Direct and Indirect Tax
An summary of direct and indirect tax
In this post, we’ll discuss about the Types Of Taxes In India: Direct Tax And Indirect Tax
We will cover the following topics:
Types of Taxes In India
India’s tax structure is divided into three tiers: local municipal bodies, state governments, and the central government. In India, taxes are classed into two categories: direct or indirect. Let us look at these two sorts of taxes to understand the distinction between direct and indirect taxes.
What is Direct Tax?
The term “direct tax” refers to when a taxpayer pays directly to the revenue body. In this case, the taxpayer is responsible for paying the tax and cannot transfer this duty to another firm. India’s Central Board of Direct Taxes (CBDT) collects and administers direct taxes. The Department of Revenue controls CBDT and advises the government on direct tax implementation.
Types of Direct taxes
The following are some common types of direct taxes imposed in India:
Income Tax
An individual pays an annual income tax based on their earnings in a given financial year. The term ‘individual’ in the ITA also includes co-operative societies, trusts, Hindu Undivided Families (HUFs), and any artificial juridical being.
Wealth Tax
Individuals, HUFs, and companies paid wealth tax based on the value of their assets in a particular financial year. It applies to a wide range of asset categories, including cash, stocks, real estate, fixed assets, bank deposits, and pension plans.
Corporation Tax
It is paid by businesses or companies that operate in India based on their earnings for the current financial year. The tax rate varies according to whether a firm is incorporated in the country or outside.
Capital Gains tax
Capital Gains Tax applies to the earnings made from the sale of a property. Residential property, stocks, bonds, precious metals, and other assets are all considered ‘property’.
Advantages and Disadvantages of Direct Taxes
Feature | Advantages | Disadvantages |
Nature | Direct payment by taxpayers to the government | Can be difficult for high-income taxpayers. |
Scope | Individuals and corporations are subject to a narrower scope. | Compared to indirect taxes, there is a limited tax base. |
Compliance | Easy to administer and monitor. | Potential for tax evasion and avoidance |
Impact | Progressive taxation reduces inequality in income. | High interest rates can discourage saving and investing. |
Revenue | Revenue source is stable and predictable. | Can be affected by economic downturns. |
Transparency | More transparency in tax collecting | Some people may believe that the tax burden is unfair. |
What is Indirect Tax?
Direct taxes are collected on taxpayers’ income and profits, whereas indirect taxes are imposed on goods and services. The taxpayers pay the indirect tax to the government through an intermediary, so indirectly funding the government.
The Central Board of Indirect Taxes and Customs (CBIC) is in charge of collecting and administering indirect taxes, which are supervised by the Department of Revenue, exactly like the CBDT.
Types of Indirect taxes
Prior to the introduction of GST in India, there were the following types of indirect taxes:
Sales Tax
The government imposed a sales tax on the selling of moveable goods.
Service Tax
All service providers, excluding those on the negative list, are required to pay this fee to the government.
Value Added Tax
It was a consumption tax imposed on a product that was applied at each stage of its production or distribution.
The GST regime was adopted by the government with the intention of streamlining taxiing procedures in India.
Advantages and Disadvantages of Indirect Taxes
Advantages | Disadvantages |
Each individual contributes to nation-building. | Increase in the overall cost of goods and services |
Easy to collect from the final consumer. | Consumers frequently lack information of the taxes paid. |
Tax distribution is fair, which means that essential products are taxed less than expensive goods. | It’s regressive in nature. |
The responsibility of payment might be passed to the end customer. | The amount received in tax is frequently uncertain, because the tax paid relies on the goods and services purchased. |
What Are the Key Differences Between Direct And Indirect Taxes?
The table below covers all the differentiating points between direct and indirect taxes:
Context | Direct Tax | Indirect Tax |
Meaning | Direct payments to the government | Paid to the government through a middleman. |
Levied on | Profits and income | Goods and services |
Taxpayer | Individuals, HUFs, and businesses | End-consumers of products, goods, and services. |
Tax Rate | Directly dependent on income and profits. | Same goes for everyone. |
Tax Burden | Progressive | The flat tax rate results in a regressive tax burden. |
Transfer of liability | Not transferable | can be transferred. |
Tax Collection | Complex | Very convenient. |
Types | Income taxes and STT | Goods and Services Tax (GST) |
Evasion | Possible | Not possible |
That brings us to the end of this post on Direct and Indirect Tax. If you have any questions or queries, please leave a comment in the section below.
FAQs
1.Is gift tax a direct or indirect tax?
Ans: The Income Tax Act provides for a gift tax. As such, it is a direct tax. If the value of the gift exceeds Rs.50,000, it is taxed at the usual slab rate.
2.What's the difference between direct and indirect taxes?
Ans: A direct tax imposed on an individual’s income or wealth. An indirect tax is imposed on individuals who use goods or services.
3.What are some examples of direct taxes?
Ans: Direct taxes include income tax, property tax, company tax, gift tax, inheritance tax, and so on.
4.Who is required to pay direct tax?
Ans: Individuals and companies are subject to direct taxes under the Income Tax Act. Those who are subject to direct taxes have to pay them. For example, income tax, asset tax, property tax, etc.
