What is Direct Tax?
Table of Contents
Introduction
A direct tax is a tax that a person or organization pays directly to the entity that imposed it, such as the government. Examples of direct taxes in India include income tax, corporate tax, capital gains tax, and securities transaction tax. Direct taxes are essential sources of revenue for the government and play a crucial role in financing public expenditure and promoting economic development.
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- Direct taxes are different from indirect taxes, which are taxes imposed on transactions, such as goods and services tax, customs duty, and excise duty.
- The Central Board of Direct Taxes (CBDT) is the apex body that administers and regulates direct taxes in India. It also issues guidelines and notifications for the computation and collection of direct taxes.
- Direct taxes are levied based on the income or wealth of the taxpayers, and hence, they are considered progressive and equitable. However, direct taxes also have some drawbacks, such as high administrative costs, tax evasion, and disincentives for saving and investment.
Types of direct taxes
There are several types of direct taxes in India, which are levied by the central government on the income or wealth of individuals and entities. Some of the most common types of direct taxes are:
- Income tax: It is a tax imposed on the income earned by individuals, Hindu Undivided Families (HUFs), partnerships, and associations of persons (AOPs). The Income Tax Act 1961 provides guidelines for the computation and collection of income tax in India.
- Corporate tax: It is a tax levied on the profits of companies and corporations. Corporate tax applies to both domestic and foreign companies operating in India. The Finance Act determines the corporate tax rates, deductions, and exemptions applicable to different categories of companies.
- Capital gains tax: This tax applies to the gains arising from the sale or transfer of capital assets, such as real estate, stocks and mutual funds, among others. Capital gains are further classified into two categories – long-term capital gains and short-term capital gains. The rates and exemptions of capital gains tax vary with the asset and the holding period.
- Securities transaction tax (STT): STT is a tax imposed on the purchase and sale of listed securities, such as shares, bonds, derivatives, and equity-oriented mutual funds.
These are some of the major types of direct taxes in India. There are also other forms of direct taxes, such as wealth tax, gift tax, and fringe benefit tax, which are either abolished or have limited applicability. Direct taxes are essential sources of revenue for the government and play a crucial role in financing public expenditure and promoting economic development.
Advantages and disadvantages of Direct Taxes
Direct taxes have both advantages and disadvantages for the economy and society. Some of the main points are:
Advantages:
- Direct taxes are equitable, as they are based on the income or wealth of the taxpayers and can be made progressive.
- Direct taxes are economical, as they have low cost of collection and administration.
- Direct taxes are certain, as both the payers and the authorities know the amount and timing of the tax liability.
- Direct taxes are elastic, as they can be easily adjusted to meet the changing needs of the government revenue.
- Direct taxes are productive, as they yield a large and stable revenue to the government.
- Direct taxes are a means of developing civic sense, as they make the taxpayers aware of their rights and responsibilities and encourage them to participate in public affairs.
Disadvantages:
- Direct taxes are inconvenient, as they pinch the payers and reduce their disposable income.
- Direct taxes are evadable, as the taxpayers can conceal their income or wealth and avoid paying the due tax.
- Direct taxes are arbitrary, as the rate and structure of the tax depend on the discretion of the government and may not reflect the true ability of the taxpayers.
- Direct taxes are disincentive, as they discourage saving, investment, and enterprise by reducing the reward for work and risk-taking.
What is a Direct Tax Code?
A Direct Tax Code (DTC) is a set of rules that is intended to replace the existing Income Tax Act (ITA) of 1961. It covers all taxes that are under the present ITA, such as corporate income tax, personal income tax, capital gains tax, and securities transaction tax. The main objective of the DTC is to simplify and consolidate the direct tax laws and make them more effective, efficient, and equitable. The DTC was first proposed in 2009, but it has not been implemented yet due to various issues and challenges. The government is expected to take steps to implement the DTC in the upcoming budget of 2020
