The government collects taxes from individuals and businesses for the purposes of the development and economic growth of the country. The taxpayers are bound to pay taxes according to the Income Tax Act 1961 and can be penalised for failing to do so. The amount of tax depends on the taxpayers' income level and sources.
Tax liability is the payment owed by an individual, a business, or another entity to the central government.
Did you know?
Taxes are as old as the ancient Egyptian civilisation. There are documented records of taxation around 3000 to 2800 BCE from ancient Egypt.
Also Read: Everything You Need to Know About Surcharge on Income Tax
What Is Tax Liability?
Tax liability is the total amount of tax owed in a given period by individuals and organisations to the central government. For businesses, tax liabilities are short-term liabilities recorded on the balance sheet and paid within a financial year. Whereas for individuals, tax liabilities are covered by using tools like tax deduction from source (TDS), from wages or salaries. It can also be paid out of pocket. The government utilises tax payments for social welfare and its own administrative purposes. Tax liabilities are current liabilities, which are short-term debts paid within a year. While individual taxpayers and Hindu Undivided Families (HUF) need to pay the income tax liability, the corporate tax liability focuses on the corporations in India.
Small Business Tax Liability
Small businesses are usually run as either proprietorship businesses, partnership firms, or small companies. Proprietorship businesses are run by an individual person who has the
the sole responsibility for the business, whereas partnership firms are run by two or more people and operate as per the Indian Partnership Act, 1932. Partnerships can be of different types, such as limited liability partnerships (LLP). These small businesses tend to operate under special tax provisions.
The corporate tax rate for companies depends upon their net profits. For example, if a company has a turnover of less than (or equal to) ₹ 250 crores, then the tax rate is 25%. For companies with a turnover above ₹ 250 crores, the corporate tax rate is 30%. Nonprofit organisations (NPO) which are established for charitable purposes are free from the payment of corporate tax. This is due to the role they play in supplementing the gaps in the government's welfare and development delivery systems. The exemptions granted to NPOs, however, are subject to various conditions and regulations.
You can incur short-term liabilities from normal business operations—report tax liabilities with other current debts on your small business balance sheet. Your business can incur tax liabilities from any taxable events, which means a transaction resulting in tax liability. This includes earning taxable income, issuing salaries, and making sales.
Earned Tax Liability
Unearned revenue refers to the amount received by an individual or company against a service or product that is yet to be supplied or delivered. It is recorded on a company's balance sheet as a liability because it represents a debt owed to the customer.
Employed individuals are required to pay income tax on their salaries or wages. Employers deduct income tax liabilities from employee salaries as TDS. Your earned income tax liability might also include tax from your business's income unless you are a C corporation.
Business Tax Liability
You need to pay taxes on the profits of your business. Corporate tax is levied on both Indian as well as foreign companies operating within the territory of the Indian government. It is regulated by the IT act. The total income of the business that is taxable under corporate taxation includes the following:
- Profits and gains from the daily operations
- Capital gains
- Earnings from property
- Income from other sources like interests, lotteries, and so on.
Salary Income is not included in the company's income. The income calculated is adjusted according to section 79. The deductions are made from the total gross income to ascertain the net income, which is then taxed.
Self-Employment Tax Liability
Every citizen of India needs to pay an income tax if they earn an income. Under section 2 (7) of the Income Tax Act, 1961, an income-generating individual is known as an assessee. Given below is a list of the assessee:
- Salaried employee
- Self-employed individual or a sole proprietor
- Hindu Undivided Family
- Partnership business
- Limited liability partnership (LLP)
- A company registered with the Registrar of Companies
The tax filing process differs for various types of assessees due to their source of income as well as the amount earned. When filing returns under the Income Tax Act, there are five main heads of income, which are as follows:
- Salary income
- Income from house property
- Capital gains
- Income from business or profession
- Income from other sources
In the case of salaried individuals, the option of 'salary income' applies to self-employed individuals or professionals; most of the income is recorded and calculated under 'income from business or profession.' The tax filing process followed by salaried and self-employed individuals is different. The income of a self-employed person is recorded under 'income from business or profession,' and the taxable income is calculated in two ways, such as:
- On the basis of presumptive taxation where the income is calculated without claiming any deduction for the expenses incurred by the business or profession while generating profits.
- The real profit is calculated after claiming the actual expenses incurred during the course of business or profession while generating revenue.
Payroll Tax Liability
Every individual earning an income should pay payroll taxes in India. This includes Hindu undivided family (HUF), individuals, sole proprietorship, partnership firms, etc. Salaried employees in India also need to pay professional taxes, levied in the form of capital gains, business gains, and income from other sources like gambling, dividends, etc.
The tax slab for each individual may differ depending on the new and the old tax regime. Usually, TDS is deducted at the source depending on the tax slab under which the individual's income falls. Employees can file ITR returns depending on their deductions and exemptions to claim a part of this payroll tax back.
Sales Tax Liability
Sales Tax is imposed on the sale and purchase of goods and services within a particular state. Every individual needs to pay sales tax on the sale of goods even if no tax liability
arises according to the tax laws of that state. There is no fixed tax rate for the sales tax as there are different sales tax acts in different states.
The sales tax rate in India averaged 14.45% from 2006 to 2021, reaching an all-time high of 18% in 2017 and a record low of 12.36% in 2012.
Also Read: Learn About Deferred Tax Asset & Deferred Tax Liability Meaning - How Deferred Tax Is Classified
Capital Gains Tax Liability
Any profit or gain that arises from the sale of a 'capital asset' falls under the category of 'income.' You will need to pay tax for that amount in the financial year in which the transfer of the capital asset takes place. This is known as capital gains tax, which can either be a short term of 20% or long term, i.e., 10% or 15%.
Short-term capital gains are levied according to the income tax slab rates applicable to the individual. For example, if the short-term capital gain is ₹ 6 lakhs and the person falls in the 30% tax bracket, then they have to pay 31.20% on ₹ 6 lakhs, i.e., ₹ 1,87,200.
Property Tax Liability
The owner of a property is liable to pay the tax imposed by the local authority, such as the municipality bodies. Such a tax is known as the property tax. This tax may differ from one location to another. There are various other factors that determine the amount of property tax payable, such as:
- Location of the property.
- Size of the property.
- Whether the property is under-construction or ready to move.
- Gender of the property owner (there may be discounts for female owners).
- The age of the property owner as senior citizens usually gets concessions.
- Civic facilities are provided by the municipal body in the locality.
Property tax allows the municipal bodies to earn revenue which is used for funding various services provided by it. It is one of the most significant sources of revenue for municipal bodies. The local municipal body provides certain important facilities, like cleanliness in the area, garbage collection, water supply, maintenance of local roads, drainage, electricity, and other civic facilities. If you do not pay property tax, then the municipal body possesses the right to take legal actions against you, such as refusing to provide the water connection or other services until it recovers the due amount.
Exemption in property tax may be provided to:
- Senior citizens
- People with disabilities
- Educational institutes
- Agricultural properties
- Former army, navy, or any other personnel employed by defence services
- Families of martyrs from the Indian Army, BSF, police service, CRPF, and fire brigade
Tax deductions
Section 80C under the Income Tax Act 1961 contains tax deductions. It has various investment opportunities for the taxpayer that can serve the dual purpose of tax saving as well as capital appreciation. The investment policies in this section offer a deduction of up to ₹ 1,50,000 annually. The different types of investment opportunities under this section are as follows:
- ELSS funds – Tax saver funds
- National Pension Scheme - under section 80CCD
- Employee Provident Fund (EPF)
- Public Provident Fund (PPF)
- Health insurance premiums - section 80D
- Senior Citizens Savings Scheme (SCSS)
- Sukanya Samriddhi Yojana (SSY)
- Deduction on rent - section 80GG
- Donation to charity
- Tax saving FDs
- National Savings Certificate (NSC)
- Life insurance premiums
- Home loan repayment
- Tuition fees
- Supporting a political party
Conclusion
Tax liability is something unavoidable that every responsible citizen in the country should abide by. If you fail to pay your taxes on time to the government, it will lead to severe fines and legal penalties. To help simplify tax liability calculations for you, the income tax department has introduced e-calculators.
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