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Budget Basics 101: All About Taxes

By Sahil Mehta

As promised, this post will deal about most of the taxes that are applicable in India and how they affect you. Taxes are a major source of revenue for the government and an even bigger source of pain to us and corporates. We cover the definitions here. Tax rates are likely to be changed, so wait for our post budget. 

Direct Taxes 
 A direct tax is one paid directly to the government by the persons on whom it is imposed (often accompanied by a tax return filed by the taxpayer). Examples include income tax, corporate tax, and transfer taxes such as estate (inheritance) tax and gift tax.

Income Tax – I doubt you need me to tell you what this is. The income earned by an individual in a fiscal year is liable to tax by the government at the prevailing rates. Essentially whatever you earn, a part of it goes to the government. 

Exemptions under 80c - Section 80C of the Income Tax Act allows certain investments and expenditure to be tax-exempt. The total limit under this section is Rs. 100,000 (Rupees One lac) which can be any combination of the below:
- Contribution to Provident Fund or Public Provident Fund
- Payment of life insurance premium
- Investment in pension Plans.
- Investment in National Savings Certificates
- Post office investments

Corporate tax – It is the tax levied on the income or capital of companies in India. Generally, the tax is imposed on net profits. 

Minimum Alternative Tax – Tax imposed on companies. This is done to tax companies who avoid paying tax in spite of having high income by showing high depreciation and dividends.  

Indirect Taxes 

These are taxes where an economic transaction takes place. An indirect tax is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the customer). The intermediary later files a tax return and forwards the tax proceeds to government with the return. An indirect tax may increase the price of a good so that consumers are actually paying the tax by paying more for the products.

Service Tax - It is a tax levied on services provided in India, except the State of Jammu and Kashmir. At present there are 119 services covered under the service tax net.

Excise Duty - An excise or excise duty is commonly understood to refer to an inland tax on the sale, or production for sale, of specific goods; or, more narrowly, as a tax on a good produced for sale, or sold, within a country.

An excise is distinguished from a sales tax or VAT in three ways: (i) an excise typically applies to a narrower range of products; (ii) an excise is typically heavier; and (iii) an excise is typically specific (so much per unit of measure; e.g. so many rupees per litre), whereas a sales tax or VAT is ad valorem, i.e. proportional to value)

GST - The Goods and Services Tax (GST) is a value added tax, which was supposed to be implemented in India by April 2012. The GST will replace all indirect taxes levied on goods and services by the Indian Central and State governments. It is aimed at being comprehensive for most goods and services with minimum exemptions. The unification of various indirect taxes under GST is expected to simplify the tax process greatly and also increase the tax base (number of people liable to pay taxes). The road map for implementing GST quickly is eagerly awaited by the industry and markets.  

Customs Duty - A tax levied on imports by the customs authorities of a country to raise state revenue, and/or to protect domestic industries from more efficient or predatory competitors from abroad.

Other Terms

Subsidy - A subsidy (also known as a subvention) is a form of financial assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry (e.g., as a result of continuous unprofitable operations) or an increase in the prices of its products or simply to encourage it to hire more labor.

 Subsidies form a considerable expenditure for the government. Some commonly subsided goods are diesel, cooking gas, food products etc. There is an urgent need to reduce the subsidy burden of the country. However lowering subsidies, generally, leads to increased costs which hurts the poor particularly.

Surcharge - A surcharge may mean an extra fee added onto another fee or charge.

Cess – It is a special tax levied by the government for a specific purpose only. For example in India, we have a 3% education cess. This cess is charged on the taxable amount including applicable surcharge. This money is supposed to be spent on improving the education sector in India.

 So that wraps up about all the important stuff you need to know about taxes. In the next one, we shall deal with the railway budget. Cheerio!


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