Taxes in India: Taxation System, Types and Applicable Laws

Overview: How taxation works in India

Direct taxes are imposed on income or specified taxable events of a person, business or other entity. Indirect taxes are generally charged on goods, services or imports and may be passed on through the supply chain. Article 265 of the Constitution of India provides that no tax shall be levied or collected except by authority of law. The Constitution allocates taxing powers among the Union and States; the Constitution (One Hundred and First Amendment) Act, 2016 introduced the constitutional framework for GST, including Article 246A and Article 269A.

Taxes commonly encountered include income tax, goods and services tax (GST), customs duty, securities transaction tax, central excise on specified goods, stamp duty, property tax, motor vehicle tax and State excise. Their scope and collection authorities differ.

1. Income tax in India

Income tax is a direct tax on taxable income, administered by the Income Tax Department. The Income Tax Department publishes the applicable legislation, rules, forms, circulars and taxpayer guidance. The law applicable to a particular tax year, including transition to any new enactment, must be checked before relying on a section number or rate.

Persons and entities subject to income tax

Depending on the applicable charging provisions, income tax may apply to individuals (including non-residents), Hindu undivided families (HUFs), firms, limited liability partnerships, companies, associations of persons, bodies of individuals, local authorities, trusts and other juridical persons. Tax liability depends on residential status, the nature and amount of income, applicable exemptions and the tax regime chosen or prescribed. Filing obligations may arise even where final tax payable is nil.

Five traditional heads of income

1. Salaries: salary, taxable allowances, perquisites and qualifying pension income.
2. Income from house property: income calculated under the statutory rules for property ownership and letting.
3. Profits and gains of business or profession: taxable business and professional income.
4. Capital gains: gains arising from transfers of capital assets, subject to applicable rules and exemptions.
5. Income from other sources: income not chargeable under another head, including certain interest, winnings and taxable gifts.

Gross total income generally represents income computed across the relevant heads after permitted aggregation and loss set-off. Total income is determined after eligible deductions, where applicable. Rates, rebates and deductions differ by taxpayer category and tax regime; older fixed exemption limits should not be used for current returns.

Taxpayers may also need to comply with tax deducted at source (TDS), tax collected at source (TCS), advance tax, self-assessment tax, audit and reporting provisions. Use the official e-filing portal for returns, payments and services.

2. Wealth tax: Historical tax, now abolished

The Wealth-tax Act, 1957 formerly imposed a tax on specified net wealth, subject to exclusions and exemptions. Wealth tax was abolished with effect from assessment year 2016-17. The old rules concerning a Rs. 30 lakh threshold, 1% levy and categories of taxable assets are historical and do not create a current wealth-tax filing obligation. Ownership, sale or transfer of assets can still have income-tax, stamp-duty or other tax consequences.

3. Gift tax and income-tax treatment of gifts

India does not impose the former stand-alone Gift-tax Act levy on ordinary current gifts. However, receipts of money or property without consideration, or for inadequate consideration, can be taxable under the applicable income-tax provisions, including the rules historically set out in section 56(2)(x) of the Income-tax Act, 1961. The exact governing provision must be checked for the relevant tax year.

Under the section 56(2)(x) framework, monetary gifts from non-exempt sources exceeding Rs. 50,000 in aggregate in a financial year can result in the entire qualifying sum becoming taxable, not merely the excess. Separate valuation and threshold rules apply to immovable property and specified movable property such as shares, securities, jewellery, bullion and artwork. The treatment of undervalued property transfers depends on statutory tolerances and valuation rules.

Important exemptions can apply, subject to conditions, to receipts from specified relatives, on an individual's marriage, under a will or inheritance, in contemplation of death, and from specified authorities or eligible institutions. Relative has a defined meaning for these provisions and should not be interpreted as covering every family relationship. Employer-provided gifts may instead be considered under salary and perquisite rules. Gifts to minors may also trigger clubbing provisions.

For more information see Gift Tax in India and the official income-tax resources.

4. Service tax and the GST regime

Service tax was a central indirect tax under the earlier regime. GST replaced service tax for most taxable services from 1 July 2017. Historical service-tax payment schedules, GAR-7 challans and half-yearly return dates are not the normal compliance rules for present-day GST supplies. Earlier liabilities, disputes and assessments may still be governed by saved provisions of the former law.

What is GST?

Goods and Services Tax is a destination-based tax on the supply of goods and services. The central framework includes the Central Goods and Services Tax Act, 2017, Integrated Goods and Services Tax Act, 2017, Union Territory Goods and Services Tax Act, 2017 and the relevant State GST Acts. The Central Board of Indirect Taxes and Customs (CBIC) provides central tax law and notifications, while the GST portal supports registration, returns and payments.

• CGST and SGST: generally apply together to intra-State taxable supplies.
• IGST: generally applies to inter-State taxable supplies and imports under the statutory framework.
• Input tax credit: allows eligible registered persons to credit specified input taxes, subject to restrictions and conditions.
• Reverse charge: makes the recipient liable to pay GST on notified categories of supplies and other specified cases.

Registration thresholds, composition eligibility, place-of-supply rules, tax rates, exemptions, invoicing and return requirements vary by facts and notifications. Consult the GST Council and the official portals for current decisions and enacted changes.

Read the historical overview of Service Tax in India.

5. Sales tax, VAT and Central Sales Tax

Before GST, States imposed value added tax (VAT) or sales tax on many sales of goods, and the Central Sales Tax Act, 1956 (CST Act) governed specified inter-State sales. GST subsumed VAT and CST for most goods, but some products remain outside GST or are subject to special transitional arrangements. Petroleum products and alcoholic liquor for human consumption require particular attention to the applicable constitutional and statutory treatment.

Inter-State sales under the CST Act

Section 3 of the CST Act describes when a sale or purchase takes place in the course of inter-State trade or commerce, including movement of goods from one State to another or transfer of documents of title during movement. Sections 4 and 5 address sales outside a State and sales in the course of import or export. Section 6 concerns liability to tax on qualifying inter-State sales, and section 8 deals with rates and conditions for specified sales. The present application of these provisions is limited by the GST framework and the goods still covered.

Registration, declarations and compliance

Where CST continues to apply, relevant registration and declaration requirements may involve statutory forms such as C, E-I, E-II, F or H, depending on the transaction. Section 10 specifies certain offences and penalties, including false declarations and other prohibited conduct. Section 17 addresses a company's liability in liquidation, and section 18 concerns liability of directors of a private company in specified circumstances. These are not substitutes for current GST compliance rules.

A movement of goods between branches is not automatically a sale under CST merely because goods cross State borders; under GST, however, certain supplies between distinct persons can be taxable even without consideration. Classification must therefore be made under the applicable law rather than old sales-tax assumptions.

See Sales Tax in India and the historical Central Sales Tax rate guide.

6. Securities Transaction Tax (STT)

STT is a transaction-based tax on specified purchases or sales of securities executed in prescribed circumstances, introduced by the Finance (No. 2) Act, 2004. Liability, rates and covered transactions depend on the security and type of transaction, including delivery-based equity trades and certain derivatives transactions. STT is distinct from income tax on capital gains or business profits. Refer to the current Finance Act and official tax guidance for the rate applicable on the trade date.

7. Customs duty

Customs duties generally apply to imports and specified exports under the Customs Act, 1962 and the Customs Tariff Act, 1975, read with applicable notifications. Charges can include basic customs duty, social welfare surcharge, applicable IGST on imports and trade-remedy duties such as anti-dumping duty. The applicable tariff classification, assessable value, country of origin, exemption and date determine the final liability. Consult CBIC and ICEGATE for customs services and notifications.

8. Central excise duty

Central excise was formerly a major manufacturing tax. GST subsumed central excise for most goods from July 2017. Excise remains relevant for specified products, including certain petroleum products and tobacco-related goods as provided by applicable legislation and notifications. State excise is separately relevant, notably for alcoholic liquor for human consumption. Rates and product coverage must be verified against current law.

9. State and municipal taxes

Stamp duty and registration charges

Stamp duty is generally levied on instruments or transactions under the Indian Stamp Act, 1899 as amended and applicable State stamp laws. Rates vary by State, document and transaction. Registration charges may apply separately under the Registration Act, 1908 and local rules. See Stamp Duty in Delhi.

Property and building tax

Urban local bodies impose property or building tax under municipal legislation, typically based on property classification, area, use and other local criteria. Municipal rates and payment procedures differ by jurisdiction.

Agricultural income and plantation income

Agricultural income has a defined treatment under central income-tax law, and certain States may impose taxes on agricultural or plantation income under their own laws. Whether a receipt qualifies as agricultural income depends on the applicable statutory definition and facts.

Other State levies

Motor vehicle tax, electricity duty, State excise and specified other levies may apply. The former luxury-tax framework has largely been subsumed into GST for covered supplies; it should not be assumed that old luxury-tax rates remain in force.

10. Official resources for current Indian tax law

• Income Tax e-Filing Portal - returns, tax payments and taxpayer services.
• Income Tax Department - legislation, circulars and guidance.
• GST Portal - GST registration, returns and payments.
• GST Council - council decisions and information.
• CBIC - GST, customs and excise notifications.
• ICEGATE - customs electronic services.
• India Code - central statutes and rules.

This article provides general information, not a determination of liability for any particular transaction. Consult the applicable enactment, Finance Act, State law and notifications for the relevant period.

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