Get ready for the Budget 2018

Expected big news – Budget expected to focus on direct taxes

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While there are unlikely to be any major changes in indirect tax as most of them are now under the purview of the Goods and Services Tax Council, Budget 2018 could have several positive changes on the direct tax side, according to analysts.

Basics check

What is a ‘Direct Tax ‘?

  • A direct tax is paid directly by an individual or organization to an imposing entity. A taxpayer, for example, pays direct taxes to the government for different purposes, including real property tax, personal property tax, income tax or taxes on assets.
  • Indirect taxes on the other hand is when tax is levied on one entity, such as a seller, and paid by another, such as a sales tax paid by the buyer in a retail setting.

BREAKING DOWN ‘Direct Tax ‘

  • Direct taxes are based on the ability-to-pay principle. This principle is an economic term that states that those who have more resources or earn higher income should pay more taxes. The ability to pay taxes is a way to redistribute the wealth of a nation.
  • Direct taxes cannot be passed onto a different person or entity; the individual or organization upon which the tax is levied is responsible for the fulfillment of the full tax payment.
  • However, this sometimes acts as a negative. Direct taxes, especially in a tax bracket system, can become a disincentive to work hard and earn more money, because the more money a person earns, the more taxes he pays.

List of Direct Taxes In India:

Income Tax

  • It is charged directly on the income of a person.
  • The rate at which it is charged varies, depending on the level of income.
  • It’s charged to individuals, co-operative societies, firms, companies, Hindu Undivided Families (HUFs), trusts and any artificial judicial person.
  • Income tax is charged on an income known as “taxable income”, which is:

Taxable income = (total income) – (applicable deductions and exemptions).

The different heads of income under which income tax is chargeable are:

  1. Income from house and property.
  2. Income from business or profession.
  3. Income from salaries.
  4. Income in the form of capital gains.
  5. Income from other sources.

Corporate Tax

  • Levied on companies who exist as separate entities from their shareholders.
  • Foreign companies are taxed on income that arises, or is deemed to arise, in India.
  • It is charged on royalties, interest, gains from sale of capital assets located in India, fees for technical services and dividends.
  • Includes Minimum Alternative Tax (MAT) which was introduced to bring Zero Tax companies under the income tax net
  • Includes Fringe Benefit Tax (FBT) which is a tax that companies pay on the fringe benefits provided (or deemed to have been provided) to employees.
  • Incudes Dividend Distribution Tax (DDT) which is a tax levied on any amount declared, distributed or paid as dividend by any domestic company. International companies are exempt from this tax.
  • Includes Securities Transaction Tax (STT) which is a tax levied on taxable securities transactions. There is not surcharge applicable on this.

Wealth Tax

  • Wealth tax is charged on the benefits derived from property ownership.
  • The same property will be taxed every year on its current market value.
  • Wealth tax is charged whether the property in earning an income or not.
  • The tax is levied on the individuals, HUFs, and companies alike.
  • Chargeability depends on residential status.

Capital Gains Tax

  • Taxed on the income derived from the sale of assets or investments.
  • Capital investments cover homes, farms, businesses, works of art, etc.
  • Capital gains = (money received from sale) – (cost of capital investment).
  • Categorized as short-term gains (gains on assets sold within 36 months of acquisition) and long-term gains (gains on assets sold after 36 months of acquisition and holding).
  • Voluntary tax that is paid by the taxpayer when the asset it sold.

Tax Rates for Different Types Of Direct Taxes:

Income Tax

In India, Income Tax is charged according to slabs which outline the details for different tax rates for different levels of income.

For individual residents under 60 years of age:

Income Slabs Tax Rates
Taxable income under Rs.2,50,000. NIL.
Taxable income between Rs.2,50,000 and Rs.5,00,000. 10% of the amount by which the taxable income exceeds Rs.2,50,000.
Less: Tax Credit u/s 87A – 10% of taxable income (up to a maximum of Rs.2,000).
Taxable income above Rs.5,00,000 and Rs.10,00,000. Rs.25,000 plus 20% of the amount by which the taxable income exceeds
Taxable income above Rs.10,00,000. Rs.1,25,000 plus 30% of the amount by which the taxable income exceeds Rs.10,00,000.
  • The Corporate Tax rate for domestic companies is 30%.

Wealth Tax- Wealth tax has been abolished (with effect from April 1, 2016 for wealth held as on March 31, 2016)

Benefits of Direct Taxation:

  • Equitable: The burden of direct taxes can’t be shifted, and an equitable sacrifice of income and wealth can be achieved from all sections of society through progressive taxation.
  • Economical: Income tax and most other forms of direct taxation are done at source with the help of TDS (Tax Deduction at Source), and are hence not a problem for the government to collect.
  • Certainty: There is a sense of certainty from the taxpayer and the government, as each know how much to pay and how much to expect to collect respectively.
  • Productivity: Direct taxes are very productive in the sense that as the working population andcommunity grows, so do the returns from direct taxation.
  • Consciousness of duty: When people consciously pay their taxes, they can claim the right to know how their money is being spent by the government.
  • Creates equal distribution of wealth: The government charges more taxes from those that can afford them, and uses this money to uplift the lower and poorer sections of society.

Now coming to the expected changes in direct taxes in budget 2018

However, the key consideration while reducing direct taxes, either for individuals or corporates, would be to ensure that the changes don’t reduce government revenue too much, as there is already the possibility of overshooting the fiscal deficit target.
• The changes that are expected of the upcoming budget
o One of the things the Budget could introduce a standard deduction for salary payers
o The other thing that could change is the medical reimbursement limit of Rs. 15,000, which is an archaic limit. So that could go up.
o The income tax slabs could be tweaked.
o There is a chance the government may introduce a long term capital gains tax on equity shares, or may remove the dividend distribution tax.
o There could be some changes on the corporate tax front as well, according to analysts, but they added that the government will be careful with these in order to minimise the impact on the exchequer.• Chief Economic Adviser Arvind Subramanian, made it clear that changing the income tax slabs to reduce the tax burden on the salaried and middle class was one of the government’s key focus areas.
• The GST has subsumed most of the indirect taxes, and so there are very few avenues for changes. On indirect tax, there is hardly anything the Budget can do
• Against the backdrop of consistently rising oil prices, there has been an increasing demand for a cut in the excise duty on fuel. However, indications from both the government and the private sector suggest that this will not happen in this Budget.

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