DIRECT & INDIRECT TAX

WHAT IS A TAX?

  • In order to finance government activities, an involuntary fee is levied on individuals and corporations by the government which is called as Tax. Taxes are an advantage granted in return for something.
  • Taxes in India are levied by the Central Government and the state governments. Some minor taxes are also levied by the local authorities such as the Municipality. According to Article 265 each tax levied or collected has to be backed by an accompanying law, passed either by the Parliament or the State Legislature.
  • To avoid any disputes between the centre and state the Constitution envisage following provisions regarding taxation:
    • Division of powers to levy taxes between centre and state is defined very clearly.
    • There are certain taxes which are levied by the centre, but their proceeds are transferred to the states. Example-Estate duty on property other than agriculture income.
    • There are certain taxes which are levied by the centre, but their proceeds are distributed between both centre and the state. Example- Union Excise Duty.
    • There are certain taxes which are levied by the states, and their proceeds are also kept by states. Example: VAT
    • There are certain taxes which are levied by the central government, but the responsibility to collect them is vested with the states. Example- Stamp Duty other than included in the Union List.

TYPES OF TAXES

  • There are mainly two forms of taxes namely Direct and Indirect taxes. Direct taxes allow the government to collect taxes directly from the consumers while Indirect tax is a tax collected by an intermediary from the person who bears the ultimate economic burden of the tax.

A) Direct Tax

A Direct tax is imposed directly on the taxpayer and paid directly to the government by the ones on whom it is imposed.

Some important direct taxes imposed in India are as under:

  • Income Tax: It is levied on and paid by the same person according to the different tax brackets as defined by the income tax department.
  • Corporate Tax: It is the tax on all the income or gains generated by corporations. It is generally levied on the profits earned.
  • Inheritance Tax: It is a tax on the estate, or total value of the money and property, of a person who has died.
  • Gift Tax:It is the tax that an individual receiving the taxable gift pays to the government.

There are certain advantages of Direct Taxes:

  • Social and economic equity
  • Relatively Elastic
  • Certainty of tax to be paid
  • Controls Inflation
  • Economical and lower cost mechanism

However, there are many cons too of Direct Taxes:

  • Tax Evasion
  • Inconvenient
  • There is imbalance in sectoral taxation
  • Impacts capital formation
  • Arbitrary rate of taxation

B) Indirect Taxes:

  • An indirect tax is a tax collected by an intermediary from the person who bears the ultimate economic burden of the tax. It can be shifted by the taxpayer to someone else.

Some important indirect taxes imposed in India are as under:

  1. Customs Duty: Customs Duty is a tariff or tax imposed on goods when transported across international borders. The purpose of it is to protect the country’s economy. Under the custom laws, the various types of duties are levied like Basic Duty, Countervailing Duty, Protective Duty, Anti Dumping Duty, Export Duty
  2. Central Excise Duty:It is the tax which is charged on excisable goods that are manufactured in India and are for domestic consumption.
  3. Service Tax: The Service Tax is levied on the gross amount charged by the service provider on the receiver.
  4. Sales Tax: Sales Tax in India is a form of tax that is imposed by the Government on the sale or purchase of a particular commodity within the country. Sales Tax is imposed under both, Central and State Government Legislation.
  5. Value Added Tax (VAT): It is a tax on the estimated market value added to a product or material at each stage of its manufacture or distribution, ultimately which is passed on to the consumer.
  6. Securities Transaction Tax (STT): STT is a tax levied on all transactions done on the stock exchanges.
Direct Tax Indirect Tax
Meaning Levied directly on the individuals or corporations. Levied on one entity but is passed on to the final consumer
Incidence The incidence and impact of the direct tax fall on the same person. The incidence and impact of the tax fall on different persons.
Nature Progressive Regressive
Impact Not inflationary Inflationary
Objective Both Social and Economical Only Economical
Administrative Cost Higher Lower
Tax Evasion Possible Possible
Examples Income Tax, Wealth Tax, Corporation Tax. Excise duty, VAT, entertainment tax, Customs Duty, GST

CONCLUSION

  • Both Direct and Indirect Tax are collected by the central and respective state governments according to the type of tax levied. Both the taxes are important for the government as well as growth perspective of the country.

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