Tax is a charge enforced and collected by the Central or/and State government to provide for the administration and meeting requirements of the country such as running hospitals, schools, roads, military production, law enforcement, etc.
Types of Taxes in India
The tax structure is broadly sub-categorized into two categories that are: Direct and Indirect Taxes.
What Is Direct Tax?
Direct taxes are those taxes that are directly collected from and paid by the same person. The tax is charged and borne by the same person. These taxes are solely dependent on the income and wealth of a taxpayer.
In India, the CBDT (Central Board of Direct Taxes), governed by the Department of Revenue, is responsible for the administration of direct taxes and is also involved in planning and providing inputs to the government regarding the implementation of direct taxes.
Types of Direct Taxes in India
Direct taxes are of the following types:
Income Tax: This tax is imposed and collected by the Central government on the income of a taxable person. It is governed and administered by the Income Tax Act. The Income-tax slabs have been made relying on the various levels of income and groups of taxpayers.
The categories of “persons” as mentioned under the Income Tax Act are:
● Individual -Taxable as per Slab rates introduced for each Assessment Year
● Hindu Undivided Family(HUF)-Taxable as per Slab rates announced for each Assessment Year
● Company-Domestic and Foreign Company (as per MAT and normal tax provisions )
● Firm( including LLP)- Taxable at a flat rate of 30%
● Association of Persons (AOP) or a Body of Individuals (BOI)-Taxable at a flat rate of 30%
● Local Authority-Taxable at a flat rate of 30%
● Artificial juridical persons-Taxable at a flat rate of 30%
Securities Transaction Tax: Securities Transaction Tax (STT) is a direct tax that is payable on the total transaction value of securities and stock exchange in India. Securities Transaction Tax came up in 2004, introduced by the then Finance Minister, P. Chidambaram, to prevent tax evasion.
Property Tax: Property tax is the amount that is paid as tax by the landowner to the municipal corporation or the local government for his area. This tax is obligatory. Property, office buildings, and residential homes that are used for self accommodation or rented out to third parties are considered real estate assets and are liable to Property Tax.
Merits of Direct Taxes
- The lower the level of income, the lower the tax burden.
- Under direct tax the distribution of wealth is just and equal.
- Direct tax rates help in controlling the rate of inflation.
Demerits of Direct Taxes
- Direct taxes might restrain savings and investments.
- The filing & Payment procedure of direct taxes is a bit complicated.
What Is Indirect Tax?
Indirect taxes are taxes that are collected and deposited by the supplier, but the ultimate burden of these taxes is transferred to the ultimate consumer of the goods. This tax is imposed and collected and deposited with the Central Government or State/Union Territory government or both.
Types of Indirect Taxes in India
The major indirect tax structure in India includes:
Goods and Services Tax: The GST law came into force on 1st July 2017 and subsumed various indirect taxes on Central and State levels. It is levied on supply of goods and /or services or both.
Central level taxes subsumed under GST:
- Central Excise Duty
- Service Tax
- The Excise Duty, under the Medicinal and Toiletries Preparations (Excise Duties) Act.
- Additional Duties of Excise (Goods of Special Importance)
- Additional Duties of Excise (Textile and Textile Products)
- Special Additional Duty of Custom, commonly called Countervailing Duty (CVD).
- Central Sales Tax
- Central Surcharges and cesses so far as they relate to goods and services.
State-level taxes subsumed under GST:
- VAT / Sales tax
- Luxury tax
- Entertainment and Amusement tax (unless levied by the local authorities)
- Taxes on lottery, betting, and gambling
- Taxes on Advertisement
- Entry Tax
- Purchase Tax
- State Cesses and Surcharges on the supply of goods and services
Merits of Indirect Taxes
- Higher revenue to the government
- Transparent tax administration
Demerits of Indirect Taxes
- Increased prices of goods and services
- Equal tax burden irrespective of Income level.
Direct and Indirect Tax Collection in India
The tax collection depends on the nature of taxes. Direct taxes are the Income-tax, Property tax, etc. They are collected and imposed generally by the Central government. The levy and administration of the Income-tax are governed by the Income Tax Act. On the contrary, Goods and Services Tax is imposed and collected by the Central Government and State or Union Territory government, or both. The GST Council, chaired by the Union Finance Minister along with the state Finance ministers makes modifications and decisions related to the GST rates, rules, and regulations.
Difference between Direct and Indirect Taxes
Direct and Indirect taxes can be distinguished based on various criteria
|Nature||Direct Tax||Indirect Tax|
|Tax payment and burden||The taxpayer has the burden and liability to pay the direct tax.||The seller or the service provider is liable to pay tax but the burden is ultimately transferred to the end consumer.|
|Tax liability||The amount of tax liability depends on the income group to which the taxpayer belongs.||The amount of tax liability amount depends on the nature and type of goods & services supplied.|
|Nature of taxes||Income or profit-based tax.||Consumption or destination-based tax.|
|Tax evasion||Tax evasion is possible due to the lack of administration, however, measures are taken to reduce it to a minimum.||Tax evasion is possible due to unhealthy practices followed by taxpayers, however, measures are taken to reduce it to a minimum.|
|Society coverage||It applies to the taxpayers who fall under the respective tax group or bracket.||It applies to all taxpayers irrespective of the tax bracket.|