Young Investor

Taxing issues

M.V.S. Santosh Kumar | Updated on February 26, 2011


As the much-awaited Union Budget is unveiled tomorrow, changes in taxation rates might be on the cards. If you are intimidated by all the jargon the Finance Minister is going to rattle out, take heart! Here are some basic explanations of important direct and indirect tax terms for easier Budget Day viewing.

Income tax

The tax which is imposed on an individual's income is the largest contributor to the government coffers from individuals. It is the direct form of tax and is computed based on an individual's income levels after exempting Rs 1.6 lakh. The taxable income is inclusive of salary, income from property, business and capital gains. Apart from initial exemption of Rs 1.6 lakh, tax payers also have an option of saving tax by investing in tax-saving instruments like PPF and ELSS, paying insurance premium, repayment of housing loan, paying rent and so on. For instance, for an individual with Rs 2.1 lakh income per annum who has invested Rs 20,000 in tax-savings instruments, the taxable income works out to Rs 30,000. At 10.3 per cent tax bracket (inclusive of cess and surcharge), the total tax would work out to Rs 3,090.

The exemption limit for women and senior citizens currently are at Rs 1.9 lakh and Rs 2.4 lakh respectively. The income tax paid would also include education cess and surcharge.

Wealth tax

Wealth tax is a direct tax which has to be paid year after year on the market value of the prescribed assets owned by an individual. The net wealth is calculated as the market value of the asset, less the debt owed by an individual. The prescribed assets include, land, commercial and residential property, cars, yachts, boats, aircrafts, gold, silver or platinum jewellery and cash-in-hand in excess of Rs 50,000. The tax has to be paid on such assets even if the asset doesn't yield any income.

Tax on these assets, like income tax, is exempt up to Rs 30 lakh; beyond this, a one per cent tax is levied uniformly. There is no surcharge or education cess on this. .

Excise duty

It is the largest indirect tax contributor for the Government of India. It is an indirect form of tax because although the end user may not pay directly, he will end up bearing the tax in the form of higher prices on products for which excise duty has been hiked.

All the goods which are produced or manufactured in India are liable to pay excise duty. However, the quantum of excise rate varies. For example , if the excise duty on cars, which is currently 10 per cent, is increased to 12 per cent on the budget day, manufacturers have to pay additional two percentage points of excise duty which they have to either absorb or pass-on to the end user.

Across the board excise duty hike is one of the expectations of the current budget which may push the prices up for certain manufactured goods.

Customs duty

The tax levied on any export or import of goods is called customs duty. This is the second largest indirect tax that contributes to the government coffers, given the amount of trade our country does. The import duty receipts for the Indian government are far higher than the export duty receipts which indicate the government's intent to encourage exports.

A 5 per cent hike in custom's duty of crude oil during the previous budget increased the prices by Rs 1.7 in case of petrol. Any roll back of this duty would reduce the burden either on the oil marketing companies or the consumers. In case of individuals, they are generally allowed duty free imports of up to Rs 12,000, beyond which they may have to pay customs based on the value of the product.

Service Tax

Service tax is an indirect tax levied on services provided and for which the service provider is responsible for. This tax can be recovered from the consumer by the service provider in course of his business transactions. For instance, your hotel bill is inclusive of the service tax and the hotel is responsible for paying these taxes. Currently, service tax rate is charged at 10.36 per cent.

Published on February 26, 2011

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