TAX MANAGEMENT CIA 1: COMPONENT 1

COMPARISON OF TAX STRUCTURE BETWEEN INDIA

SUBMITTED BY-
AND AFGHANISTAN KOMAL AGRAWAL

INTRODUCTION REGISTER NO. – 1720148

CLASS – 5 BBA A
Tax Structure & Taxation System in India

India offers a well-structured tax system for its population. Taxes are the largest source of income

for the government. This money is deployed for various purposes and projects for the development of the nation.

Taxes are determined by the Central and State Governments along with local authorities like municipal

corporations. The government cannot impose any tax unless it is passed as a law.

Types of taxes

Taxes are classified under two categories namely direct and indirect taxes. The largest difference between these

taxes is their implementation. Direct taxes are paid by the assessee while indirect taxes are levied on goods and

services.

A) Direct taxes

Direct taxes are levied on individuals and corporate entities and cannot be transferred to others. These include

income tax, wealth tax, and gift tax.

Income tax

As per the Income Tax (IT) Act, 1961 every assessee whose total income exceeds the maximum exempt limit is

liable to pay this tax. The tax structure and rates are annually prescribed by the Union Budget. This tax is

imposed during each assessment year, which commences on 1st April and ends on 31st March. The total income

is calculated from various heads such as business and profession, house property, salaries, capital gains, and

other sources. The assesses are classified as individuals, Hindu Undivided Family (HUF), association of persons

(AOP), body of individuals (BOI), company, firm, local authority, and artificial judiciary not falling in any other

category.

B) Indirect taxes
Indirect taxes are not directly paid by the assessee to the government authorities. These are levied on goods and

services and collected by intermediaries (those who sell goods or offer services). Here are the most common

indirect taxes in India:

o Value Added Tax (VAT)

This is levied by the state government and was not imposed by all states when first

implemented. Presently, all states levy such tax. It is imposed on goods sold in the state and

the rate is decided by the state governments.

o Customs duty

Imported goods brought into the country are charged with customs duty which is levied by the

Central Government.

o Octroi

Goods that move from one state to another are liable to octroi duty. This tax is levied by the

respective state governments.

o Excise duty

All goods produced domestically are charged with excise duty. Also known as Central Value

Added Tax (CENVAT), this is paid by the manufacturers.

o Service Tax

All services provided domestically are charged with service tax. The tax is paid by all service

providers unless specifically exempted.

C) Goods and Service Tax (GST)

As a significant step towards the reform of indirect taxation in India, the Central Government has introduced the

Goods and Service Tax (GST). GST is a comprehensive indirect tax on manufacture, sale and consumption of

goods and services throughout India and will subsume many indirect taxes levied by the Central and State

Governments. GST will be implemented through Central GST (CGST), Integrated GST (IGST) and State GST

(SGST).

Four laws (IGST, CGST, UTGST & GST (Compensation to the States), Act) have received President assent. All

the States & UT expected to pass State GST Act, by end of May 2017. GST law is expected to take effect from

July 1, 2017.
Tax Structure & Taxation System in Afghanistan

In the early 1980s, direct taxes accounted for about 15% of government revenues. The share provided by

indirect taxes declined from 42% to 30%, as revenues from natural gas and state enterprises played an

increasing role in government finance. Tax collection, never an effective source of revenue in rural areas, was

essentially disabled by the disruption caused by fighting and mass flight. Under the Taliban, arbitrary taxes,

including those on humanitarian goods, were imposed.

In 2005 the government introduced an income (or wage) tax. Employers with two or more employees were

required to pay 10% on annual income over about $3,500 and 20% on income over about $27,000.

Corporate taxes

No matter what kind of legal form the company has, all of them are required to pay a corporate tax of 20

percent. That can be found in the 4th article of the Afghan Income Tax law.

Value-added tax (VAT)

In 2014 the parliament of Afghanistan worked close to International Monetary Fund to raise the domestic

revenues and therefor added a value-added tax (VAT) of 5 percent. Although, the existing law does not include

all goods and services (hotels are affected for example), the government is planning to broaden this tax. VAT

affects both domestic business people and their trade partners. The domestic tax payer is obliged to pay the VAT

on the taxable supply and the importer is obliged to pay the VAT on the taxable imports.

Business receipt tax (BRT)

Afghanistan has many different tax rates of business receipt tax on their goods and services. The size of the

business receipt tax depends on which kind of company and how large the company is. Lowest BRT has travel

agents, culture, smaller restaurants and commodities with a tax rate of 4 percent. The lager restaurants, hotels

and club halls have to pay 5 percent in business receipt tax. That tax rate was increased during 2015, from 2

percent to 4 percent, when the government wanted to increase the state revenues to finance the increased need

for aid and foreign arms.

Income taxes

Individuals are subject to tax at progressive rates, calculated monthly.

 Income slab per month (AFN) Applicable Rate

0 - 5,000 0%

5001-12,500 2%

12,501-100,000 10% + AFN 150

100,001 and above 20% + AFN 8,900

The development of the fiscal situation in Afghanistan during 21st century

Since the beginning of the 21st century, governmental revenues have aggregately increased. One of the reasons

for this improvement is a more efficient tax system. However, revenues have been less than what they planned

for due to situations such as tax evasion and the large drug market, tightening constraints on the budget. In 2015,

the government made some improvements of both the tax administration and the customs and that made the

revenues increase during 2015.

Customs and fees

Except from the regular taxes on income and corporations, there are a number of other different customs and

fees that have increased in Afghanistan after the creation of NUG (National Unity Government), resulting in

increasing revenues for the state. To begin with, there are general increases of customs fees on certain items and

air space fees. There is also a tax on fuel import and a 10 percent fee on cellphone top-up cards.
 Comparison of tax structure of India and Afghanistan

INDIA AFGHANISTAN

ADMINISTRATION The Indian fiscal year runs from 1 April to
31 March. All companies must file tax
returns by 30 September or 30 November
(for companies undertaking international
transactions; see the discussion of transfer
pricing in Section E). Tax is payable in
advance on 15 June, 15 September,
15 December and 15 March. Any balance of
tax due must be paid on or before the date of
filing the return. The carry forward of losses
for a fiscal year is not allowed if a return is
filed late.
A non resident with a liaison office in India
is required to submit a statement in the
prescribed form within 60 days after the end
of the fiscal year.
Afghanistan follows a period of 12 months of
the solar year as its tax year (that is, 21 or
22 December in a calendar year to 20 or
21 December of the following calendar year).
If a legal person wishes to use a 12-month
period other than the solar period as its tax
year, it may apply to the MoF in writing and
provide the reasons for the change. The MoF
may grant such application if it is justifiable
and if it fulfills the criteria provided in the
income tax manual.

INCOME TAX Income Tax Slabs Tax Rate for Income slab per Applicable
SLABS per year Individual & HUF month (AFN) Rate
Below the Age Of
60 Years 0 - 5,000
Up to ₹2,50,000* Nil 0%
₹2,50,001 to 5% of total income (0-4312.85 INR)
₹5,00,000 exceeding
₹2,50,000 5001-12,500
₹5,00,001 to ₹12,500 + 20% of
₹10,00,000 total income (4313.82-10782.38
2%
exceeding INR)
₹5,00,000
Above ₹10,00,000 ₹1,12,500 + 30%
of total income
exceeding 12,501-100,000 10% + AFN
₹10,00,000 150
(10783.24-86259.05
INR) (INR 129.39)

100,001 and above 20% + AFN

8,900
(86259.91 INR and
above) (INR 7677.06)

CORPORATE TAX 35% 20%

RATE

PERSONAL 35.88% 20%

INCOME TAX
RATE
SALES TAX RATE 18% 10%

DIVIDEND Dividend income received from Indian Dividend is subject to 20% withholding by
companies is not taxable in the hands of all the person making the payment, and such
shareholders. This applies to resident as well
 as non-resident shareholders. However, tax income shall be added to other streams of
is payable at the rate of 10% on income income for the purpose of CIT.
earned by way of dividend in excess of INR
1 million by a taxpayer resident in India
other than domestic companies and certain
funds, trusts, and institutions. This tax is in
addition to the tax payable by a company on
dividend distribution.
FOREIGN An Indian company is taxed on its A non-resident company is taxed on its
INCOME worldwide income. A foreign company is Afghan-source income only; however, a
taxed only on income that is received in resident company is taxed on its worldwide
India, or that accrues or arises, or is deemed income. Double taxation of foreign income
to accrue or arise, in India. This income is is avoided by means of foreign tax credits.
subject to any favourable tax treaty
provisions. According to the current tax law,
payments for allowing/transferring the right
to use software, customised data, or
transmission of any signal by satellite, cable,
optic fibre, or similar technology are taxable
as royalty income deemed to accrue or arise
in India, whether or not the location of such
right or property is in India. The CBDT has
notified the rules for granting foreign tax
credit to resident taxpayers in respect of
taxes paid in overseas countries. The rules
lay down broad principles and conditions for
computation and claim of foreign tax credit,
respectively. In cases where the taxpayer has
not been given credit of certain taxes paid
outside India since the tax was under
dispute, the taxpayer can approach the tax
officer within six months from the end of the
month in which the dispute was settled with
prescribed documents. The tax officer has
been empowered to pass an order granting
consequential relief. This has been made
effective from tax year 2018/19 onwards.
Double taxation of foreign income for
residents is avoided through treaties that
generally provide for the deduction of the
lower of foreign tax or Indian tax on the
doubly taxed income from tax payable in
India. Similar relief is allowed unilaterally
where no treaty exists, in which case a
resident would be taxed under the Indian tax
law but would be allowed a deduction from
the Indian income tax payable of a sum
being the lower of the Indian tax rate on the
doubly taxed income or the rate of tax
prevailing in the other country in which
income is already taxed.

PARTNERSHIP A partnership firm and an LLP are taxed as
INCOME separate legal entities. The share of income
of partners from a partnership firm or an
LLP is exempt from tax. Partnerships and
LLPs are taxed at 31.2% (inclusive of
surcharge and health and education cess) if
the income is less than INR 10 million and
34.944% (inclusive of surcharge and health
Every general partnership shall be required
to make an annual report of all its receipts,
expenses, and disbursements, and to
determine its net income in the same manner
as an individual. The partnership is required
to report separately for each partner the share
of net income/loss; the gain/ loss from sale
or exchange of movable and immovable
 and education cess) if the income exceeds property; and salary, interest, dividends,
INR 10 million. advances, etc.
The interest payment to partners on capital
or current account is allowed as tax-
deductible expenditure. However, the
maximum interest rate allowable for tax
purposes is 12% per annum. A working
partner can be paid salary, bonus,
commission, or remuneration. The maximum
permissible deduction in respect of
remuneration payable collectively to all
working partners is based on the book profit
of the firm, at slab rates for different levels
of book profit.

INTEREST Interest income received by an Indian Interest income is subject to 20%

INCOME company is taxable at normal CIT rates. withholding by the person making the
Interest income received by a foreign payment, and such income shall be added to
company is taxed at a concessional rate of other streams of income for the purpose of
withholding at 5%/20%, subject to CIT.
conditions
ROYALTY The domestic tax law defines the term Royalty income is subject to 20%
INCOME ‘royalty’ to include consideration from the withholding by the person making the
transfer of all or any rights (including the payment, and such income shall be added to
granting of a licence), imparting of any other streams of income for the purpose of
information, or use or right to use of any CIT.
right in respect of a patent, invention, model,
design, secret formula or process, trademark,
or similar property. The definition also
includes imparting of any information
concerning technical, industrial, commercial,
or scientific knowledge, experience, or skill;
use or right to use any industrial,
commercial, or scientific equipment; the
transfer of all or any rights (including the
granting of a licence) in respect of any
copyright, literary, artistic, or scientific
work, including films or video tapes for use
in connection with television, or tapes for
use in connection with radio broadcasting,
but not including consideration for the sale,
distribution, or exhibition of
cinematographic films; or rendering of any
services in connection thereto.
Royalty income received by a non-resident
taxpayer is taxed at 10%, 15%, or 20%
(subject to treaty benefits and furnishing of
prescribed documentation). Surcharge and
health and education cess as applicable will
be levied in addition to the basic tax rates
mentioned above. However, surcharge and
health and education cess would not apply
on the tax rate specified in the tax treaties.
The issue is litigative and there are divergent
views on this.
Further, income arising to a non-resident/
foreign company by way of royalty/
FTS rendered in/ outside India to National
technical research organisation shall be
exempted.
INVENTORY Inventories are to be stated at the lower of Inventories are generally valued at cost or
VALUTATION cost or market value. The first in first out net realisable value, whichever is lower.
(FIFO) and average method are accepted. Generally, there is conformity between book
Conformity of methods used for books and and tax reporting. The first in first out
tax reporting is desirable, and the method (FIFO) and weighted average cost methods
used should be consistently applied. are acceptable, provided that they are
consistently applied.
CAPITAL GAINS As of 2018, equities listed on recognised Capital gains from the sale/transfer/exchange
stock exchange are considered long term of a capital asset or investment in a trade or
capital if the holding period is one year or business, including goodwill, is subject to
more. Until 31 January 2017, all Long term income tax at the rate of 1%. The tax so
capital gains from equities were exempt as deducted in the case of corporations and
per section 10 (38) if shares are sold through LLCs, whether resident or otherwise, is
recognized stock exchange and Securities allowed as a credit. However, in the case of
Transaction Tax(STT) is paid on the sale. individuals, the tax so deducted at the time
STT in India is currently between 0.017% of transfer of ownership is a final tax in lieu
and 0.1% of total amount received on sale of of income tax.
securities through a recognized Indian stock
exchange like the NSE or BSE. Now, from
F.Y 18-19, exemption u/s 10(38) has been
withdrawn and section 112A has been
introduced. The long term capital gain shall
be taxable on equities @ 10% if the gain
exceeds Rs. 1,00,000 as per the new section.
However, if equities are held for less than
one year and is sold through recognised
stock exchange then short term capital gain
is taxable at a flat rate of 15% u/s 111A and
other surcharges, educational cess are
imposed.(w.e.f. 1 April 2009.)
In respect of Immovable property, the
holding period has been reduced to 2 years
to be eligible to Long term capital gain.
Whereas, many other capital investments
like Jewellery etc. are considered long term
if the holding period is 3 or more years and
are taxed @ 20% u/s 112.
INFOGRAPHIC:
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