Understanding India’s Tax Structure

Broadly, the tax system in India is three-tiered:

Central government: This branch levies some taxes. The central government collects tax on all types of income and wealth, part of sales tax, service tax, and customs, and excise duties.
State government: This level levies others. State governments collect intrastate sales taxes, entertainment and profession taxes, liquor manufacturing excises, stamp duties on transfer of property, and property taxes.
Local government: They collect the third and final set of taxes. Local governments levy octroi (taxes on goods brought into some cities) and charge for public utilities like water supply and sewerage.

As with most other areas of the Indian economy, the tax system has reforms that have been recently set in motion. These reforms were intended to rationalize the tax structure, to bring more people into the tax net, and to simplify the payment procedures. Indian tax rates are moderate, with a peak tax rate of 33.6 percent (a typically bureaucratic number) for individuals and the same flat rate for corporations. You can file your tax returns online, and the introduction of the Permanent Account Number (PAN) has helped track money through the system. The government has made arrangements for non-residents and expatriates doing business in India to acquire a PAN. For more on getting a PAN, see Chapter 5.

Tax types

Two main types of taxes exist in India: direct and indirect. Direct taxes are a burden on ...

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