In India, the tax applies either directly or indirectly to income. The taxes that exert directly are direct taxes, and the rest fall under indirect taxes. The direct tax meaning applies to income generated as a salary, profit, or interest from a fixed deposit.
Furthermore, a direct tax is where the impact and the incidence fall under the same category. The Central Board of Direct Taxes (CBDT) oversees direct taxes in India. It was formed due to the Central Board of Revenue Act of 1924. This article is an introduction to direct tax, the direct tax definition with a direct tax example.
Types of direct taxes
There are various types of direct taxes in India. Here are a few:
1. Income tax
The tax that applies directly to an individual's income is the income tax. The department falls under the Income Tax Act of 1961. The central government of India supervises the income tax department.
The income tax slabs revision takes place during the yearly union budget. It applies to income generated from profit in business, profession, bonus, capital gains, house property income, etc. However, the government does provide some tax breaks known as deductions. The gross amount of income tax is determined after accounting for deductions.
2. Corporate Tax
This tax is due to all Indian companies, public and private, that are registered under the Companies Act of 1956. Finance Minister Nirmala Sitharaman made several announcements in September 2019, including significant cuts to corporate tax.
The government decided to reduce the domestic corporate tax to a final rate of 25.17 per cent, including all surcharges and cess. Amid an economic slowdown, this was done to encourage growth and investment. Additionally, corporate tax includes the following.
● Minimum Alternate Tax (MAT): It covers companies that pay no taxes and whose accounts are prepared per the Companies Act.
● Tax on Fringe Benefits: This kind of direct tax is levied against companies for the services (drivers, maids, etc.) that are given to workers as fringe benefits.
● Dividend Distribution Tax (DDT): This tax is imposed on any sums declared, paid, or distributed to shareholders as dividends by domestic entities; DDT does not apply to foreign corporations.
3. Wealth Tax
It pertains to the market value of individual possessions. Wealth tax, also known as capital tax or equity tax, applies to the wealthier segments of society. The Wealth Tax Act's application was stopped on April 1, 2016. This was caused by a low level of awareness and yield. Moreover, a higher cost of collection was an administrative burden.
The super-rich (those with an annual taxable income exceeding INR 1 crore) now face an additional 2% surcharge in its place. Wealth taxes are applied to several specified assets, including land, buildings, cars, jewellery, bullion, yachts, and cash exceeding a certain threshold.
Advantages and disadvantages of Direct Taxes
Direct taxes come with a set of advantages.
● Equitable: Direct taxes are fixed costs. The price of goods increases due to the tax, and everyone must pay the increased price.
● Economical: The direct tax system has a low cost of collection. Most of them are taxed "at the source." For instance, income tax is subtracted monthly from an officer's pay. This reduces expenses, allowing a much higher percentage of tax revenue.
● Certainty: With direct tax, the taxpayers are aware of the amount and deadlines for payment. Additionally, the government is aware of the potential revenue. Both sides share a sense of certainty. As a result, the corruption of collecting officials is reduced.
● Elastic: Direct taxes can serve the purpose when the state suddenly faces a financial emergency and needs more money. Raising the rate of income tax or death duties is a simple way to increase revenue.
● A way to foster civic awareness: Individuals develop an awareness of their rights and duties when paying direct taxes. They have the right to know where the government is spending its money.
However, there are some drawbacks to direct taxation as well
● Tax evasion: The most significant drawback of direct taxes is tax evasion. The likelihood of tax evasion through deceptive means increases when the legal system contains loopholes. For example, several taxpayers reduce their tax obligations by artificially suppressing profits on their financial statements.
● Social conflict: There is a chance of social unrest because a section of the slab is not taxed owing to their limited earnings. This ignites a sense of free-riding, criminal activity, inferiority complexes, and social injustice.
● Convenience: Direct tax filing and submission involve several formalities and lengthy processes that taxpayers must complete. For the taxpayers, this makes the entire process tedious and inconvenient.
What is a Direct Tax Code?
The direct tax code aims to simplify the wireframe of the direct laws in India. It covers the Income Tax Act of 1961 and the Wealth Tax Act of 1957.
● DTC from 2009 to 2014
On August 12, 2009, the Direct Taxes Code Bill's first draft was made public. A revised discussion paper (RDP) was then released in 2010. In addition, the government established a Standing Committee of Finance (SCF) to consult with various stakeholders after DTC 2010 was introduced in Parliament. In 2012, the SCF delivered its report to Parliament. A revised version of DTC was released in 2014 after the government considered the SCF's recommendations. However, it expired in May of that year, when the NDA government took office.
● Direct Taxes Code from 2014 to now
An expert committee was established in 2017 by the government of Prime Minister Narendra Modi to draft a new Direct Taxes Code. On August 19, 2019, Nirmala Sitharaman, the finance minister, received the task force report on DTC. But it hasn't yet been made public. Some reports say the highest income tax bracket should be raised significantly, and there should be a wide range of incentives for start-up businesses, among other things.
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Frequently Asked Questions
Direct taxes are non-transferable taxes paid by the taxpayer to the government. Conversely, indirect taxes are transferable taxes where the liability to pay can be shifted to others.
The likely disadvantages are tax evasion, social conflict and certain inconvenient formalities. These points have been discussed in detail above.
There are various ways to save on your taxes. By checking the appropriate tax act, you can identify the taxable and non-taxable amounts.