A direct tax is a type of tax where the individual or an entity makes the payment directly to the government. Under the direct tax system, the tax burden lies with the taxpayer himself rather than other entity or person. The most common example of direct taxes are- Income Tax, Corporate Tax, Property Tax and so on.
What is a Direct Tax?
A direct tax is a tax in which the impact and incidence are both included in the same category. The tax is paid directly to the entity that imposes the payment by the organization or an individual.
Income tax, corporate tax, property tax, inheritance tax, and gift tax are some of the direct tax examples that come under the purview of direct tax.
A direct tax is mostly based on the ability-to-pay premise. According to this economic theory, individuals with more resources or a higher income should pay a higher tax burden. Some critics argue that this serves as a disincentive for people to work hard and achieve more money because the more money they earn, the more taxes they must pay.
A direct tax is the opposite of an indirect tax, which is imposed on one entity (e.g., a seller) and paid by another (e.g., a sales tax paid by the customer in a retail context). Governments rely on both types of taxes to generate money.
Example of Direct Taxes
The key example of direct taxes can be your salary. The income tax is filed on an annual basis even though the deductions are made on monthly basis. Apart from this, corporation tax, inheritance tax, property tax and gift tax are also direct taxes.
- An individual or organization pays a direct tax to the entity that imposed it.
- Income, property, and asset taxes are all examples of direct taxes.
- Indirect taxes, such as sales taxes, also exist in the Indian taxation system and are imposed on the seller but are paid by the buyer.
Types of Direct Taxes
“The hardest thing in the world to understand is the income tax.” Albert Einstein. But you don’t have to start worrying now because you’ve got us by your side to simplify things. So, let us start with the various types of direct tax imposed in India.
|Income Tax||Wealth Tax||Estate Tax|
|Corporate Tax||Securities Transaction Tax||Dividend Distribution Tax|
|Minimum Alternate Tax||Fringe Benefits Tax||Capital Gains Tax|
Income tax must be paid based on an individual’s age and wages. The Indian government has several tax slabs that determine how much income tax must be paid. The taxpayer must file an income tax return each year (ITR). Individuals may be eligible for a refund or may be required to pay a tax depending on their ITR. Individuals who fail to file their ITR face severe fines.
This direct tax is due annually and is calculated based on the property’s ownership and market value. If a person possesses a property, he or she must pay a wealth tax, which is imposed regardless of whether the property provides income. Corporations, Hindu Undivided Families (HUFs), and individuals must pay wealth tax depending on their residency status. Assets such as gold deposit bonds, stock holdings, home property, commercial property rented for more than 300 days, and house property owned for business and professional usage are excluded from wealth tax.
It is also known as Inheritance Tax and is calculated based on the value of an individual’s estate or the money left after his or her death.
Apart from shareholders, domestic enterprises will have to pay corporate tax. Foreign firms that earn money in India must pay corporate tax. In India, income obtained through asset sales, technical service fees, dividends, royalties, or interest is taxed. This direct tax is further classified into Securities Transaction Tax (STT), Dividend Distribution Tax (DDT), Fringe Benefits Tax and Minimum Alternate Tax (MAT).
Capital Gains Tax
It’s a type of direct tax that’s levied on revenue derived from the sale of assets or investments. Capital assets include farms, bonds, stocks, businesses, art, and real estate investments. Depending on how long it is held, tax can be classified as long-term or short-term. Any assets other than securities sold within 36 months of purchase are considered short-term profits. If any income is earned through the sale of properties that have been held for longer than 36 months, long-term assets are assessed.
Merits of Direct Tax
Despite a few drawbacks, direct taxes play a critical part in India’s economy. If these taxes are implemented correctly, they can significantly maintain price levels and prevent inflation. Let’s glance over direct tax benefits as we focus on the good side.
|Advantages of Direct Tax|
|Economic and social balance|
|Inflation is curbed|
|Equal distribution of wealth|
|Imposes a sense of certainty|
Direct Taxes vs. Indirect Taxes
While direct taxes are applicable on the activities conducted and the income earned, indirect taxes are levied on services and products. The tax burden cannot be shifted in case of a direct tax whereas in case of a direct tax the burden can be easily shifted. A direct tax is paid by the concerned personnel, whereas an indirect tax is paid by an individual but recovered by another individual who bears the tax.
Explaining the Direct Tax Code
The Direct Tax Code, sometimes known as the DTC, was created to replace the Income Tax Act of 1961. DTC’s major goal is to make direct taxation more equitable, effective, and efficient. The DTC was also written to alter and stabilize all direct tax legislation so that the tax-to-GDP ratio rises and voluntary compliance becomes easier.
|Objectives of the Direct Tax Code|
|To simplify and consolidate all the central government’s direct tax rules.|
|To improve the effectiveness and efficiency of the tax system.|
|To bring the consolidated law on direct taxes, such as income tax and dividend tax, into effect.|
|To achieve horizontal fairness among different classes of taxpayers, best worldwide practices must be followed|
|Tax regulations must be straightforward, stable, and resilient to improve compliance.|
|To gradually phase out a plethora of tax breaks and deductions to broaden and deepen the tax base.|
Before this, taxes might have got you feeling blue, but now we are sure you are out of despair, having known the basics of which is direct tax, is income tax a direct tax, what is direct tax and everything you can probably consume of direct tax in one go.
So, before it’s income tax time again, folks: time to gather up those receipts, get out those tax forms, sharpen up that pencil, and get going.
By investing a portion of your income in tax-deductible funds, investments, and policies, you can have a portion of your income treated as or declared non-taxable.
Some tax-saving fixed deposits, investments in National Savings Certificates (NSCs), insurance policies, EPF and PPF schemes, and other investments are immediately excluded from taxation under Section 80C, 80CCC, and 80D.
Direct taxes have the drawback that filing an income tax return takes longer than indirect taxes, which you don’t even realize while paying.
An assessment year is a 12-month period that begins on April 1st and ends on March 31st.
No, receipts are divided into two categories: revenue receipts and capital receipts. All revenue receipts are taxable unless specifically exempted, and all capital receipts are exempt unless specifically taxed.
GST is an indirect tax that is levied on goods and services.
No, TDS is an indirect tax
All the current TDS rates can be accessed here: https://www.incometaxindia.gov.in/charts%20%20tables/tds%20rates.htm
If a person’s income is less than 2.5 lakhs, he /she is not liable to pay any tax. For people above the bracket, the taxation is calculated as follows: https://www.incometax.gov.in/iec/foportal/help/individual/return-applicable-1