Direct tax is a tax that is paid directly to the government by the person or entity that is liable to pay the tax. The most common examples of direct taxes are income tax, corporate tax, and property tax.
- Income Tax: Individuals, companies, and other entities are required to pay income tax on their income, such as wages, salary, and business profits.
- Corporate Tax: Companies are required to pay corporate tax on their profits.
- Property Tax: Owners of property, such as real estate, are required to pay property tax based on the value of the property.
Direct taxes are typically progressive, meaning that the tax rate increases as the income or wealth of the taxpayer increases. They are also mandatory and cannot be avoided by the taxpayers, unlike indirect taxes.
Direct taxes are considered to be more stable and predictable than indirect taxes, as they are less affected by changes in consumer spending or economic conditions. They also tend to be more efficient and less distortionary than indirect taxes, as they do not discourage productive activities such as saving and investment.
Overall, Direct taxes are considered as a more fair way of taxation as it is based on the ability to pay principle, where the more you earn, the more you pay. This is in contrast to indirect taxes, which are based on consumption, regardless of a person’s ability to pay.
Direct Tax laws in INDIA
In India, direct tax laws are governed by the Income Tax Act of 1961 and the Wealth Tax Act of 1957. The Income Tax Act lays out the rules and regulations for the assessment and collection of income tax, while the Wealth Tax Act lays out the rules and regulations for the assessment and collection of wealth tax.
- Income Tax: The Income Tax Act of 1961 lays out the rules and regulations for the assessment and collection of income tax in India. It provides for the levying of income tax on individuals, Hindu Undivided Families (HUFs), firms, companies, and other entities. The Act lays out the different tax slabs and the applicable tax rates for different categories of taxpayers.
- Corporate Tax: The Corporate Tax rate in India is 30% for domestic companies and 40% for foreign companies. The government also provides various tax exemptions, deductions and incentives to companies to promote certain sectors or activities.
- Wealth Tax: The Wealth Tax Act of 1957 lays out the rules and regulations for the assessment and collection of wealth tax in India. It provides for the levying of wealth tax on individuals, HUFs, firms, and companies based on the value of their assets. However, the wealth tax act has been repealed from the financial year 2016-17, so the wealth tax is not applicable in India anymore.
- Capital gains Tax: The Capital Gains Tax is levied on the profit or gain made by an individual or a company on the sale of a capital asset such as land, building, shares, bonds, etc. The tax rate varies depending on the type of capital asset and the duration for which it was held by the taxpayer.
- Other Direct Taxes: There are other direct taxes in India such as Securities Transaction Tax (STT), Gift Tax, Fringe Benefit Tax (FBT) etc.
Indirect tax is a tax that is paid indirectly to the government by the person or entity that is liable to pay the tax. Indirect taxes are typically added to the price of goods or services and are paid by the final consumer when they purchase the goods or services. The most common examples of indirect taxes are sales tax, value-added tax (VAT), and excise duty.
- Sales Tax: Sales tax is a tax on the sale of goods and services. It is typically added to the price of the goods or services at the point of sale and is paid by the final consumer. Sales tax is usually set as a percentage of the sale price.
- Value-Added Tax (VAT): VAT is a tax on the value added to goods or services at each stage of production or distribution. It is typically added to the price of the goods or services at the point of sale and is paid by the final consumer. VAT is usually set as a percentage of the sale price.
- Excise Duty: Excise duty is a tax on the production or sale of certain goods, such as alcohol, tobacco, and gasoline. It is typically added to the price of the goods at the point of production or sale and is paid by the final consumer. Excise duty is usually set as a fixed amount per unit of the goods.
- Service Tax: Service tax is a tax on the services provided by certain service providers such as restaurants, hotels, and transportation companies. It is typically added to the price of the service and is paid by the final consumer.
- GST: The GST is a value-added tax that is levied on the supply of goods and services. GST is levied at different rates, depending on the nature of the goods or services. GST is divided into two types: CGST and SGST (or UTGST in case of Union Territories). CGST is collected by the Central Government, and SGST (or UTGST) is collected by the State Government.
- IGST: The IGST is levied on inter-state supplies of goods and services and is collected by the Central Government.
- Cess: In addition to GST, cess is also levied on certain luxury goods and sin goods such as tobacco, pan masala, aerated drinks etc. The proceeds from the cess are utilized for specific social welfare schemes.
- Custom Duty: Custom duty is a tax imposed on goods imported into or exported out of India. It is governed by the Customs Act, 1962 and the rules and regulations made under it.
Important Differences Between Direct Tax and Indirect Tax
|Direct Tax||Indirect Tax|
|Paid directly to the government by the person on whom it is imposed||Paid indirectly by the consumer through the price of goods and services|
|Examples: Income Tax, Wealth Tax, Capital Gains Tax||Examples: Sales Tax, Value Added Tax (VAT), Service Tax, Excise Duty|
|Cannot be passed on to another person||Can be passed on to another person|
|Progressive in nature||Regressive in nature|
|Examples: Tax on Income, Tax on Property, Tax on Capital Gains||Examples: Sales Tax, Service Tax, Excise Duty, Customs Duty|
Direct taxes and indirect taxes are two types of taxes that are imposed by the government on individuals and entities. The main differences between the two are as follows:
- Direct Tax vs Indirect Tax: Direct taxes are imposed directly on the income or wealth of an individual or entity, while indirect taxes are imposed on the consumption of goods and services.
- Basis of calculation: Direct taxes are calculated on the basis of income or wealth of the taxpayer, while indirect taxes are calculated as a percentage of the value of the goods or services consumed.
- Liability: In the case of direct taxes, the liability is on the person whose income or wealth is being taxed, whereas in the case of indirect taxes, the liability is on the person who pays for the goods or services consumed.
- Progressivity: Direct taxes are typically progressive, meaning that the tax rate increases as the income or wealth of the taxpayer increases. Indirect taxes, on the other hand, are typically regressive, meaning that they place a greater burden on lower-income taxpayers.
- Ability to avoid: Direct taxes are mandatory and cannot be avoided by the taxpayers, unlike indirect taxes. Indirect taxes are paid at the point of consumption, so it is easier to avoid them by not purchasing the goods or services in question.
- Administration: Direct taxes are administered by the Income Tax Department, while indirect taxes are administered by the Central Board of Indirect Taxes and Customs (CBIC).
Overall, both types of taxes play a crucial role in the functioning of a country’s economy, with direct taxes being used primarily for income redistribution and indirect taxes being used primarily for revenue generation.