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What are Direct taxes? Investing in public goods and services

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Direct and indirect taxes significantly impact how the Indian economy develops. However, the liability of direct taxes, such as income tax, which every Indian citizen must pay directly to the tax authorities, cannot be shared by another party.

Direct and indirect taxes are the two categories of taxes the Indian government imposes on its citizens. After being imposed initially as a direct tax, indirect taxes are typically transferred to another party. Goods and Services Tax (GST) and Value Added Tax (VAT) are typical indirect taxes. GST is a direct tax assessed against manufacturers and service providers; however, since it is included in the ultimate price of the products or services, it is an indirect tax for consumers.

Did you know? The Indian government receives a sizable portion of its funding from income taxes, which were collected to the tune ₹13,63,649 crore as of 17 December 2022.

What is a Direct Tax? 

A direct tax is one in which the same entity is subject to both the impact and incidence of the tax. Therefore, the payment of direct taxes cannot be transferred to another person or entity. The entity or person against whom this kind of tax is imposed is liable for paying it. Income tax, corporation tax, property tax, and gift tax are some of India’s most typical types of direct taxes.

The most well-known example is the income tax slab rates, where those with higher incomes must pay taxes at a higher rate than those with lower incomes.

Also Read: Learn About Difference Between Direct Tax and Indirect Tax – Read Complete List of Direct and Indirect Taxes

Features of Direct Tax

  • Direct Tax proposals aim to maintain the continuity and stability of taxation, further simplify and rationalise various provisions to reduce the compliance burden, promote the entrepreneurial spirit and provide tax relief to citizens.
  • The constant endeavour of the income tax department to improve taxpayers’ services by making compliance easy and smooth. To further improve taxpayer services, the proposal is to roll out a next-generation Common IT Return Form for taxpayer convenience, along with plans to strengthen the grievance redressal mechanism.
  • The rebate limit of Personal Income Tax is to be increased to ₹7 lakhs from the current ₹ 5 lakhs in the new tax regime. Thus, persons in the new tax regime with income up to ₹7 lakhs do not pay any tax.
  • Tax structure in the new personal income tax regime, introduced in 2020 with six income slabs, to change by reducing the number of slabs to five and increasing the tax exemption limit to ₹3 lakhs. Change to provide major relief to all taxpayers in the new regime.

Types of Direct Taxes in India 

In India, direct taxes are also levied based on a person’s or an organisation’s financial capacity. Therefore, this kind of tax typically has a progressive tax system, meaning that the higher the taxpayer’s capacity to pay, the higher the applicable tax rate. 

1. Income Tax 

The government levies an income tax, possibly the most well-known direct tax, on the yearly revenue brought in by companies and individuals. Corporate tax is the tax levied on profits made by corporations. 

Every year, income tax is calculated following the provisions of the Income Tax Act of 1961 and paid upfront to the federal government. The net taxable income or tax bracket determines the income tax rate. In the case of salaried employees, income tax may be withheld in the form of TDS (tax deducted at source).

On the other hand, self-employed people must pay tax based on the declared income listed on their filed Income Tax Return. ITRs are statements of income and tax obligations (based on reported income) submitted to the IRS in the designated format. Income from salaries, capital gains, businesses, rental income from real estate, and other sources are all subject to income tax.

The Union Budget 2023 has significantly improved the new income tax system, including changes to exemption limits, tax slabs, tax rates, and raising rebates. Using this table, let’s examine the differences between the new and old regimes.

Net Annual Income Range

Old Tax Regime

New Tax Regime (till March 31st, 2023

New Tax Regime (From April 1, 2023)

0- ₹ 2.5 lakh

0%

0%

0%

₹ 2.5 lakh- 3 lakh

5%

5%

0%

₹ 3 lakh- 5 lakh

5%

5%

5%

₹ 5 lakh-6 lakh

20%

10%

5%

₹ 6 lakh- 7.5 lakhs

20%

10%

10%

₹ 7.5 lakh- 9 lakhs

20%

15%

10%

₹ 9 lakh-10 lakhs

20%

15%

15%

₹ 10 lakh-12 lakhs

30%

20%

15%

₹ 12 lakh- 12.5 lakhs

30%

20%

20%

₹ 12.5- ₹ 15 lakhs

30%

25%

20%

More than ₹ 15 lakhs

30%

30%

30%

NOTE: This income tax slab is not applicable for Senior and Super Senior

Tax Relief For Start-ups 

The government has announced that it will move the incorporation deadline for startups to qualify for income tax benefits from March 31, 2023, to March 31, 2024. Additionally, the window for loss carryover and set-off has been extended from seven to ten years following incorporation. However, shareholders who hold at least 51% of the company’s shares may continue to hold those shares during the year the loss is to be carried forward and set off.

Also Read: What Is Direct Tax – Explore Direct Tax Examples And Types

1. Corporate Tax 

Both Indian and foreign organisations must pay taxes to the government under the Indian Income Tax Act of 1961. The net profit of domestic businesses is subject to corporate tax.

Additionally, foreign corporations that conduct business in India and generate profits are required to pay taxes to the Indian government. A company must pay taxes on all its income, including dividends, interest, and royalties.

Corporate tax is currently assessed at 25% of net profit for businesses with a gross turnover of up to  ₹250 crores and 30% for businesses with a gross turnover over ₹250 crores.

In addition, additional forms of corporate tax, such as

  1. MAT

“Zero tax companies,” typically referred to as businesses that claim little to no income to save on taxes, are subject to MAT.

  1. FBT

The FBT tax is levied on the extras provided to employees by their employers, such as drivers and maids.

  1. DDT

A domestic company must pay the Dividend Distribution Tax on any sum declared, distributed, or paid as a dividend to its shareholders. Only domestic firms are impacted. This tax is not paid by foreign companies that distribute dividends in India (such dividends are taxable in the hands of the shareholder).

  1. SST

The SST is levied against businesses’ revenue from taxable securities transactions. There is no additional fee/surcharge for this tax.

2. Capital Gains Tax as Direct Tax

A person’s capital assets include anything they own for their benefit or as an investment. Any item capable of being utilised for more than a year and is not aimed to be sold or liquidated during normal business operations is considered a capital asset for businesses. Some examples of capital assets include equipment, vehicles, houses, stocks, bonds, works of art, businesses, and farms.

The income from selling investments or other assets is subject to the capital gains tax. Capital tax is divided into two categories based on the holding period: short-term gains and long-term gains.

3. Property Tax as Direct Tax 

Property tax, also known as the house tax, is a local charge that states municipal corporations impose on owners of immovable property, such as residential or commercial properties, to maintain the neighbourhood in which the property is located. Based on the municipal corporation charged with maintaining particular areas, each city in an Indian state may have different property tax regulations.

Property taxes are typically assessed using the annual rateable value (ARV) or area-based rating. Owner-occupied homes and other non-rental properties are assessed based on cost, and the ARV is then calculated by applying a percentage of cost, typically 6%. On unoccupied and government-owned land, there is no property tax.

4. Gift Tax as Direct Tax 

Gifts given by individuals other than immediate family or relatives, such as parents, spouses, brothers, and sisters, in cash,  check, or another form, are subject to the gift tax. In contrast to the ₹ 25,000 value taxed before 1988, under the most recent amendment to the Income Tax Act of 1961, the gift’s monetary value must surpass ₹ 50,000 to be taxed. Between the decades, the Gift Tax was eliminated, reinstated in 2004 and is still in effect today. Consumers should know that Gift Tax is applied to the overall gift amount, not just the excess over the ₹ 50,000 threshold limit.

Also Read: What is Indirect Tax? – Meaning, Types and Advantages

Advantages of Direct Tax 

Direct taxation offers several advantages. Here is a list of a few of them:

1. Constructive

Direct taxes are incredibly fruitful. The amount of money collected through direct taxes directly relates to the nation’s wealth changes. In easy words, a rising population and economic prosperity will lead to higher direct tax returns.
2. Economic 

Direct taxes like income taxes are mainly withheld at the source and are tallied annually. For instance, a monthly deduction is made from a worker’s salary for income tax. As the employer serves as the tax collector in this situation, there are significant administrative cost savings. The direct tax is more cost-effective thanks to this system than other taxes with high administrative costs.

3. Ethical

Based on a taxpayer’s income, direct taxes are levied. Compared to taxpayers with lower incomes, those with higher incomes must pay more taxes. In other words, rich people pay more taxes than poor people do. Nevertheless, this holds for all facets of society. People with comparable economic circumstances pay the same amount in taxes. The direct tax’s equitable characteristic promotes justice and equality for all demographic groups.

4. Regulates Inflation 

An anti-inflationary tool that can stabilise market prices is direct taxes. It can be applied to regulate product demand and use. By raising the direct tax, one can reduce the rise in product and service demand that occurs during inflation. By doing this, you’ll compel everyone to spend less on goods and services, lowering demand and, in turn, lowering the inflation rate.

5. Progressive 

Direct taxes are crucial in bridging the gap in financial disparities nationwide. These taxes are progressive because they are levied as per an individual’s income. The funds raised from these taxes are used to implement laws and policies to assist the underprivileged in society and advance social and economic equality.

6. Specific

The tax authorities can also accurately predict the amount of direct tax revenue they can anticipate. The tax amount is clear because it is decided before the deadline for filing taxes. This mutual assurance of the tax amount helps to eradicate misconduct from the tax collection process.

Conclusion 

Direct taxes include income taxes, property taxes on real estate and other assets, etc. These direct taxes and others are paid directly to the Indian government’s appropriate tax authorities. India has had direct taxation for a very long time. The country’s wealth is redistributed with the assistance of direct taxes. People with higher incomes must pay more taxes, while those with lower incomes must pay less. Despite some disadvantages, direct taxes are essential to the growth of India’s economy. If these taxes are properly implemented, they can significantly contribute to keeping prices stable and preventing inflation.

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