Introduction to the Indian Tax System for Businesses:
The Tax system of India is as complex and complicated as the legal laws of the country. This is a multi-layered system and the businesses that are operating in India are needed to follow the laws. The x Act of 1961. This acts provides businesses and their subsidiaries with different provisions, regulations, assessments, and ways to calculate and assess tax collection in India.
It’s an interesting fact that is needed to be known that a company that doesn’t reside in India is only taxed on the income which the company is being able to make from the Indian Source. Their worldwide income is not even touched or asked by the government. This system on which Indian taxation is based is called to be a Residence based taxation system.
With the above fact, you would have surely been amazed and would be wondering what is Tax System in this country of 100 Billion people is and how the framework of taxation works. So today to answer your curiosity on the same. We have bought up an article for you where we will be discussing the Indian Tax System and how it works for a business that is formed in India or the ones that are being operated in the country with their offices here. Without wasting any more minutes let’s dive down into the article-
There are certain types of taxes that are being levied by the government on businesses. These taxes are as follows- GST(Goods and Services Tax), Customs Duty Tax, Corporate Income Tax, and Excise Duty.
Corporate Income Tax- This type of tax is imposed on the profits that a company makes. This tax is calculated on the basis of applicable tax rates and deductions that are allowed under the Income Tax Act.
GST(Goods and Services Tax)- Introduced in 2017, this is a tax that was levied on the supply of goods and services in the country. There were multiple indirect taxes in the country such as service tax, central excise duty, and value-added tax.
Customs Duty- Regulated by Customs and Excise Act, This tax is levied on the import and manufacture of goods.
Business and the Taxes in India
There are two types of taxes in India which are as follows- Direct Tax and Indirect Tax. The major difference that is upheld in these taxes is in the method of collection of these taxes, The impact of the taxes as well as their nature.
Direct Tax- This is a tax that is directly imposed on a particular person by the government. This tax is based on income, profits, or assets borne by an individual. Examples of these taxes are as follows- Income Tax, Corporate Tax, Wealth Tax, Dividend Distribution Tax, etc. This type of tax is directly collected by the government from individuals. Individuals are required to file their taxes to the government and pay them accordingly. The tax liability is based on income or profits earned by an individual during a specific period. This tax is based on the capability of an individual to pay, the higher the income is the higher the tax is to be paid by the individual. The concept behind this tax is to redistribute wealth and curb the differences in income.
Indirect Tax- The tax that is levied on the production, services, sales, or consumption of goods is called Indirect Tax. The Indirect tax examples are as follows- Goods and Services Tax, Value Added Tax, Excise Duty, Customs Duty Etc. These are indirectly passed on to customers as part of the price of the product or service charges. This tax is collected through businesses or individuals at the supply chain stage, starting from manufacturer to wholesale retailer, and the final chain ends at a retail customer. These taxes are suspicious and regressive in nature as these taxes do not consider the account of the taxpayer’s income level. A person who has a lower income is the one who suffers the most because of these taxes as because of these taxes the prices of certain commodities go on a high rise.
Corporate Taxation in India:
This is a tax that is directly levied on the company’s income in the country. This tax is also governed under Income Tax Act 1961 in the Indian tax system. This tax applies to domestic companies, foreign companies, and companies that are permanently established in India. There are certain factors that are to be taken into consideration,- this tax is dependent on the type of company the tax is being levied on. Another factor that plays a major role in this taxation is the level of income a company has to offer. The tax rate for foreign companies under Corporate Tax is a 40% surcharge and cess(varies if any treaty is being done with the home country of the company and the Indian Government), while for domestic companies, it is a 25% surcharge and applicable cess.
Income Tax Regulations and GST for Businesses:
Companies in India are required to file their income tax returns and pay taxes on the taxable income, This taxable income is calculated on various factors like-Revenue, Expenses, Deductions, etc. This is calculated by subtracting allowable deductions and exemptions from total income. The accounting method used is either cash or accruals basis and the other relevant provisions under the Income Tax Act of 1961. This is a must requirement for businesses to understand to avoid penalties and optimize tax planning strategies.
As mentioned above, GST is an indirect tax that is levied on goods and services in India. This is a tax that was able to bring a breakthrough change in the Indian tax system. Businesses after 2017 are required to register for GST and comply with various regulations and rules. These rules and regulations are related to invoicing, return filing, tax payments, etc.
Tax Compliance, Deductions For Businesses:
There are various taxes laws and regulations that are required by businesses to be followed. Apart from this, there are various types of deductions and exemptions that are given to businesses in India. All of this is granted on the basis of the Indian Tax Act 1961. Businesses can claim various exemptions on salaries, income from some other sources, rent, etc. They claim these to reduce their tax liability.
There are certain compliances as well that should always be done on time by these businesses and firms. These compliances include proper filing of returns and taxes on time. Financial records are the other major thing that is needed to be maintained by businesses and companies throughout the financial year.
India is a big market for different types of business establishments and companies. Companies from all around the world are looking to enter into the Indian Market. Also with the boom of startup culture, it needs to be understood that Indian-borne businesses are doing exceptionally well in their respective field. To have knowledge of the Indian Business diaspora and being able to comply with and follow Indian Business Laws and Regulations is something that should be kept as the first priority of companies. This will not only safeguard the business and their operations in India but it will also help these companies and establishment to grow and nurture their business in the country without any hassle or hassle.