Tax System in India: Direct and Indirect Taxes Explained

Direct Taxes

India has entered into Double Taxation Avoidance Agreements (DTAA) with 65 countries, including the US. In case of countries with which India has a DTAA, the tax rates are determined by such agreements.
Domestic corporations are granted credit on foreign tax paid by them while calculating tax liability in India. In the case of the US, dividends are taxed at 20%, interest income at 15%, and royalties at 15%.

Indirect Taxes

Excise Duty

The manufacture of goods in India attracts Excise Duty under the Central Excise Act 1944 and the Central Excise Tariff Act 1985. Herein, the term"Manufactur" means bringing into existence a new article having a distinct name, character, use, and marketability, and includes packing and labeling.
Most products attract excise duties at the rate of 16%. Some products also attract a special excise duty and an additional duty of excise at the rate of 8% above the 16% excise duty. A 2% education cess is also applicable on the aggregate of the duties of excise. Excise duty is levied on an ad valorem basis or based on the maximum retail price in some cases.

Customs Duty

The levy and the rate of customs duty in India are governed by the Customs Act 1962 and the Customs Tariff Act 1975. Imported goods in India attract basic customs duty, additional customs duty, and education cess. The rates of basic customs duty are specified under the Tariff Act. The peak rate of basic customs duty has been reduced to 15% for industrial goods. Additional customs duty is equivalent to the excise duty payable on similar goods manufactured in India. An education cess at 2% is leviable on the aggregate of customs duty on imported goods. Customs duty is calculated on the transaction value of the goods.
Rates of customs duty for goods imported from countries with whom India has entered into free trade agreements, such as Thailand, Sri Lanka, BIMSTEC, South Asian countries, and MERCOSUR countries, are provided on the website of the Central Board of Excise and Customs (CBEC).
Customs duties in India are administered by the CBEC under the Ministry of Finance.

Service Tax

Service tax is levied at the rate of 10% (plus 2% education cess) on certain identified taxable services provided in India by specified service providers. Service tax on taxable services rendered in India is exempt if payment for such services is received in convertible foreign exchange in India and the same is not repatriated outside India. The Cenvat Credit Rules allow a service provider to avail and utilize the credit of additional duty of customs/excise duty for payment of service tax. Credit is also provided on payment of service tax on input services for the discharge of output service tax liability.

Securities Transaction Tax

Transactions in equity shares, derivatives, and units of equity-oriented funds entered into a recognized stock exchange attract Securities Transaction Tax at the following rates:

• ...