System

Tax reforms In India• INDIRECT TAXES:• Customs duty:• Multiplicity of levies must be reduced. There should be only three types of duties: a basic customs

duty, an additional duty of customs and anti-dumping/safeguard duties.• Zero per cent duty for life-saving drugs and equipment, defense and security related goods and

imports by the Reserve Bank of India• Ten per cent duty for raw material, inputs and intermediate goods and 20 per cent for consumer

durables by 2004-05.• By 2006-07, five per cent duty for basic raw materials such as coal, ores and concentrates, xylems;

eight per cent for intermediate goods; 10 per cent for finished goods other than consumer durables; and 20.0 per cent for consumer durables.

• Nominal reduction in duty on motor vehicles to 50 per cent from 60. Import duty on second hand cars may continue at existing levels.

• Exemption for cell phones from countervailing duty may be withdrawn but basic import duty may be cut to zero in 2003-04.

• Eight per cent duty on crude oil, 15 per cent on petroleum products by 2003-04 and five per cent on crude oil and 10 per cent on petroleum products by 2004-05.

• Higher duty of up to 150 per cent for specified agriculture products.• Duty cuts should be in stages of five per cent each year.

• Excise duty:• Zero per cent duty for life-saving drugs and equipment,

security items, food items and agricultural products.• Six per cent duty for processed food products and matches.• Twenty per cent rate for motor vehicles, air conditioners

and aerated water.• Separate rates for tobacco products and their substitutes.• Bulk tea may be exempt from excise duty.• Central excise duty on kerosene may be raised to one

rupee a liter.• Warehousing facility for petroleum products should be

withdrawn.

DIRECT TAXES:

• Three personal income tax tiers to be replaced by two tiers. Income between Rs 100,000-400,000 will be subjected to 20 per cent tax. All income above 400,000 will be subjected to tax at 30 per cent.

• Dividends received from Indian companies will be fully exempt.• Long term capital gains on listed equity will be fully exempt.• Standard deduction for salaried taxpayers will be reduced to nil.

However, exemption for conveyance allowance subject to a ceiling of Rs 9,600 will continue.

• Interest subsidy of two percent for housing loans up to 500,000 to all borrowers.

• Reduction in corporate tax rate from existing levels of 36.75 per cent to 30 per cent for domestic firms and 35 per cent for foreign companies over a period of three years.

• Elimination of Minimum Alternate Tax under section 115JB of the Income Tax Act.

Direct Tax Code

• The Direct Taxes Code (DTC) is said to replace the existing Indian Income Tax Act, 1961 If approved, the DTC shall come into force on the April 1, 2012, and shall be applicable for income earned during the financial year 2012-13.

Highlights of the Direct Taxes Code bill

• Common threshold income tax exemption limit for men and women proposed at Rs. 2 lakh per annum, up from Rs. 1.6 lakh

• 10 per cent tax on annual income between Rs. 2-5 lakh, 20 per cent on between Rs. 5-10 lakh, 30 per cent for above Rs. 10 lakh

• Tax burden at highest level will come down by Rs. 41,040 annually• Proposal to raise tax exemption for senior citizens to Rs. 2.5 lakh from Rs. 2.4 lakh

currently• Corporate tax to remain at 30 per cent but without surcharge and cess• MAT to be 20 per cent of book profit, up from 18.5 per cent• Proposal to levy dividend distribution tax at 15 per cent• Exemption for investment in approved funds and insurance schemes proposed at Rs.

1.5 lakh annually, against Rs. 1.2 lakh currently• Proposed bill has 319 sections and 22 schedules against 298 sections and 14

schedules in existing IT Act• Once enacted, DTC will replace archaic Income Tax Act.

• DTC removes most of the categories of exempted income. Equity Mutual Funds (ELSS), Term deposits, NSC (National Savings certificates), Unit Linked Insurance Plans (ULIPs), Long term infrastructures bonds, house loan principal repayment, stamp duty and registration fees on purchase of house property will lose tax benefits.

• Only half of Short-term capital gains will be taxed• Surcharge and education cess are abolished.• For incomes arising of House Property: Deductions for Rent

and Maintenance would be reduced from 30% to 20% of the Gross Rent. Also all interest paid on house loan for a rented house is deductible from rent.

• Tax exemption on Education loan to continue.• Tax exemption on LTA (leave travel allowance) is

abolished.• Taxation of Capital gains from property sale : For sale

within one year, gain is to be added to taxable salary.• Tax on dividends: Dividends will attract 5% tax.• Medical reimbursement : Max limit for medical

reimbursements has been increased to 50,000 per year from current 15,000 limit.