Question

Grant Wilson is an employee of Market Enterprises, a corporation operating in State A. Identify the different types of potential taxes to be paid by both Grant and Market Enterprises with respect to this employment relationship.

Answer 1

Diffrent types of taxes paid by GRANT

Direct Taxes

Direct taxes are the personal liability of tax payer. These are collected directly from the tax payers and they have to be paid by the persons on whom it is imposed. Important direct taxes are listed below:

Income Tax

This is most important type of direct tax and almost everyone is familiar with it. TDS is its famous synonym and whosoever is earning above a minimum amount (tax exemption limit) has to pay income tax.

Wealth Tax

This is in addition to the income tax and is levied if your net wealth exceeds Rs 30 Lakh at the rate of 1% on the amount exceeding Rs 30 Lakh.

*Note – In Budget 2013-2014 Finance Minister Mr P. Chidambaram introduced a surcharge of 10 percent on taxpayers with an annual taxable income of more than 1 crore (10 million) rupees.

Property Tax/Capital Gains Tax

This is levied on the capital gains arrived by selling property and stocks. Tax rates are different for long term and short term capital gains.

Gift Tax/ Inheritance or Estate Tax

Amount exceeding Rs. 50000 received without consideration by an individual/HUF from any person is subjected to gift tax as income under “other sources”. There are exemptions like money received from relatives is not taxable. Marriage gifts and money received through inheritance are also exempt from gift tax. Inheritance tax was earlier in practice but has been repealed by the government.

Corporate Tax

Companies operating in India are taxed as per the corporate tax rate on their income. This tax is one of the major sources of revenue for government.

Indirect Tax

Impact and incidence of indirect Taxes fall on different persons as opposed to direct taxes where impact and incidence is on the same person. These taxes are recovered from different groups of people but the liability remains with the person who collects it. Tax payer recovers the indirect taxes paid from their consumers and clients and finally pays it to government.

For example, when we purchase any product we pay VAT, when we eat in restaurants we pay service tax which are ultimately deposited in government’s kitty by the service providers. Brief about various types of indirect taxes is given below:

Service Tax

Service providers in India are subject to service tax, which is charged on the aggregate amount received by the service provider. Services like leasing, internet/voice, transport, etc are subject to service tax.

Custom Duty

Custom duties are indirect taxes which are levied on goods imported to/exported from India. There are different rules for different types of goods and sectors. Government keeps on changing these rates so as to promote import/export of specific goods.

Excise Duty

Excise duties are indirect taxes which are levied on goods manufactured in India for domestic consumption. Like custom duty, there are a number of rules which keep on changing as per government discretion.

Sales Tax and VAT

Sales tax is levied by the government on sale and purchase of products in Indian market. As customers, whatever you buy from the market, you pay sales tax on it. Now, sales tax is supplemented with new Value Added Tax so as to make it uniform across country.

Security Transaction Tax (STT)

STT is levied on transactions (sale/purchase) done through the stock exchanges. STT is applicable on purchase or sale of various financial products like stocks, derivatives, mutual funds etc.

Taxes paid by Emplyee

Three main types of taxes fall under the category of payroll taxes:

1. The regular income tax that must be withheld from employees' paychecks. Employees can adjust their income tax withholding by filing Form W-4 with their employer and designating the number of withholding allowances they wish to claim. Ideally, the total income tax withheld should come close to equaling their overall tax liability at the end of the year. By adjusting their withholding allowances properly, employees can avoid owing large amounts in taxes or providing the government with an interest-free loan.
2. Federal Insurance Contribution Act (FICA) taxes. This tax includes contributions to two federal programs, Social Security and Medicare. The tax rate for FICA taxes does not often change but the earnings on which those taxes are applied changes from year to year. In 2006, full FICA taxes of 7.65 percent were due on the first $94,200 earned. Only the Medicare portion of the FICA tax, 1.45 percent, was due on earnings over $94,200. Employers are required to match the FICA amount withheld for every employee, so that the total FICA contribution is 15.3 percent on the first $94,200 earned. Self-employed persons are required to pay both the employer and employee portions of the FICA tax.
3. Federal Unemployment Tax (FUTA, the "a" stands for the word Act in the original name of the act). This tax is approximately 1 percent of the first $7,000 in wages paid to an employee and is paid in full by the employer. Technically, the federal unemployment insurance payroll tax is 6.2 percent of the first $7,000 of an employee's wages. However, employers in states with their own unemployment insurance tax programs receive a 5.4 percent credit toward their federal tax payment, reducing their tax rate to 0.8 percent. Since all states have federally approved programs, the effective FUTA rate is 0.8 percent.
4. State Unemployment Taxes. Unemployment Insurance (UI) is a federal-state program jointly financed through federal and state employer payroll taxes. The federal portion is the FUTA. The state unemployment tax differs from state to state, the rate being determined by each state separately and within the state for each employer separately. The UI program is based on experience-ratings. This means that within a given state, firms that lay off a higher percentage of workers and whose employees collect a higher amount of UI benefits pay higher tax rates than firms that lay off fewer workers. The national average state tax rate in 2003 was 2.1 percent. This rate was paid on the first $7,000 to $9,000 of earnings depending on the state. In 2004, the states had a range of maximum UI tax rates from 5.4 percent to almost 11 percent.
5. Local Payroll Taxes. Cities and municipalities may impose a payroll tax. These taxes are usually paid by both the employee and employer and vary in range widely.