Understanding the Tax Structure in India: A Key Pillar of Nation-Building

Taxes are the backbone of any nation’s development. Governments worldwide impose taxes to fund critical projects, including infrastructure, public education, military advancements, law enforcement, and more. In India, the tax system is designed not only to generate revenue but also to foster economic stability, promote equity, and drive national progress. Several path-breaking reformative changes have taken place in the taxation laws in terms of substantial legislation, organisational structure and procedures over the recent years. Together these changes seek to bring in efficiency and transparency in the system, reduction in tax complexity and litigation with an objective to improve investor confidence and improve tax compliance.

The Indian tax system primarily consists of two types of taxes: Direct Taxes and Indirect Taxes. India follows a financial/fiscal year from 1st April to 31st March and not calendar year for the purposes of all compliances.

1. DIRECT TAXES

The direct taxes are governed by the Income Tax Act and is levied by the Central Government. The Income Tax Act, 1961 is valid till 31st March 2026 i.e for Financial year 2025-26 after which it is being replaced by Income Tax Act, 2025(w.e.f 1st April 2026). The new laws aim at simplification of tax provisions, removal of redundant sections, and keep pace with the evolving technology and economic environment. The direct taxes are administered by the Central Board of Direct taxes under the Ministry of Finance.

For further details please visit the web site of CBDT at

https://www.incometaxindia.gov.in

India-France DTAA at : https://incometaxindia.gov.in/dtaa/108690000000000026.htm

1.1 Personal Income Tax: The personal income tax is levied on an individual depending on his residential status. The residential status for any particular financial year is determined on an objective criteria of number of days of stay in India. You are considered a Resident in India if any one of these is true(subject to certain conditions for Indian citizens or Persons of Indian Origin):

1. You stay in India for 182 days or more in a financial year, OR
2. You stay in India for 60 days in a year + 365 days in the last four years

If you are resident for a particular financial year, then the global income is taxable in India along with a compliance requirement to declare all foreign assets/income in India. Unlike the French quotient familial, India does not reduce tax based on family size. Each individual is a separate tax entity.

For Non-Residents, only the income that has source in India (accrue/arise/received or deemed to accrue/arise/received) is taxable in India. This includes salaries for services rendered in India, rent from Indian properties, capital gains from movable and immovable Indian assets including shares and securities, house etc , and interest from Indian bank accounts. Similarly, income from any business/profession set up and controlled in India is also taxable in India. However, as an NRI, filing an Income Tax Return(ITR) is mandatory if your Indian income crosses the basic exemption limit. Even if your income is below this limit, filing can help you claim refunds for TDS deducted on interest or rent etc under the applicable DTAAs.

In India, individual taxpayers can choose between two income tax regimes: the Old Tax Regime, which offers various exemptions and deductions, and the New Tax Regime, which provides lower tax rates with limited exemptions. Rates vary based on income slabs, making it a progressive tax along with applicable surcharges/cess depending on income levels. India relies on a combination of compulsory withholding of taxes and advance tax payments by the Individual to ensure that 90% of the tax liability is already met before the end of financial year on 31st March.

For NRIs, Tax Deducted at Source (TDS) /withholding taxes are deducted at applicable rates before the payment for rent, interest, dividend , property sale etc is made. Similarly, NRIs must also pay advance tax if their tax liability exceeds Rs 10,000 in a financial year. Penal Interest is applicable if advance tax is not paid. NRIs can file a request for lower deduction certificate if they are eligible for lower taxation rate under the DTAA provisions/ or if the income is below taxable limits to avoid the hassle of claiming refund later in their ITR.

1.2 Corporate Taxes: Companies and corporate entities pay corporate tax on their income. Companies resident in India are taxed on their worldwide income arising from all sources in accordance with the provisions of the Income Tax Act. A corporation is deemed to be resident in India if it is incorporated in India or if its control and management is situated entirely in India. Non-resident corporations are essentially taxed on the income from Indian sources. Typical revenue avenues for foreign companies include Licensing and Royalties towards technology, trademarks, or other intellectual property, Technical Services such as consulting, engineering, and IT support, to Indian companies, Income from financing through loans, or other financial instruments, Dividends from Investment in shares etc. The income earned from a business connection in India is taxable in India if the foreign company has a Permanent Establishment.

In India, corporate tax rates differ based on a company's residency status, turnover, and specific conditions. The standard rate for Domestic Companies is 25%(Turnover up to ₹4 billion)/30%(Turnover exceeding ₹4 billion). The domestic companies can also opt for concessional Tax Rates under new tax regime of 22% (plus a 10% surcharge and 4% health and education cess), resulting in an effective tax rate of 25.17%, provided they do not claim certain exemptions or incentives or a concessional rate of (plus a 10% surcharge and 4% cess), leading to an effective tax rate of 17.16% for new manufacturing companies incorporated on or after October 1,2019, and commencing production before March 31, 2023.

The standard tax rate for foreign companies is 35% of the total taxable income (plus applicable surcharge (2% for income between 10-100 million rupees and 5% for income greater than 100 million rupees) and cess (4%). In addition, the Indian government offers marginal exemptions if the total amount to be paid – including surcharges – exceeds certain income thresholds, so that the surcharge does not place a disproportionate burden on companies.

Tax Deducted at Source (TDS) /withholding taxes are deducted at applicable rates before the payment for rent, interest, dividend , property sale etc is made. However, taxpayers can file a request for lower/NIL deduction certificate if they are eligible for lower taxation rate under the DTAA provisions. The taxpayer can claim relief under the applicable Double Taxation Avoidance agreement at the time of filling annual Income Tax return as well. That, however, necessarily requires a valid Tax Residency Certificate among other documents. Foreign companies entering into international transactions with its Associated Enterprises that give rise to taxable income in India must adhere to Transfer Pricing compliance requirements under Indian tax laws.

The foreign companies are also liable for Minimum Alternate Tax (MAT) applicable at 15% on book profits if the normal tax liability is less than 15% of the book profit for companies that have a permanent establishment in India. However, MAT does not apply to certain types of income such as Dividends, Capital gains from the transfer of shares Royalties and fees for technical services. Foreign companies can avoid MAT if they are residents of countries with a double taxation agreement (DTAA) with India and they do not have a permanent establishment in India.

1.3 Securities Transaction Tax(STT): It is a direct tax payable in India on the value of securities including shares, derivatives, equity oriented mutual funds (excluding commodities and currency) transacted through a recognized stock exchange. The STT is levied and collected by the union government of India. STT can be paid by the seller or/and the purchaser depending on the transaction. The Securities Contract (Regulation) Act, 1956 defines Securities the transactions of which are taxable under STT. If a person is trading in securities and offering income or loss from such trading as business income, STT paid is allowed to be deducted as business expense.

1.4 Capital Gains Tax:- it is a tax imposed by the government on the profit or gain that arises from the transfer (sale/relinquish/gift etc) of a “capital asset”, such as stocks, bonds, immovable property etc. This tax applies in the year the transfer of the capital asset takes place. There are two types of capital gains: Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG), depending on the time the asset is held before being sold. The rate of taxation on such gains is determined on the basis of the nature of asset transferred and it’s period of holding. Though exemption/concessional rates are also applicable under the domestic laws for certain categories of investors like FIIs or certain instruments like government bonds.

For illustration, Short-Term Capital Gains (STCG) on Equity Shares and Equity-Oriented Mutual Funds, on which Securities Transaction Tax (STT) is applicable/listed on recognized stock exchanges, STCG is taxed at 20%. Whereas, the STCG on other assets are taxed as per the taxpayer’s applicable income tax slab rates. Similarly, Long-Term Capital Gains (LTCG) on Equity Shares and Equity-Oriented Mutual Funds on which STT is paid are taxed at 12.5%.

All capital gains must be reported in the Income Tax Return (ITR) for the relevant assessment year. The taxpayer must also pay other liabilities including advance Tax as applicable with relief under the DTAAs as well.

2. INDIRECT TAXES

Indirect taxes are levied on the production, sale, or consumption of goods and services. Unlike direct taxes, the burden of indirect taxes is borne by end consumers. Historically, this category included various taxes like VAT, excise duty, and entertainment tax. However, with the introduction of the Goods and Services Tax (GST) in 2017, India’s indirect tax system underwent a transformative change. The taxes are administered by the Central Board of Indirect taxes and customs under the Ministry of Finance.

2.1 Goods and Services Tax (GST):- The Goods and Services Tax (GST) has unified India’s fragmented tax structure by replacing multiple indirect taxes with a simplified regime. It eliminated the cascading effect of taxation, significantly reducing the cost of goods and services. GST is categorized into Central GST (CGST): Levied on intra-state sales, collected by the Central Government. State GST (SGST): Levied on intra-state sales, collected by State Governments and Integrated GST (IGST): Levied on inter-state sales, collected by the Central Government. GST Council is the Apex decision-making body for GST in India.

GST Rates in India: Effective from September 22, 2025, The GST Council has reformed the rates to ease compliance, boost consumption, and fuel economic growth.

• Essential items, including dairy products, 33 lifesaving drugs, and educational materials, are at a nil GST rate, while individual health/life insurance is exempted.​
• Daily essentials, agricultural goods, and healthcare equipment were moved to the 5% GST slab
• The standard rate for most of the products including automobiles like small cars, motorcycles and electronics appliances is 18% GST.​
• Sin goods such as pan masala, aerated and caffeinated beverages, and Specified actionable claims (betting, casinos, gambling etc), luxury vehicles face a steep GST rate of 40%.​

Further, Small businesses with a turnover of up to 15 million can opt to pay a fixed GST rate ₹ (1% for traders, 5% for restaurants, 6% for services) instead of regular GST under the Special Composition Scheme Under GST.

Foreign companies that supply goods or services to Indian consumers must register for the GST if its revenue exceeds the exemption threshold, which is ₹20 lakh for services and ₹40 lakh for commodities in most states. Registration is mandatory if the subsidiary is engaged in inter-state supply of goods or services or falls into specific categories such as e-commerce operators or input service distributors. Even if the revenue is below the threshold, GST registration is compulsory for subsidiaries involved in imports, exports, or operating as SEZ units. Additionally, separate GST registrations are required for operations in multiple states.
GST implications arise for payments to the parent company, such as royalties, fees for technical services, or dividends. However, GST is paid by the recipient of goods/services instead of the supplier in certain notified cases under the Reverse Charge Mechanism (RCM).
GST also applies to taxable services or goods provided by an Indian subsidiary to its foreign parent, classifying such transactions as export of services or goods. Similarly, commissions paid to foreign agents assisting with goods supply are generally not subject to Reverse Charge Mechanism since the place of supply is deemed to be outside India.
>Accordingly, the companies would be liable to conform to e-invoicing, file GST returns and other requirements under the GST.

2.2. Custom Duty: It is an indirect tax levied on goods imported into or exported out of the country. The primary objective of customs duty is to regulate the movement of goods across borders, protect domestic industries, and generate revenue for the government. This is levied by the Central Government. The Customs Act, 1962 governs the levy, collection, and enforcement of customs duties in India. Customs tariffs are prescribed under the Customs Tariff Act, 1975 and vary depending on the nature of the goods, their classification under the Harmonized System of Nomenclature (HSN), and the trade agreements between India and other countries. Preferential rates apply under Free Trade Agreements (FTAs), such as those with ASEAN, Japan, and South Korea and the EU.

The effective customs duty on imports is a combination of Basic Customs Duty (BCD) which is levied on all imported goods at rates specified in the Customs Tariff Act with rates typically ranging from 5% to 40%, Integrated GST (IGST) which is applied on imports to ensure parity with domestic goods, aligning with GST laws along with Social Welfare Surcharge (SWS) (levied at 10% of the Basic Customs Duty to fund social welfare schemes). Additional duties like Anti-Dumping, Safeguard, or Countervailing Duty (CVD) may also apply.

The government also levies Export Duty on select goods such as petroleum products, iron ore, and certain agricultural commodities to discourage their export and ensure domestic availability.

Customs Duty Exemptions and Concessions exist for specific Goods typically raw materials for manufacturing, goods imported for research and development with special announcements in Budget each year. Importers/exporters must comply with procedures for filing Bill of Entry (imports) and Shipping Bill (exports) and can avail reduced duty rates under FTAs by providing certificates of origin.

For further details please visit the web site of CBIC at

https://www.cbic.gov.in/

2.3 The Central Excise Duty (CED): It is an indirect tax placed on items made in India and intended for domestic use. The taxable event is manufacture,’ and central excise duty liability begins when the items are made. The duty is governed by the Central Excise Act, 1944, and the Central Excise Tariff Act, 1985. Central Excise Duty has been subsumed in GST except for the following products Crude petroleum, Diesel with a high rate of acceleration, Spirit of motion (commonly known as petrol) , Natural gas as a renewable energy source, Fuel for aviation turbines, Tobacco and tobacco products. The rates for central excise duty on petroleum products and tobacco are specified by the central government and are revised periodically based on fiscal and economic needs. As these products remain outside the GST ambit, the input tax credits from other business expenses cannot be offset against the excise duty paid on these fuels in India. A new "National Security & Health Cess" has been integrated into the excise structure to fund public health initiatives, ensuring the total tax incidence on tobacco products remains high (often exceeding 60-70% of the value) while simplifying the compliance process for manufacturers.

For further details please visit the web site of CBIC at

https://www.cbic.gov.in/