The word “tax” is derived from the Latin word “taxo.” A tax is a government-imposed fee or financial charge on an individual or an organization in order to raise funds for public services according to tax slabs. Most nations rely on types of taxes as their fundamental source of revenue. The money raised is subsequently used to pay for other government spending programs. Failure to pay taxes or refusing to contribute results in the imposition of penalties under the law.
Although there are many different sorts of taxes imposed on both persons and businesses, income taxes and sales taxes are the most well-known. Despite the fact that these taxes are divided into two groups – direct and indirect taxes –
A direct tax is one of the types of taxes that are paid directly to the government by a legal company or an individual. The Central Board of Direct Taxes (CBDT), which is overseen by the Department of Revenue, is in charge of direct tax administration in India. The agency is also responsible for planning and advising the government on the implementation of direct taxes. These taxes are not transferable to another individual or legal body.
These types of taxes are significant since they account for a significant portion of India’s tax revenue because they are paid directly to the government. The authority to pay these tax amounts is delegated to the taxpayers, thus they are referred to as direct taxes.
Direct taxes are based on the ability-to-pay criterion. This economic principle states that people with more resources or higher earnings should pay more taxes. The ability to set tax rates can be used to redistribute a country’s wealth.
Salary, home property, expert or commercial enterprise revenues, and capital gains are all subject to direct taxes. Extra earnings from various sources, such as fixed deposits, mutual funds, and stock market interests, are also taken into account in certain tax slabs. The tax legal responsibility of a person liable to types of taxes is based on his or her residence status and gender.
A person’s income tax is the best illustration of direct tax. If a person earns Rs 100,000 per year and owes Rs 50,000 in taxes, the direct tax is Rs 50,000.
Types Of Direct Taxes
In India, there are three sorts of direct taxes. Others have been phased out as a result of different revisions to the Income Tax Act of 1961. The following taxes are examples of direct taxes:
The most prevalent sort of direct tax charged on your income is the income tax. It is determined based on your taxable income and the Income Tax Act of 1961’s income tax slab. Corporate tax is a tax that is levied on the profits made by businesses.
Securities Transactions Tax
If you trade stocks, you will be charged a Securities Transaction Tax(STT) on each security transaction you make. Even if you lose money on the trade, you must pay this tax. The STT on your trade value is collected by your broker and paid to the stock exchange, which then pays it to the government.
Capital Gains Tax (CGT)
Your taxable income includes capital gains. If you sell a capital asset and make a profit, you must pay capital gains tax on the profit. The capital gains tax rate is not specified in the income tax brackets. The tax rate is determined by the type of capital asset transferred and the time period following the transfer.
In India, indirect taxes are types of taxes related to taxes levied on services and goods when they are acquired and sold. CBIC, which stands for Central Board of Indirect Taxes and Customs, is in charge of indirect taxes in India. CBIC, like CBDT, is a division of the Revenue Department.
It’s worth emphasizing that these taxes aren’t paid directly to the government by the assessee. Instead, tariffs are levied on services and goods, with middlemen collecting the money.
Under the Indian tax system, these types of taxes are collected by the service or product vendors. The tax is levied in addition to the item’s or service’s initial value, increasing their cost. These parties then pay a similar amount to the government, which is referred to as indirect.
Difference Between Direct And Indirect Taxes
The following chart signifies the difference between direct and indirect tax:
|DIRECT TAX||INDIRECT TAX|
|Imposition||Imposed on income or profits||Imposed on goods and services|
|Taxpayer||Individuals, HUFs, firms and companies||End-consumer of the goods and services|
|Applicability||Applicable to the taxpayer alone||Applicable to every stage of the production-distribution chain|
|Tax burden||The burden falls directly on the individual||The burden is shifted to the consumer by the manufacturer or service provider|
|Transferability||Cannot be transferred to anyone else||Can be transferred from one taxpayer to the other|
|Coverage||Confined to an entity or individual taxpayer||Wide coverage because all the members of the society are taxed|
|Administrative cost||Higher administrative costs and many exemptions||Lesser administrative costs because of stable, convenient collections|
|Tax evasion||Possible||Not possible|
|Allocative effects||Have good allocative effects since they put less burden on the collection||Allocative effects not as good as those of direct taxes|
|Inflation||Helps in reducing inflation||Might help in increasing inflation|
|Orientation||Discourage investments, lessen savings||Growth-oriented, encourage savings|
|Mode of progress||Progressive, reduce inequalities||Regressive, enhance inequalities|
|Most common types (in India)||Income, Wealth, Corporate Tax||GST or Goods and Services Tax|
The best examples of indirect taxes are excise fees on liquor, petrol, and cigarette taxes.
Other Common Taxes In India
Goods and Services Tax (GST)
GST is one of the types of taxes that unified the country’s indirect tax structure when it was introduced in 2017. It has eliminated the tax cascade effect and made tax payments simple and straightforward to calculate. GST is levied on both products and services, and any firm registered in India is required to register for it, unless exempted.
When you import items from other nations into India, you must pay this tax. Imports and items brought to India after being purchased overseas are therefore subject to customs duty.
Value Added Tax (VAT)
Despite the fact that VAT on a variety of goods was subsumed by GST, it is still applied to some things today. It can be applied to any type of value addition to commodities.