Understanding The Various Types Of Direct Tax: A Comprehensive Guide

Taxes constitute the biggest source of revenue for the Indian government. The money generated from collecting taxes goes into funding different projects for the development of the country. This enables the government to boost the economy, improve infrastructure and uplift the standards of living of the people. One crucial aspect of the Indian tax system is the imposition of various types of direct taxes, which include income tax, corporate tax, and wealth tax. These direct taxes play a significant role in shaping the fiscal policies that contribute to the overall progress and prosperity of the nation.

The Constitution of India gives the Central and the state governments the authority to levy taxes. The taxes can’t be levied without the approval of an accompanying law that has been passed by the State Legislature or the Parliament.

The types of taxes that are levied are implemented by the government are of two types- direct and indirect tax. Direct tax is paid to the government by the individual directly. Some types of direct tax in India include income tax, capital gain tax, corporate tax, etc. On the other hand, indirect tax is not levied directly on income or wealth but on goods and services. This type of tax includes sales tax, value-added tax, excise duty, etc.

Paying taxes is a duty of every Indian citizen. But, It is also important to understand how taxes work. This article will give an overview of what is direct tax, the types of direct taxes, and their various advantages.

Let’s Understand Direct Tax

It is imperative to understand what are direct taxes in India as a tax-paying citizen of the country. A tax that is levied directly on an individual’s income or an organization is a direct tax. This type of tax can’t be passed to someone else or an entity. Direct tax in India must be paid directly to the Indian tax authorities.

Levying and collecting direct taxes in India is the responsibility of the Central Board of Direct Taxes. It is a statutory body that is a part of the Department of Revenue and was formed under the Central Board of Revenue Act, of 1924. Planning and suggesting inputs for the implementation of direct taxes to the government is also part of this department’s jurisdiction.

Income tax and corporate tax are significant direct tax examples in India. They are also referred to as progressive taxes because this culminate in a bigger share of tax being paid as an individual earns more income.

What Are the Different Types of Direct Tax

Some of the different types of direct taxes fall under the following categories. So let’s have a look at this direct taxes list.

1. Income Tax:

Income tax is the most common tax that must be paid by every Indian. It is levied directly on an individual’s income and is paid according to the different income tax brackets. The tax is chargeable both to individuals and businesses. When it is imposed on income earned by a business house, it is referred to as a corporate tax. Income tax must be paid directly to the Central government of India every year.

Income tax can also be deducted as TDS (tax deducted at source) if an individual is a salaried employee. On the other hand, if an individual is self-employed, they need to pay tax based on declared income according to their Income Tax Return (ITR) submission. ITR is a declaration of income and tax liability that should be submitted to the Income Tax (IT) Department.

2. Corporate Tax:

A tax imposed on the net profit of domestic companies is referred to as a corporate tax. According to the Income Tax Act, of 1961, the tax must also be paid by foreign corporations whose income derives from India. The income of a company that is earned as dividends, interest, royalties, and technical services fees is taxable.
The corporate tax also includes Securities Transaction Tax(SST), Minimum Alternative Tax(MAT), Fringe Benefits Tax(FBT), and Dividend Distribution Tax(DDT).

3. Capital Gains Tax:

Anything that an individual owns for personal use or the goal of investment is known as a capital asset. For a business, anything that may be used for over a year without the intention of selling or liquidating during the span of a business operation is a capital asset. This includes machinery, homes, cars, bonds, etc.

The tax levied on the income generated from the sale of investments or assets is referred to as the capital gains tax. Capital tax is further categorized as short-term gains and long-term gains based on the holding period.
Please note that wealth and estate taxes have been abolished in India. These types of direct tax are not levied anymore.

Advantages of Direct Taxes

Direct taxes help the country’s social and economic growth. A list of direct tax advantages is noted down below.

1. Curb Inflation:

Increasing the tax rate helps reduce the demand for goods and services during monetary inflation. This in turn helps in reducing the inflation rate.

2. Economic and Social Equitability:

The Government imposes tax slabs and exemptions on the basis of a person’s earnings and economic situation. People with higher levels of income pay a higher tax, while people who earn less pay lower taxes. This is done to balance out economic inequalities and the money generated helps uplift the poor.

3. Productive:

Direct taxes and elastic and very productive. As the population or prosperity of a country increases, so do the returns on direct taxes automatically increase.

4. Economical:

Direct taxes are paid annually which reduces the administrative costs on the authorities who are responsible for levying and collecting taxes. Also, since the tax is deducted at the source and the employer acts as the tax collector, this system is a lot more economical.

5. Certainty:

The system of direct tax gives the feeling of certainty to taxpayers as well as the government. It is simple to calculate the amount of tax that is required to pay and the amount of tax that is required to be collected. The amount is also known beforehand by both the taxpayers as well as the government.

6. Lower Rate of Interest:

In comparison to indirect taxes, direct taxes give a higher rate of tax collection as they must be paid directly by an individual and not from the whole economy. The responsibility of the taxes lies on the person which results in greater compliance and more direct government spending.

An Overview of Direct Tax in India: Key Takeaways

Direct taxes are imposed directly on the income of an individual or business and are non-transferable. They are levied and collected by the Central Board of Direct Taxes. Income tax, corporate tax, and capital gains tax are some of the direct tax examples in India. These are progressive in nature as the share of taxes one has to pay increases with their income.

Direct tax in India has various advantages for the social and economic development of the country. They are equitable, productive, and economical and can help in curbing inflation. Direct taxes are chargeable on taxable income and are collected annually.

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