Income Tax

Direct Tax?

Direct Tax?

Last Updated : March 13, 2023, 6:25 p.m.

The Indian Government levies two kinds of taxes on the citizens of India. These are Direct Tax and Indirect Tax. Indirect taxes are generally transferred to another person after being charged as a direct tax. Some common examples of this indirect tax are VAT and Goods and Services Tax or GST. So, as an India, we need to bear both direct and indirect tax.

GST is levied on the service providers or manufacturers as a direct tax. Then this direct tax is transferred to the consumers when it becomes a part of the final price of the service or goods. Thus, it is turned into an indirect tax for the consumers.

In contrast, the responsibility of the direct taxes cannot be transferred to another person, like Income Tax. Income Tax is a specific kind of tax that every individual needs to pay directly to the tax authorities in India. Both direct and indirect taxes are crucial components that play a significant role in changing the path of the economy of India.

To understand direct and indirect tax clearly, let us clarify our basics regarding direct tax.

What is a Direct Tax?

Generally, direct taxes are levied on a person’s income and paid directly by an organization or taxpayers to tax authorities of the Indian Government. The organization or person in question cannot transfer this kind of tax to another individual or entity for payment. Some notable examples of direct tax include corporate tax and income tax. So, somebody must pay direct and indirect taxes within the declared date.

Different types of direct taxes in India

The Government of India has levied multiple kinds of direct taxes on citizens. Some of those direct taxes are:

Income Tax

It is the most well-known direct tax levied by the government of India on annual income generated by individuals and businesses. The income tax levied on the revenue generated by companies is called Corporate Tax. Income Tax is a widespread type of direct tax that is calculated according to the provisions of the Income Tax Act 1961. This tax is directly paid to the Central government every year.

The rate of income tax depends on the net taxable income. Somebody can deduct this tax in the form of TDS or tax deducted at source, in the case of salaried individuals. However, in the case of self-employed persons, the tax is payable depending on the declared income according to their Income Tax Return submission. ITR is usually a statement of payment and the tax liability which needs to be submitted to the Income Tax Department in the given format.

Income tax is a specific kind of direct tax that can be levied on various income sources,like capital gains, salaries, house property, business, or other sources.

Corporate Tax

According to Indian Income Tax Act 1961, foreign and Indian organizations are liable to pay this kind of tax to the government. This corporate tax is levied on the domestic firms’ net profit. Also, foreign companies whose profits are deemed or appear to emerge through their tasks or operation in India are also liable to pay this kind of tax to the Indian Government. A company’s income, be it in interest, dividends, or royalties, is also taxable.

Recently, companies with a gross turnover of up to Rs. 250 crores have had to pay corporate tax at 25%of the net profit. However, companies with a turnover of more than Rs. 250 crores need to pay this direct tax at 30%. 

Apart from this, there are some other types of corporate taxes, such as:

  • Fringe Benefits Tax or FBT
  • Minimum Alternative Tax or MAT.
  • Securities Transaction Tax or STT.
  • Dividend Distribution Tax or DDT.

Capital Gains Tax

This is another kind of direct tax. The capital assets of a person refer to any object or thing owned for personal use or the purpose of investment. In the case of businesses, the capital asset is a thing that can be utilized for over a year and is not intended to be liquidated or sold during business operations.

Cars, machinery, shares, homes, art, bonds, businesses, and farms are some of the significant examples of capital assets to which a direct tax can be applied.

This capital gains tax is imposed on the amount that can be earned from selling those assets. According to the holding period, capital tax can be categorized under long-term and short-term gains.

Online Payment of Direct Tax

Most people need to pay direct and indirect taxes. They can make their payment through the online portal or the official website of the Government of India.

What are the benefits of direct tax?

Both direct and indirect tax have their benefits to offer. Let us discuss some of the notable benefits of a direct tax.

Productive

A direct tax is very productive. The revenue generated from this tax is directly proportional to the changes in the country’s national wealth. Simply put, the increase in a country’s prosperity or population will eventually increase the returns on direct tax.

Economic

Direct tax, like income tax, is collected per year and is removed at the source. For instance, this kind of direct tax is removed from an employee’s salary every month. Therefore, this procedure of collecting direct tax saves a lot of administrative costs as here, and the tax collector is the employer. This procedure makes the direct tax a more economical option than any other kind of direct and indirect tax.

Certain

In the situation of direct taxes, a taxpayer can be well aware of the amount of tax they need to pay. Moreover, the tax authorities can also estimate the revenue which they can expect from the direct tax.

Anti-inflationary

Direct taxes can be utilized as anti-inflationary equipment to stabilize the price level in the market. A direct tax can be used to control the demand and use of products if required. The increase in demand for services and products during inflation can be reduced by increasing the direct tax.

Conclusion

Thus, direct and indirect tax are vital tools that the Government of India gets from the citizens of India and can use to protect the economy and ensure the growth of our country. So, it is the duty of an Indian citizen to pay direct and indirect tax.

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