DIRECT TAXES
A direct tax is one that is levied directly on an individual or organization's income, wealth, or property. The taxpayer bears the burden of the tax and cannot easily shift it to someone else. In contrast, an indirect tax is levied on a transaction, such as a sale of goods or services, and often gets passed on to the consumer in the final price.
Here are some common examples of direct taxes:
- Income tax: This is a tax on the income earned by individuals and businesses.
- Property tax: This is a tax on the value of real estate or other property.
- Wealth tax: This is a tax on the total value of a person's assets. (Less common than income and property tax)
- Inheritance tax: This is a tax on the value of assets that are inherited from a deceased person.
| Subject | Direct Tax | Indirect Tax |
|---|---|---|
| Definition | Taxes imposed directly on individuals or entities. | Taxes imposed on goods and services rather than on individuals or entities directly. |
| Burden | Cannot be shifted; borne by the taxpayer. | Initially borne by the seller or producer, but can be shifted to the end consumer through higher prices. |
| Examples | Income tax, property tax, wealth tax, capital gains tax. | Sales tax, value-added tax (VAT), excise duty, customs duty, goods and services tax (GST). |
| Progressivity | Usually progressive; tax rate increases as taxable amount increases. | Not inherently progressive; applied uniformly regardless of income level. |
Direct taxes typically consist of several components, each targeting different sources of income or assets.
The main components of direct taxes include:
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Income Tax: This is the tax imposed on an individual's or entity's income, including wages, salaries, interest, dividends, rental income, and other sources of income. Income tax rates may vary depending on the level of income and other factors.
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Corporate Tax: Corporations are subject to corporate income tax on their profits. This tax is levied on the earnings of corporations and business entities.
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Capital Gains Tax: This tax is levied on the profit earned from the sale of assets such as stocks, bonds, real estate, and other investments. The tax rate may vary depending on how long the asset was held before being sold.
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Property Tax: Property tax is imposed on the value of real estate properties owned by individuals or entities. It is typically assessed annually by local governments based on the assessed value of the property.
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Wealth Tax: Some countries levy a tax on the net wealth or assets owned by individuals or entities above a certain threshold. This tax is often based on the total value of assets such as real estate, investments, cash, and other valuables.
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Inheritance Tax (Estate Tax): This tax is imposed on the transfer of assets from a deceased person to their heirs or beneficiaries. It is based on the value of the inherited assets and may vary depending on the relationship between the deceased and the heir, as well as the size of the estate
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Income tax is part of direct tax or indirect tax?
Income tax is a component of direct tax. It is imposed directly on individuals or entities based on their income. The burden of income tax cannot be shifted to someone else; it is the responsibility of the taxpayer to pay the tax on their earnings. Therefore, income tax falls under the category of direct taxes
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India's tax structure has three tiers: central government, state governments, and local municipal bodies. Each tier levies specific taxes. Here's a breakdown:
| Level | Taxes Levied |
|---|---|
| Central Government | * Income Tax * Corporation Tax * Goods and Services Tax (CGST) * Customs Duty * Central Excise Duty (phased out with GST) |
| State Governments | * Value Added Tax (VAT) (replaced by GST for most goods and services) * State Excise Duty * Professional Tax * Land Revenue * Stamp Duty * Income tax on agricultural income (rare) |
| Local Municipal Bodies | * Property Tax * Octroi (mostly abolished) * Entertainment Tax (varies by state) * Local service taxes |
Key Components:
- Direct Taxes: Income tax, corporate tax, wealth tax (not very common).
- Indirect Taxes: Goods and Services Tax (GST), customs duty, excise duty (mostly replaced by GST), VAT (mostly replaced by GST), sales tax (varies by state).
GST (Goods and Services Tax): Introduced in 2017, GST is a major reform that applies a single tax on the supply of goods and services across the country. It has replaced a multitude of indirect taxes, simplifying the tax system. GST has three components:
- CGST: Central Goods and Services Tax (collected by central government)
- SGST: State Goods and Services Tax (collected by state government)
- IGST: Integrated Goods and Services Tax (levied on inter-state transactions, collected by central government)
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Net direct tax collections had stood at Rs 16.64 lakh crore in the preceding financial year 2022-23. Refunds stood at Rs 3.79 lakh crore in FY24, an increase of 22.74 per cent over the refunds of Rs 3.09 lakh crore issued in FY23
Income tax collections continued to be higher than corporate tax collections. Gross corporate tax collection (provisional) in FY24 was Rs 11.32 lakh crore, a growth of 13.06 per cent over Rs 10 lakh crore collected in the preceding year, while the net corporate tax collection stood at Rs 9.11 lakh crore, up 10.26 per cent from Rs 8.26 lakh crore in the previous financial year
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"Net direct tax" typically refers to the total amount of direct taxes collected by a government after accounting for any refunds or rebates.
To calculate the net direct tax, you would start with the gross direct tax collections, which is the total amount of direct taxes collected from individuals and entities. Then, any refunds or rebates issued to taxpayers would be subtracted from the gross collections to arrive at the net direct tax.
The net direct tax collection is an important indicator of a government's revenue from direct taxes and its effectiveness in tax administration. It reflects the actual amount of revenue that the government receives from direct taxes after adjusting for any refunds or adjustments made to taxpayers
7. Major tax reforms in India
India has undergone several major tax reforms over the years to simplify the tax structure, improve compliance, and boost economic growth.
Some of the significant tax reforms in India include:
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Goods and Services Tax (GST): One of the most significant tax reforms in India, GST was introduced on July 1, 2017, replacing a complex system of indirect taxes including VAT, service tax, excise duty, and others. GST is a destination-based tax levied on the supply of goods and services, aimed at creating a unified national market, eliminating cascading effects of taxes, and streamlining tax administration.
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Direct Tax Code (DTC): The Direct Tax Code was proposed to replace the existing Income Tax Act, 1961, with a simplified, modernized, and taxpayer-friendly direct tax regime. Although the DTC has not been implemented in its entirety, certain provisions and reforms proposed in the code have been incorporated into the existing tax laws to improve efficiency and reduce litigation.
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Reduction in Corporate Tax Rates: In September 2019, the Indian government announced significant cuts in corporate tax rates to boost investment, promote economic growth, and make Indian industry globally competitive. The corporate tax rate for domestic companies was reduced from 30% to 22%, and for new manufacturing companies incorporated after October 1, 2019, the tax rate was further reduced to 15%.
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Benami Transactions (Prohibition) Act: The Benami Transactions (Prohibition) Act was enacted in 1988 to prohibit benami transactions and provide for confiscation of benami properties. In 2016, the government amended the Act to make it more stringent and effective in curbing black money and undisclosed income.
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Demonetization: In November 2016, the Indian government announced the demonetization of high-denomination currency notes (Rs. 500 and Rs. 1,000) to curb black money, corruption, and counterfeiting. The demonetization move was accompanied by various measures to promote digital transactions and increase tax compliance.
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Introduction of Insolvency and Bankruptcy Code (IBC): The Insolvency and Bankruptcy Code was introduced in 2016 to provide a comprehensive framework for the resolution of insolvency and bankruptcy cases in a time-bound manner. The IBC aims to promote ease of doing business, protect the interests of creditors and investors, and facilitate the resolution of stressed assets
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For Prelims: Economic and Social Development-Sustainable Development, Poverty, Inclusion, Demographics, Social Sector Initiatives, etc.
For Mains: GSIII: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment
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Previous Year Questions
1.Enumerate the indirect taxes which have been subsumed in the Goods and Services Tax (GST) in India. Also, comment on the revenue implications of the GST introduced in India since July 2017. (UPC CSE GS III 2019)
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