Income tax system in India. Why and how are people taxed

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Taxes are the main source of government revenue. These taxes can be direct or indirect. There are 56 direct taxes in India. Income tax happens to be the most well-known form of tax among people. Income tax is the tax paid by natural or legal persons as part of their income.

Income Tax in India | unsplash

Why central and state governments levy taxes

India’s constitution empowers central and state governments to collect taxes as income. The constitution specifies the taxes that must be collected by the two governments. Regarding these laws, the state and the central government promulgate laws.

The main taxes in force in India are income tax, wealth tax, corporation tax and GST.

Income tax falls under the jurisdiction of the central government, making it the authority for collecting and distributing these taxes. According to entry 82 of the trade union list of the Seventh Schedule of the Indian Constitution, the central government is empowered to tax non-agricultural income.

These taxes are levied on individuals, undivided Hindu families, companies, businesses, associations, organizations. Current income tax is governed by the Income Tax Act 1961, which replaced the British-era Indian Income Tax Act of 1922.

The law governs the aspects of collection, administration, collection and collection of income tax. Under this law, a person residing in India is liable to tax on his income earned in any part of the world, while a person not residing in India must pay taxes on income earned only in India. .

An important aspect of Indian income tax is that agricultural income is exempt. However, in accordance with the provisions of the constitution, a state government can tax farm income.

Income Tax in India |  unsplash
Income Tax in India | unsplash

What is the tax bracket system

The income tax structure in India follows a system of brackets. Under this system, slabs are laid and individuals or entities pay taxes on their income based on these slabs.

In accordance with the 2020 financial budget, here are the tax tiles with regard to income tax:

INCOME TAX SLAB TAX RATE
0- 250,000 None
250000-500000 5%
500001-750000 Rs 12,500 + 10% of total income exceeding 500,000
750001-1000000 Rs 37,500 + 15% of total income exceeding 750,000
100,0001-1250000 75,000 + 20% of total income exceeding 1,000,000
1250001-1500000 125,000 + 25% of total income exceeding 1,250,000
Above 1,500,000 187,500 + 30% of total income exceeding 1,500,000

Previously, age was also a factor in some tax brackets. People aged 60 to 80 and those over 80 were exempt from income tax if their income was less than 3 lakh and 5 lakh, respectively. However, that is not the case now.

The Indian income tax system also has a withholding tax system. Income from certain sources provided for in the provision is taxed before it is paid to the beneficiary.

One of the goals is to make the government available with funds throughout the year. The TDS applies to salaries, interest on securities, lotteries, horse racing winnings, insurance commissions, life insurance payments, among others.

Income Tax in India |  unsplash
Income Tax in India | unsplash

Society taxes

Corporate tax is levied on the income of companies. These taxes are levied at specific rates in accordance with the provisions of the Income Tax Act 1961.

Companies incorporated in India, companies that acquire income from India, foreign companies that have established themselves permanently in India, among others, are subject to corporation tax.

The corporate tax rates in India today are:

TYPE OF COMPANY TAX RATE
National company with turnover up to 250 crore 25%
National company with a turnover of over 250 crore 30%
Foreign companies 40%

Despite a well-structured tax system, tax evasion is one of the big problems in India. It is said that only one percent of India pays income tax.


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