Tax Liability - Meaning, Types of Tax Liabilities in India

Taxes are mandatory contributions made to support the country's economy. Tax obligations are the responsibilities that taxpayers must fulfil. Paying taxes is a primary duty of a taxpayer. Tax obligations are established by law and are assigned based on the economic activities declared by the taxpayer. In this blog, we will discuss tax liabilities in detail.

What are Tax Liabilities?

Tax liability is the total amount of taxes that individuals and organisations owe the central government during a given period, typically a fiscal year. 

For individual taxpayers, managing tax liabilities involves mechanisms such as Tax Deducted at Source (TDS) or direct out-of-pocket payments, while for businesses, tax liabilities are classified as short-term obligations and are recorded on the balance sheet to be paid within the financial year.

Who Is Liable for Tax Liabilities?

• All residents and non-residents earning taxable income in India
• Hindu Undivided Families (HUFs) 
• Both private and public companies 
• Partnerships and LLPs 
• Trusts and charitable institutions 
• Foreign companies and individuals earning income in India 
• A company registered with the Registrar of Companies 

Types of Tax Liabilities in India

Here's a breakdown of the main types of tax liabilities -

Direct Taxes

Direct taxes impact individuals and businesses directly based on income or wealth. It mainly comprises income tax and corporate taxes.

1. Income Tax: Levies a tax on individuals, HUFs, partnerships, and small businesses on their taxable income.

• Rates are based on income slabs and categories like individual, HUF, etc.
• Deductions and exemptions are available to reduce taxable income.
• Annual filing is required to declare income and pay taxes.

1. Corporate Tax: In India, a corporate tax is a uniform flat-rate tax of 30%, applicable to the net taxable profits of both domestic and foreign companies.

• Applies to all income earned by domestic companies from any source.
• Foreign companies are taxed only on income earned within India.
• Separate filing procedures and deadlines for companies.

Indirect Taxes

Indirect taxes are included in the price of goods and services that you purchase. You may not be able to identify those costs, but you already pay them. These costs are collected by businesses and deposited with the government.

Goods and Services Tax (GST): A unified tax replacing various earlier levies applicable to most goods and services. GST is the only indirect tax levied by the Indian government. Remember - 

• GST rates vary depending on the type of good or service.
• The input tax credit system allows businesses to claim credit for taxes paid on inputs.
• The compliance requirements for businesses dealing with GST are complex.

Additional Tax Liabilities

• Health and Education Cess: 4% tax on the payable income tax for specific public welfare purposes.
• Surcharge: Additional tax levied on income depending on the income slab, primarily applicable to high-income individuals.
• Dividend Distribution Tax (DDT): Abolished since 2021-22, previously levied by companies on distributed dividends.
• Minimum Alternative Tax (MAT): Ensures companies pay a minimum income tax by recalculating income without exemptions and deductions.

Local and State-Level Taxes

• Property Tax: Levied by local authorities on property owners based on its value.
• State-Level Taxes: State-specific taxes like SGST, State VAT, and Entry Tax may apply.

What Happens When Tax Liabilities Are Not Met?

Both individuals and businesses must take their tax obligations seriously to avoid the legal and financial consequences of failing to comply with tax laws. These consequences can range from financial penalties to criminal charges, depending on the severity and nature of the tax non-compliance. Let us take a look at those consequences -

For Individuals

Penalties on Failure to File Taxes

• Rs. 5,000 for exceeding six months and Rs. 10,000 for exceeding one year, with a potential further increase for continued non-compliance.
• Individuals may lose any eligible tax refunds for the year if they don't file returns.
• Government services or benefits like subsidies and grants, bank loans and financial assistance, and immigration and visa applications may become unavailable until tax compliance is achieved.
• Failure to file can trigger audits and enhanced scrutiny of future income and tax reporting.

Interest and Penalties on Failure to Pay Taxes

• Interest accrual: 1% per month on outstanding tax amount, compounding rapidly.
• Increased penalties: 1% per month on the outstanding tax amount, up to a maximum of 100% of the tax due.
• The Central Board of Direct Taxes may freeze bank accounts and seize assets to recover unpaid taxes.
• Lawsuits and prosecution for tax evasion in extreme cases.

Tax Evasion

• Up to 3 years for lesser offences and 7 years for severe offences involving intentional tax evasion.
• Depending on the extent of fraud, fines can range from significant monetary penalties to a multiple of the evaded tax amount.
• Individuals may be blacklisted from government contracts, licenses, and benefits.
• A public record of tax evasion can damage the individual's credit score and professional reputation.

For Businesses

Interest and Penalties on Failure to File Taxes

• Up to Rs. 10,000, increasing further for continued non-compliance.
• A minimum 1% tax on estimated income may be levied even if no returns are filed.
• In severe cases, directors may be disqualified from holding directorships in any company for up to 5 years.
• Companies may lose eligibility for government contracts, subsidies, and licenses.

Interest and Penalties on Failure to Pay Taxes

• 1% per month compounding interest on the outstanding tax amount.
• 5% of tax if paid within 30 days of the due date, increasing to 100% for significant delays.

Tax Fraud

• Up to 7 years of severe offences involving intentional tax evasion.
• Depending on the extent of fraud, fines can range from significant monetary penalties to a multiple of the evaded tax amount.
• Businesses may be blacklisted from operating in India or face difficulties obtaining licenses and permits.
• Public records of tax fraud can severely damage the business's reputation and stakeholder trust.

How to Minimise Tax Obligations?

Listed below are some of the effective strategies to minimise your tax obligations:

Diversify Your Investments

• Invest in publicly traded stocks across different countries and markets to diversify your portfolio.
• Be aware of the tax implications associated with international investments.

Leverage Tax Treaties

• Understand the tax treaties between your country of residence and the countries where your stocks are listed.
• These treaties can help reduce or eliminate double taxation on investment income.
• Use tax treaties to your advantage, mainly when dealing with dividends from stocks listed in other countries.

Utilize Tax-Efficient Accounts

• Explore tax-efficient accounts like Public Provident Fund (PPF), National Pension System (NPS), Equity Linked Savings Schemes (ELSS), Tax-saving Fixed Deposits (FDs), Unit Linked Insurance Plans (ULIPs), etc. available in your country.
• These accounts offer tax benefits such as tax-deferred growth or tax-free withdrawals.
• Invest in publicly traded stocks through these accounts to reduce your tax burden.

Consider Tax-Efficient Investment Vehicles

• Evaluate investment vehicles like ETFs and mutual funds, which may offer tax advantages when investing in publicly traded stocks.
• These funds often employ strategies to minimise capital gains distributions.
• Investing in these tax-efficient vehicles can help you reduce tax obligations while maintaining a diversified stock portfolio.

Plan for Capital Gains and Losses

• Strategically manage capital gains and losses when investing in publicly traded stocks.
• Use capital losses from stock investments to offset gains in other areas, reducing your overall tax liability.
• Take advantage of lower tax rates during low-income years by pursuing capital gains on publicly traded stocks.

Seek Professional Tax Advice

• Due to the complexity of tax laws and cross-border taxation, consult a qualified tax advisor or accountant.
• A tax professional can provide personalised guidance based on specific circumstances, ensuring compliance and maximising tax efficiency in your stock investments.