India is a country with one of the largest populations and also is a land of diversity in culture, ethnicity, language, food and what not. As a citizen of the country, it is important for us to understand the country and its regulations out of which Direct Tax is one of the major points.
What is Tax?
Taxes are referred to as a required payment to the Indian government made by people or businesses that fall under a certain tax bracket. In India, taxes are imposed at every level, from municipal to national, and are regarded as one of the main sources of revenue for the government.
Taxes are imposed by the government on its residents in order to raise revenue for economic development initiatives, strengthen the national economy, and raise citizens’ standards of life. The Indian Constitution grants the State and Central governments the exclusive right to raise taxes, which gives our government the power to do so. All domestic taxes must be supported by authorising legislation that has been approved by the State Legislature or the Parliament.
So, what is a direct tax?
Direct taxes are levied against the same company on both an incidence and an effect basis. For instance, direct taxes include income tax, corporate tax, wealth tax, and gift tax. An indirect tax, on the other hand, is not imposed directly upon the taxpayers. This tax is imposed on products and services, and it is not the same individual who bears the burden and pays the tax. For instance, as a customer, you could have paid SGST/CGST for meals you ordered from a restaurant. Even if the real tax was imposed on the restaurant, you must pay this to the owner of the establishment since they have transferred the weight of the taxes to you. Indirect taxes in India include things like service tax, federal excise, customs duty, GST, and entertainment tax, among others.
The Constitution of India holds certain provisions with regard to the levying of direct tax and it includes the following:
The preamble of the constitution refers to India as a “Socialist” nation that guarantees “equality of opportunity and status” for its citizens. Similar to this, Articles 37 and 38 of the Directive Principles of State Policy underline that the state must work to reduce economic disparities and prevent the concentration of wealth and productive resources. Direct taxes with a progressive character, in which the wealthiest are taxed at a greater rate than the poor, are one approach to this. For instance, the income tax rate for someone making Rs. 3,000,000 per year is 5%, whereas the rate for someone making Rs. 10,000,00 is 30%.
A 25 per cent extra tax surcharge is needed for everyone earning more than Rs. 50,000,000 in annual income!
According to Article 265 of the Indian Constitution, “no tax must be imposed or collected except by the authority of law.” Therefore, unless expressly and unambiguously permitted by law, no direct taxes may be imposed or collected in India. The Income-tax Act of 1961 (ITA) was passed to establish the levying and collecting of tax on an individual’s income. The Gift Tax Act and the Wealth Tax Act were two additional direct tax laws that the government passed at various times in time. Both of these laws have since been repealed. Additionally, as has been described below, the Indian Constitution places restrictions on the parliament’s ability to make laws relating to direct taxation.
First, the parliament should have the authority to pass legislation imposing taxes. The union government is only permitted to levy the taxes that are clearly stated in List I of Schedule 7. For instance, according to Entry 82 of List I, the parliament alone has the authority to draught laws imposing an income tax (other than agricultural income, which may be taxed only by state legislatures). Similar to Entry 84 of List I, Entry 85 and Entry 86 grant the parliament authority to enact wealth tax and corporate tax, respectively. According to Article 248 of the Constitution, when read with Entry 97 of the Union List, every tax that is not expressly stated in Lists II and III of Schedule 7 is also chargeable by the parliament.
Examples of taxes that have been taxed under these residuary clauses include gift and spending taxes. Additionally, the taxing laws shall not be arbitrary, discriminatory, or in breach of Articles 21, 14, or 19(1)(g) of the Indian Constitution, which are the essential rights stated in Part III of the Constitution. A few recent case studies that have been in the news have been used to explain the aforementioned constitutional provisions.
What is Direct Tax?
You pay these taxes directly, as was previously mentioned. Such taxes are imposed by the government directly on a person or an organisation, and they cannot be transferred to another person or organisation. Only one such federation, the Central Board of Direct Taxes (CBDT), which is run by the Department of Revenue, winks at direct taxes. The CBDT has the support of multiple statutes that oversee various parts of direct taxes to help it with its feeling of responsibility.
Some of these Acts would include:
- Income Tax Act
- Corporate Tax
Companies must pay corporation tax on the earnings they make within a particular fiscal year.
- Capital Gains Tax
The revenue from selling investments or other assets is subject to the capital gains tax. Capital tax is divided into two categories based on the length of the holding period: short-term profits and long-term gains.
The ability-to-pay concept, which states that people with access to greater resources and a higher income must pay more in taxes, is the foundation upon which direct taxes are levied. The way the direct rules are written makes taxes appear to be a way to redistribute wealth in the nation.
Transferring direct taxes to another person or organisation is possible. The only parties liable for paying taxes are the organisations and people to whom direct taxes are levied. Tax arrears may be punished with penalties and/or jail time. Because it puts larger taxes on people who work hard to attain a higher income, the direct tax system, which is based on the brackets system, may prove to be demoralising.
Therefore, people may decide to settle and restrict their production in order to decrease their outlay with the expectation of having to pay greater taxes. Another type of tax that is placed on people when they trade for goods and services is known as an indirect tax. Retail and wholesale sellers are periodically charged with indirect taxes.
Who Should Pay Income Tax?
- Income tax may be filed by completing the necessary paperwork. ITR-1 forms should be used to submit taxes for salaried persons making less than Rs 50 lakh annually from salary, rental income, other sources, and agriculture.
- Individuals and HUfs without any income from professional or company earnings or gains must submit their taxes using the ITR-2 form.
- Individuals and HUFs should file their taxes using the ITR-3 form if they receive income from business and professional gains and profits.
- The ITR-4 tax form should be used to file taxes for individuals, HUFs, and corporations (excluding LLP) with an overall income of less than Rs 50 lakh and income from a profession or business estimated in accordance with Sections 44AD, 44ADA, and 44AE.
- Individuals and HUFs should file ITR-5 tax returns for entities and people other than corporations.
- Companies that are not claiming Section 11 exemptions must file their taxes using the ITR-6 form.
- Individuals and businesses should file their taxes using Form ITR-7 if they are required to provide their return under Section 139(4A), 139(4B), or 139(4D).
- Only individuals or businesses are obliged to provide returns under Sections 139(4A), 139(4B), 139(4C), or 139(4D).
Procedure for Filing Income Tax Return and Paying it
In India, an Aadhaar card and a PAN card are required to submit income taxes. The Income Tax Department issues PAN (permanent account number) cards, whilst the Unique Identification Authority of India issues Aadhaar cards (UIDAI).
When the window is open, people can file income taxes. They can file their taxes and the penalty if they miss the deadline to file. Penalties and jail may follow failure to file income taxes. Property taxes are paid by property owners, whereas corporate taxes are paid by businesses.
Conclusion
Along with the direct tax there is also the indirect tax in the land of India. And it is nothing but the GST, central excise duty, and customs are examples of indirect taxes. An indirect tax imposed on domestically produced items is called central excise duty.
As responsible citizens, we should all file ITR or Income Tax Returns on time, remitting our tax liability on a timely basis. This will help us not only avoid any interest or penalty but also participate in the building of our nation and its future for a new and upcoming generation.
