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Know your taxes

Tax is one thing which everyone has to bear with and so it is better to know about your liabilities.

Tax is one of those terms, which is persistent in everyone’s life and it’s not just hard but almost impossible to escape it. Whether an employee, self-employed or employer/entrepreneur, everyone is liable to pay a part of his/her earnings and possessions to the government. The only way to escape it is to plan long-term savings.


What is Tax?


Tax is a fee charged or ‘levied’ by a government on a product, income, or activity. If tax is levied directly on personal or corporate income, then it is a direct tax. If tax is levied on the price of a good or service, then it is called an indirect tax. Personal income tax and corporate income tax are direct taxes whereas taxes like central excise, sales tax, service tax, and value added tax (VAT) are indirect taxes. Tax keeps on increasing in proportion to your financial growth.


Taxes to be taken care of


1. Central Excise Tax: It is a tax which is primarily for the manufacturers and traders whose turnover is above Rs 1.5 crore. Excise duty on most commodities ranges between 0 to 16 per cent. However, duty imposed on seven items, namely, motor cars, tyres, aerated soft drinks, air conditioners, polyesters filament yarn, pan masala and chewing tobacco is 32 per cent. Though, central value added tax or CENVAT, (tax on the goods manufactured as per the central excise and customs act definition) is applicable to practically all manufactured goods, to avoid cascading effect on duty. Small Scale Sector is exempted from paying excise duty on annual production up to Rs10 million.


2. Central Sales Tax (CST): This tax is generally levied on the sale of all goods by a dealer in the course of inter-state trade or in the course of import into or export from India. CST is charged at the rate of 4 per cent on the manufactured goods. A sub tax to CST is local sales tax, which is applied when sales take place within the state. This can go up to 15 per cent depending on the state law. Under this, export business is exclusively tax-free because foreign currency comes to India but Import on the other hand is heavily taxed via heavy import duties.


3. Service Tax: Such a tax is basically applicable to the service industry but if manufacturers have a service arm then it is applicable to that as well. Recently, government enhanced the service tax to 8 per cent.


4. Value Added Tax (VAT): VAT is the indirect tax on the consumption of goods, paid by its original producers upon the change in goods or upon the transfer of the goods to its ultimate consumers. It is based on the value of the goods, added by the transferor. Currently VAT is charged at 12.5 per cent.


Every small business comes under the sphere of taxation but the problem is that although every entrepreneur is aware about his/her tax liabilities, but suffers from mismanagement. Taxation when done manually is a very cumbersome process involving lots of time, money and manpower. The solution to this is IT business solutions, which help organising and streamlining the entire taxation process for the entrepreneur, thereby saving time and manpower.  Dinesh Konchady, Consultant at Inode Technologies says, “About 40 per cent of the workforce in any small business is stuck in solving complex tax process, which means a huge loss of precious time and human resource.” He further says, “We see the SMB (small and medium business) segment in India as a strong area for growth and believe that technology can be used as the cutting edge tool for solving all SMB related issues.”


Ways to reduce Tax Liabilities:


The government offers many incentives to investors in India with a view to stimulate industrial growth and development. These concessions or Tax Holidays as they call are meant to attract more and more people to taxation.

 These rebates include:


A)    Five year tax holiday for:

  1. Power projects
  2. Firms engaged in exports
  3. New industries in notified states like the north eastern region and the state of Sikkim and for new industrial units established, in electronic hardware/software parks
  4. Export oriented units and units in free trade zones i.e. special economic zones ( SEZs)
  5. As per 1994-95 budget, firms engaged in providing infrastructure facilities, can also avail of this benefit

B)     Deduction of 30 per cent of net income for 10 years for new industrial undertakings.


C)    Deduction of 50 per cent on foreign exchange earnings by construction companies, hotels and on royalty, commission etc. earned through foreign exchange.


D)    Any company engaged in scientific and industrial research and development activities.


Konchady says, “Reducing tax liabilities within corporate sector is possible only if the government announces partial or full subsidy to products/services or they become tax-free. Currently products under such scheme are baby food like Parle-G; agricultural machines and tools; and services related to agriculture and defense.”


Apart from the above, other means of reducing taxes is by investing in various saving schemes like the Government Savings Bank, Government Saving Certificates, Public Provident Fund, Post Office Saving Scheme, Bonds and Debentures and Equity Linked Savings Scheme, which have been very popular within insurance sector.


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