Direct Tax

Indian taxation overview: Sense of duty.

India has embarked on a series of tax reforms since early 1990s. The focus of reforms has been on rationalization of the tax rates and simplification of procedures.

Direct tax in India is levied by central, state and local government bodies. Principal taxes including corporate tax, custom duties, central excise duty and services tax are levied by the central government. On the other hand states levy direct taxes like state excise duties, sales tax and stamp duties. Local government bodies levy octroi duties and other taxes of local nature like water tax and property taxes.

Income earned in a financial year is liable to tax as per the rates prescribed for that year. A financial year runs from 1 April to 31 March of the following year. India follows a residence based taxation system. Broadly, taxpayers may be classified as residents or non-residents. Individual taxpayers may also be classified as 'residents but not ordinary residents'.

An Indian company is always an Indian resident. Additionally, any other company whose affairs are wholly controlled and managed from India is also a resident. Any other company would be a non-resident.

Residential Status
An individual is resident in India if he is in India in the tax year for :

• 182 days or more; or
• 60 days or more (the period of 60 days stands changed to 182 days or more for Indian citizens or persons of Indian origins on a visit to India; and also for citizens of India who leave India for employment abroad as member of a crew of an Indian ship) during the tax year, and an aggregate of 365 days or more during the four years preceding the tax year.
• An individual who does not satisfy the above conditions is a non-resident.
• A resident is "not ordinarily resident" in India in any tax year if he:
• has been "non-resident" in India in nine out of the 10 previous years preceding that year: or
• has during the previous seven years, preceding that year, been in India for a total period of 729 days or less.

Taxability based on status

Heads of Income
The income is categorized under five broad heads or classes of income. The taxable component of the income is ascertained according to the rules for a particular head/class of income and then aggregated to determine the total taxable income. However, losses under certain heads cannot be aggregated with income earned under other heads.

Salaries cover those that are received for services rendered and include wages, pension, fees, commission and the taxable value of perquisites. For this purpose, valuation rules for certain standard perquisites, typically provided by employers in India, have been issued. Standard deduction is available from the salary income. The amount of deduction depends upon the amount of salary earned.

Income from house property includes income arising from use of residential and commercial property. Only two prescribed deductions are permitted while computing the income.

Profits and gains from business or profession covers income earned from business or profession net of permissible deductions, against the revenue earned. In addition, general non-specified revenue expenses, incurred for the business are also deductible.

Capital gains cover gains arising from transfer of capital assets. The period of holding determines the classification of the asset, which then determines the manner of taxation. Capital assets held for less than 36 months (12 months in case of shares/securities) are treated as short-term assets. Other capital assets are categorized as long-term capital assets. Long-term capital gains enjoy a lower rate of tax. This may further be reduced by making prescribed investments.

Sale of certain specified investments are subject to gross basis of taxation, under which tax is levied on value of transaction. Gain arising from transactions subject to gross basis of taxation is entitled to concessional tax treatment under income tax.

Income from other sources is the residuary head/class of income and covers any income not specifically dealt with under the other heads. A deduction in respect of expenses incurred for earning the income, is available.


Individuals
Tax rate for Individuals for Financial year 2011-12 (Assessment year 2012-13) is as follows:

Individual (except female/ senior citizen) Female (Below 65 years) Senior citizen (Above 65 years) Senior citizen (who is 80 years or more Rate 0 - 180,000 0 - 190000 0 - 240000 0-500000 Nil Rs. 180,001 to Rs. 500,000 Rs. 190,001 to Rs. 500,000 Rs. 240,001 to Rs. 500,000 - 10% Rs. 500,001 to Rs. 800,000 Rs. 500,001 to Rs. 800,000 Rs. 500,001 to Rs. 800,000 Rs. 500,001 to Rs.800,000 20% > Rs.  800,000 > Rs.  800,000 > Rs.  800,000 > Rs. 800,000 30%

Education Cess @ 3% of the Income Tax will be levied extra. Surcharge is not applicable

Foreign Nationals
Indian tax law provides for exemption of income earned by foreign nationals for services rendered in India, subject to prescribed conditions. For example

• Remuneration from a foreign enterprise not conducting any business in India provided, the individual's stay in India does not exceed 90 days and the payment made is not deducted in computing the income of the employer;
• Remuneration received by a person employed on a foreign ship provided his stay in India does not exceed 90 days;
• Remuneration of foreign diplomats, consular staff, trade officials and their staff and family; and
• Income of an employee or consultant of a government approved foreign charitable institutions.

Companies

Domestic Company
i. Income-tax: 30% of total income.

ii. Surcharge: The amount of income tax as computed in accordance with above rates, and after being reduced by the amount of tax rebate shall be increased by a surcharge at the rate of 7.5% of such income tax, provided that the total income exceeds Rs. 1 crore.

iii. Education Cess: 3% of the total of Income-tax and Surcharge.

Firms
i. Income-tax: 30% of total income.

ii. Surcharge: The amount of income tax as computed in accordance with above rates, and after being reduced by the amount of tax rebate shall be increased by a surcharge at the rate of 7.5% of such income tax, provided that the total income exceeds Rs. 1 crore.

iii. Education Cess: 3% of the total of Income-tax and Surcharge.

Kinds of Taxes

Annual Tax
An annual tax is levied on income earned, for a financial year, on the various taxpayers listed above as per the rates declared by the annual budget. The rates would vary with each budget. The annual tax is payable in advance by way of quarterly installments during the financial year. The quarters would vary depending on the taxpayer involved e.g. in the case of companies the payment for the first quarter would fall on 15 June of the financial year involved.

Minimum Alternate Tax (MAT)

i. Tax: 18% of the book profit.

ii. Surcharge: The amount of book profit as computed in accordance with above rates shall be increased by a surcharge at the rate of 7.5% of such income tax, provided that the total income exceeds Rs. 1 crore.

iii. Education Cess: 3% of the total of Income-tax and Surcharge.