Taxation is how the government collects income in India and funds public basic services, infrastructure development and other services through the government. The tax systems of India take the forms of both direct and indirect taxes by both central and state governments. Direct taxes are those which are imposed on individuals and corporations as income tax and corporate tax based on their earnings or profits. Indirect taxes, on the other hand, are imposed on goods and services which are not paid by consumers directly; an example would be Goods and Services Tax (GST) Custom Duty. This divided tax system facilitates and promotes an equal balance for the collection of revenue without damaging economic growth and social equator. Taxation, thus, is one of the most essential sources of revenue for the Indian government that allows its provision of public services, infrastructure and other social amenities to be put together.
Taxation is divided into direct and indirect taxes and is governed through central and state departments. Income Tax and Corporate Tax fall under the head of direct tax, which applies to the earned amount or profit earned from an individual to a legal organisation. In return, indirect tax is applied towards goods and services payable to a consumer through agents; some instances are the GST and Customs Duty. Therefore, it is constructed by maintaining economies, neither weakening growth nor diluting social equilibrium.
What are Direct Taxes?
The difference between direct taxes and indirect taxes is that, unlike indirect taxes imposed by the government on an individual or corporation, the levy of such a tax depends upon the income, wealth or profits of that particular individual or corporation. A tax liability arises under this type of obligation for which no third party will bear it. They are the lifeblood of a nation as far as its revenue structure goes, as they go a long way in bringing about a fair distribution of wealth. These will then help promote social and economic equity and generate healthy revenue for the government. Ongoing reforms to improve efficiency, transparency, and taxpayer-friendliness characterise this direct taxation system in India, an indispensable part of sustainable economic growth.
Types of Direct Taxes in India
- Income Tax: It is the tax on individuals, HUFs, and other concerns based on all sources of income, such as salary, rental profit, business profit, and capital gains. The quantum of tax would be decided upon the progressive tax slabs.
- Corporate Tax: Tax on the domestic and foreign companies based on their profits as their turnovers are being taxed at differentials taxation of small and big companies based on their turnovers.
- Capital Gains Tax: This tax is collected on the gains earned from transferring capital assets like real estate, stock, bonds, etc. Winners can term their gains as either short-term capital gains or long-term capital gains depending on the duration for which they have held an asset.
- Wealth Tax (Repealed as in 2015): In India, if the value of the net worth of individuals or corporations crossed over a limit, then they used to be taxed based on their worth.
- Dividend Distribution Tax (abolished in 2020): Dividends are no longer taxed at the level of the company earning them but at the hands of the individual shareholders as income.
- Security Transaction Tax (STT): A tax on the transactions of stock, derivatives and equity mutual funds initiated or executed in recognised exchanges.
- Minimum Alternate Tax (MAT): MAT will come into play on companies with nearly zero or practically no taxable income because of major deductions. Hence, in such circumstances, these assessees do not pay the minimum tax.
- The Equalisation Levy shall apply to a non-resident company that derives its income from electronic commerce to provide online services in India. It is imposed by the government.
What are Indirect Taxes?
Indirect taxes are not actually interested in the income or profit of an individual; they are levied on indirect taxes on goods and services. If direct taxes link themselves with some despondent taxpayers who have to pay taxes directly, then indirect taxes extend some relief to a taxpayer. These taxes are collected by intermediaries like retailers, manufacturers or service providers and remitted to the government. Most economies, such as India, rely heavily on these for revenue generation. They play a significant role in the revenue collection framework, from which the government can mobilize resources for public services and infrastructures. Although the merits of these taxes include easy collection and broad-based application, their demerits include being regressive. The introduction of GST has streamlined India’s indirect tax regime while working to establish one market across the country and reducing complications. However, improvements must be continued to make things better in terms of equity, transparency, and efficiency for this system.
Types of Indirect Taxes in India
- Goods and Services Tax (GST): It’s an indirect all-inclusive tax on the supply of both goods and services. Replacing all different kinds of State and Central levies such as Value Added Tax (VAT), Service Tax and Central Excise, it works upon a destination basis with a two-tiered architecture – Central Goods and Services Tax (CGST), State Goods and Services Tax (SGST) and Integrated Goods and Services Tax (IGST).
- Customs Duty: It is a tax and tariff imposed on the imports and exports of the country to regulate trade in a country and generate revenue. Some of the examples include the basic customs duty, assessed at base cost on the value of imported articles; the countervailing duty, which is on imports to supplement the indirect taxes of other countries; and the anti-dumping duty, which could be exercised for the protection of domestic industries from pests of unfair trade practices. The most important function of customs is to regulate the movement of goods in the country.
- Excise Tax is payable at the time of manufacturing goods as categorised under heads of manufacture of goods in the country. Till GST, excise tax happened to be the one and only direct tax levied on every excisable good or service, essentially consisting of such goods as liquor, beer, tobacco, etc., and liquid fuels. Even after GST, excise duty taxes are demanded for some portions of petroleum and liquor.
- Value-added tax is a type that is levied on goods, either by the state government or by the central government.
- Service Tax: Earlier, it used to be a disjoint taxation model, but now it forms a part of GST. Service tax was charged by the companies on the services they provided to consumers, and its range before the implementation of the GST structure was between 5% and 15%.
- Stamp Duty is a kind of tax on legal documents. Normally, it is calculated in terms of a fixed amount or as a percentage of the transaction value. It normally applies to property transactions, contracts, and agreements.
- Other Indirect Taxes: Octroi is a municipal tax on the goods coming into the area. Entertainment tax charges upon ticket sales of all kinds of movies, events, and amusement parks are other indirect taxes.
Direct Taxes vs Indirect Taxes
Direct and indirect taxes are two basic dimensions of the tax system, which are significantly different in terms of application, collection, and impact. Therefore, a proper tax system will consist of these two taxes only. Direct tax is fair because it taxes individuals according to their income level, and indirect tax widens the base of revenue due to its vast applicability. When these two types of taxation are combined, they allow for development, equity and efficient allocation of resources in the economy.
1. Definition
- Direct taxes directly levy a tax on an individual’s income, wealth, or earnings, where liability lies directly with the taxpayer, such as income tax or corporate tax.
- Indirect taxes are indirect levies charged on goods and services but end up being borne by the consumers themselves, including GST and Customs Duty.
2. Collection and Assessment
In the case of individuals or businesses, direct taxes are assessed and collected by relevant government agencies. Income tax has been withheld from the individual’s income or gains.
Indirect taxes are collected at the time of sale or delivery of service by intermediaries such as retailers and service providers and are remitted to the government. GST is passed on in the price of goods or services that the consumer pays for.
3. Tax Burden
Direct taxes are obligations whose payer is the income earner. Indirect taxes pass on the burden to another person. Although levied upon an intermediary, say a wholesaler or retailer, in the final stage or upon the ultimate consumer, they form part of the cost that he incurs in buying the good or service; hence, the extra price that he pays forms the final passing on of the tax burden to the consumer.
4. Basis for Taxation
Direct taxes are based on one’s or an entity’s “capacity to pay.” Thus, if one has more income, he or she pays more taxes because the system is progressive.
On the other hand, indirect taxes are based on consumption, it applies to all consumers without regard to income and therefore, making them regressive.
5. Impact on Consumers
Direct tax does not directly discard goods and services; instead, it influences the amount of disposable income the taxpayer has at his disposal. It mostly raises the price of goods and services.
6. Compliance and Evasion
Because direct taxes have simpler forms in filing returns and in calculating liabilities, they tend to have a greater incidence of evasion, requiring strict enforcement and monitoring. Indirect taxes are usually incorporated into transactions and collected automatically.
On the other hand, despite this, lapses within systems like Goods and Services Tax (GST) could lead to such fraudulent claims as fictitious invoices.
7. Equity
Direct taxes are just in the manner that they are a progressive tax but not through extra contributions of high-income people as in income taxes. However, indirect taxes are termed as regressive because taxes are to be paid directly from the nets of large expenditure groups for whom the taxable consumption goods and services absorb more out of their meagre earnings.
Conclusion
Direct and indirect taxes are the essential part of a sound taxation system. In direct taxes, fairness can be seen as levying taxes directly on incomes, while indirect taxes provide buoyancy, enabling revenues to be raised at the consumption level. They complement each other in achieving economic growth, reducing inequality and providing public services and development services by the government.
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