Taxation in India

India has a three-tier federal tax structure that consists of the following:

  • Union government

  • State government

  • Urban or rural local bodies of government

Distribution of Taxes

The power to levy taxes and duties is distributed among the three tiers of government.

  • The union government is empowered to levy main taxes or duties, such as customs duties, income tax, central excise tax, sales tax, and service tax.

  • The state governments are empowered to levy principal taxes, such as sales tax (tax on intrastate sale of goods), state excise tax, and tax on professions.

  • The local bodies of government are empowered to levy tax on areas such as properties and entry tax (tax on entry of goods for use/consumption within areas of the local bodies).

Income Tax

Income tax in India can be classified as described in the following table.

Tax Type Description

Tax Deducted at Source (TDS)

TDS is the tax collected from the assessee. This tax is deducted at the source when a specified type of income is accrued. For more information, see How to: Set Up Tax Deducted at Source.

Tax Collected at Source (TCS)

TCS is a tax collected by the seller from the buyer, when goods are sold or services are rendered. For more information, see How to: Set Up Tax Collected at Source.

Excise Tax

Central excise tax is an indirect tax levied on goods manufactured in India. Excisable goods are those that are movable, manufactured or produced in India, marketable or saleable in the market, and specified in the Central Excise Tariff Act. The actual sale of goods in the market is not required because excise tax is charged based on the manufacture of goods, and not on the sale. For more information, see How to: Set Up Excise Tax for India.

Sales Tax

Sales tax is imposed on commodities that are produced or imported and sold for the first time. The sales tax is collected by the seller of the taxable goods, although it is usually recovered by the seller from the purchaser. Each state has a sales tax classification and administration procedure. The tax levied on sales transactions that occur in the state where the transaction takes place is covered by VAT. For goods that are part of interstate movement, Central Sales Tax (CST) is applicable. For more information, see How to: Set Up Indian Sales Tax.

Service Tax

Service tax is an indirect tax imposed on taxable services. The provider of taxable services is liable for paying the service tax. If the service provider is also receiving taxable service, the service tax amount is treated as service tax credit. This service tax credit can be set off or it can be used to discharge the service tax liability. You can calculate the service tax on purchase and sales invoices and keep track of service tax credit and service tax liability. For more information, see How to: Set Up Service Tax.

See Also