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INVESTMENT

TAXATION SYSTEM IN INDIA

India has a well-developed tax structure with clearly demarcated authority between Central and State Governments and local bodies.

Central Government levies taxes on income (except tax on agricultural income, which the State Governments can levy), customs duties, central excise and service tax.

Value Added Tax (VAT), stamp duty, state excise, land revenue and profession tax are levied by the State Governments.

Local bodies are empowered to levy tax on properties, octroi and for utilities like water supply, drainage etc.

Indian taxation system has undergone tremendous reforms during the last decade. The tax rates have been rationalized and tax laws have been simplified resulting in better compliance, ease of tax payment and better enforcement. The process of rationalization of tax administration is ongoing in India.

Direct Taxes

In case of direct taxes (income tax, wealth tax, etc.), the burden directly falls on the taxpayer.

Income tax

According to Income Tax Act 1961, every person, who is an assessee and whose total income exceeds the maximum exemption limit, shall be chargeable to the income tax at the rate or rates prescribed in the Finance Act. Such income tax shall be paid on the total income of the previous year in the relevant assessment year.

Assessee means a person by whom (any tax) or any other sum of money is payable under the Income Tax Act, and includes -

(a) Every person in respect of whom any proceeding under the Income Tax Act has been taken for the assessment of his income (or assessment of fringe benefits) or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person;

(b) Every person who is deemed to be an assessee under any provisions of the Income Tax Act;

(c) Every person who is deemed to be an assessee in default under any provision of the Income Tax Act.

Where a person includes:

  • Individual
  • Hindu Undivided Family (HUF)
  • Association of persons (AOP)
  • Body of individuals (BOI)
  • Company
  • Firm
  • A local authority and,
  • Every artificial judicial person not falling within any of the preceding categories.

Income tax is an annual tax imposed separately for each assessment year (also called the tax year). Assessment year commences from 1st April and ends on the next 31st March.

The total income of an individual is determined on the basis of his residential status in India. For tax purposes, an individual may be resident, nonresident or not ordinarily resident.

Resident

An individual is treated as resident in a year if present in India:

1. For 182 days during the year or

2. For 60 days during the year and 365 days during the preceding four years. Individuals
fulfilling neither of these conditions are nonresidents. (The rules are slightly more liberal for Indian citizens residing abroad or leaving India for employment abroad.)

Resident but not Ordinarily Resident

A resident who was not present in India for 730 days during the preceding seven years or who was nonresident in nine out of ten preceding years is treated as not ordinarily resident.

Non-Residents

Non-residents are taxed only on income that is received in India or arises or is deemed to arise in India. A person not ordinarily resident is taxed like a non-resident but is also liable to tax on income accruing abroad if it is from a business controlled in or a profession set up in India.

Non-resident Indians (NRIs) are not required to file a tax return if their income consists of only interest and dividends, provided taxes due on such income are deducted at source. It is possible for non-resident Indians to avail of these special provisions even after becoming residents by following certain procedures laid down by the Income Tax act.

Status Indian Income Foreign Income
Resident and ordinarily resident Taxable Taxable
Resident but not ordinary resident Taxable Not taxable
Non-Resident Taxable Not taxable

 

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