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Taxation System in India

India has a well-developed tax structure with obviously demarcated authority between Central and State Governments and local bodies. Central Government levies taxes on income, central excise, customs duties, and service tax. Value added tax (VAT), stamp duty, State Excise, land revenue and tax on professions are levied by the State governments. Local bodies are empowered to levy tax on properties, octroi and for utilities like water supply, drainage etc. In last 10-15 years, Indian taxation system has undergone wonderful reforms. The tax rates have been rationalized and tax laws have been simplified resulting in better compliance, ease of tax payment and better enforcement. The procedure of rationalization of tax administration is ongoing in India. The Most of the State Governments in India have replaced sales tax with VAT.

Direct Taxes
  • Tax on Corporate Income
  • Capital Gains Tax
  • Personal Income Tax
Indirect Taxes
  • Excise Duty
  • Customs Duty
  • Service Tax
  • Securities Transaction Tax
  • Sales Tax/VAT

Direct Tax

Taxes on Corporate Income:
Companies residents in India are taxed on their worldwide income arising from all sources in accordance with the provisions of the Income Tax Act. Non-resident corporations are basically taxed on the income earned from a business connection in India or from other Indian sources. A corporation is deemed to be resident in India if it is incorporated in India or if it's control and management is situated entirely in India. Domestic corporations are subject to tax at a basic rate of 35% and a 2.5% surcharge. Foreign corporations have a basic tax rate of 40% and a 2.5% surcharge. In addition, an education cess at the rate of 2% on the tax payable is also charged. Corporates are subject to wealth tax at the rate of 1%, if the net wealth exceeds Rs.1.5 mn.

Capital Gains Tax:
Tax is payable on capital gains on sale of assets. Long-term Capital Gains Tax is charged if
  • Capital assets are held for more than three years and
  • In case of shares, securities listed on a recognized stock exchange in India, units of specified mutual funds, the period for holding is one year.
Long-term capital gains are taxed at a basic rate of 20%. However, long-term capital gain from sale of equity shares or units of mutual funds is exempt from tax.

Personal Income Tax:
Personal income tax is levied by Central Government and is administered by Central Board of Direct taxes under Ministry of Finance in accordance with the provisions of the Income Tax Act. The rates for personal income tax are as follows:
  • Income range (Rupee) Tax Rate (%)
  • 0-100,000 Nil
  • 1,00,000-1,50,000 10
  • 1,50,000-2,50,000 20
  • 2,50,000 and above 30
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