Direct Taxes in India

Direct tax is a tax directly paid to the government by the individuals or organizations on whom it is imposed.  The main examples of Direct Taxes are Income Tax, Gift Tax, Wealth Tax, Property Tax etc.

Important Laws on Direct Tax

The Various laws under direct taxes are collected in India are as follows:

Income Tax Act, 1961

This act sets out the rules and regulations for collection of taxes on income that comes from any source such as business, owning a property, gains received from investments, salaries and pensions, winning in lottery etc. The income tax slabs, various tax benefits etc. are listed in this act.

Wealth Tax Act, 1951

Wealth Tax, 1951 is the law for collection of tax on net wealth of individuals and HUFs in India. This tax was abolished 2015 due to its meagre contribution. At the time of its abolition, it was calculated as 1% of the net wealth (wealth –debt) of a person / HUF exceeding Rs. 30 Lakh. Currently, its place has been taken by surcharges on income above Rs. 50 Lakh and Rs. 1 Crore.

Gift Tax Act, 1958

Gift Tax, 1958 was enacted to charge tax on gifts from the recipients. Any person was liable to pay 30% tax on gifts. It was abolished in 1998. Currently, gifts received from family members (parents, siblings, cousins, spouse, uncles and aunts) are not taxable. Apart from these, the gifts received from local authorities are also non-taxable. Other gifts are taxable if the gift amount exceeds Rs. 50000.

Income Tax

Income tax is most well known and higher resource mobilizer for Indian exchequer. It is levied on income earned by an individual or business in a financial year. Thus, there are two kinds of Income Taxes viz. Personal Income Tax and Corporation Tax.

Personal Income Tax

Personal Income tax is levied on individuals and HUF (Hindu Undivided Families) by the Central Government. The levy of the Income tax follows the principle of “ability to pay” and is a progressive tax. This implies that those who can pay more should pay more; as the rate of tax increases as the taxable amount increases. On this basis, low income people have been exempted from the Income Tax with minimum exempt limit varying from year to year. Currently, the minimum taxable income with reference to Income Tax is Rs. 250,000. It was Rs. 40,000 in 1995-96 budget. The current income tax slabs are as follows:

Capital Gains Tax

Capital gain stands for profit from sale of a property or investments such as shares, gold, real estate and valuables like paintings, antique items etc. The taxable income in capital gains tax is the difference of price of asset/share when purchased and when sold. Capital Gains tax is of two kinds viz. short term and long term. At present, while there is a 15% tax on short term capital gains, the long term capital gains are not taxed in India. One year is the period which separates long and short terms for this purpose.

Securities Transaction Tax

This tax was introduced in 2004 by UPA government to avoid the tax evasion in case of capital gains. It is levied on the value of the securities.

Perquisite Tax

Perquisites refer to all the perks or privileges that employers extend to their employees. This may include houses, vehicles, phone bills, tour packages, etc.

Corporate Income Tax

Corporation Tax is levied on the net income of the companies. The rates of corporate taxes in India were very high once upon a time. They were reduced gradually since liberalization and it was pegged at around 35% in 2005-06. Still, India is ahead of many economies in terms of corporation tax.

Currently, basic tax rate for domestic companies is 30% and for foreign companies is 40%.  A minimum alternate tax (MAT) is levied at 18.5 percent of the adjusted profits of companies where the tax payable is less than 18.5 percent of their book profits.  After including surcharges, the current effective corporate taxes are 33.9% for domestic companies and 43.26% for foreign companies. The effective rate of dividend distribution tax remains at almost 17%. Large dividend tax-paying companies include ONGC, Coal India, TCS, ITC, NTPC etc.

A brief description of different types of corporate taxes is as follows:

Minimum Alternative Tax (MAT)

MAT was first introduced in Finance Act 2000 at 7.5% of book profits. Over the years, this tax has increased and now stands at 18.5%, however, the companies in infrastructure and power sector are exempted from this tax. Once MAT is paid, the company can carry the payment forward and set it off against the regular tax payable during the subsequent five year period subject to certain conditions.

Fringe Benefit Tax (FBT)

FBT was applied to every fringe benefit passed by an employer to their employees. It covered numerous heads such as LTA, employee welfare, accommodation, entertainment, Employer Stock Option Plans (ESOPs) etc. It was started in 2005 and scrapped in 2009.

Dividend Distribution Tax (DDT)

DDT was introduced after the 2007 budget. This tax is levied on companies based on the dividends they pay to investors.  At present, DDT is 15%.

Banking Cash Transaction Tax

BTT was in force between 2005-2009 and was 0.1% of every bank transaction.

Marginal Tax Rate

Marginal Tax Rate refers to the amount of tax paid on an additional rupee of income. The marginal tax rate for individuals increases as their income increases. In India, the marginal tax rate has remained around 33-34% for the last two decades. Currently it stands above 35% for high earners.

Tax on Agricultural Income

In India, the agricultural income is exempt from tax by virtue of section 10(1) of Income Tax Act. Under the law, the agricultural income is defined as:

• Any rent or revenue derived from land, which is situated in India and is used for agricultural purposes.
• Any income derived from such land by agricultural operations including processing of agricultural produce, raised or received as rent-in-kind so as to render it fit for the market or sale of such produce.
• Income attributable to a farm house (subject to some conditions).
• Income derived from saplings or seedlings grown in a nursery.

Kindly note that for some farming activities, fraction of the income is taxable. For example, for tea cultivation (40-60 ratio is used, which implies that 40% income is considered Business Income while 60% is agricultural income. This figure stands at 35-65 for latex, 25-75 for coffee growing and curing; 40-60 for coffee growing, curing, roasting and grounding.