Tax Club

Direct Tax in India; No under the tables here!

Created on 22 Aug 2022

Wraps up in 5 Min

Read by 612 people

Updated on 11 Sep 2022

"It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture from the Earth to give it back a thousand fold" –  Kalidas in Raghuvamsa, eulogising King Dalip.

Taxes represent the cost of government services such as roads, highways, police, education, healthcare, and defence. You pay taxes so the government can offer the services you desire and anticipate. Everyone is required to pay taxes, regardless of where they reside. Taxes are a vital component of our economy.

India has a complicated tax structure with several levies. The system aims to tax income and consumption and gather funds for residents to spend and invest in the nation. India's taxation system is relatively new; it was created and implemented after its independence in 1947 to satisfy India's demand for public money.

There are three levels of taxation: federal, state, and local. In India, there are two types of taxes: direct and indirect. Direct tax includes income, capital gains, and corporation tax. In contrast, indirect taxes include the value-added tax, the Goods and Services Tax, and the customs fee, among others.

The Central Government of India collects customs duty, central excise duty, income tax, and service tax. Likewise, State governments collect income taxes on agricultural income in addition to state excise charges, professional taxes, land revenue, and stamp duties. Local municipal governments can collect octroi, property tax, and other taxes for water and drainage supply, among other services. 

What is a Direct Tax?

A direct tax in India is a form of tax in which the impact and incidence come under the same category. The tax is paid directly to the organisation that imposes the payment by the business or individual. The tax has to be paid directly to the government, and no one else is permitted to accept payment.

"Income tax returns are the most imaginative fiction being written today." — Herman Wouk.

What are the many types of direct tax? 

Here are the several types of direct taxes in India: 

1. Corporate tax 

This tax is imposed on domestic corporations whose stockholders are distinct. Foreign firms whose revenue derives or is presumed to arise in India must likewise pay this tax. Interest, royalties, dividends, fees for technical services, and gains from selling assets located in India are taxed. In addition, corporate tax includes the following: 

Minimum Alternative Tax (MAT)
Imposed on zero-tax corporations whose financial statements are produced by the Companies Act. 

Fringe Benefits Tax 
Companies pay this tax on fringe benefits (drivers, cleaners, etc.) offered to their employees. 

Dividend Distribution Tax (DDT) 
The government imposes this tax on dividends declared, distributed, or paid to shareholders by domestic firms; international corporations are free from DDT. 

Tax on Securities Transactions (STT) 
This obligation stems from taxable securities transactions that generate taxable revenue. 

2.  Wealth tax

Depending on the property's market value, you have to pay this annual tax as part of your obligations. The owner must pay this tax regardless of whether a property creates a profit.

Individual, Hindu Undivided Families (HUFs), and companies must pay wealth tax depending on their residency status. It include economic assets such as shareholdings, gold deposit bonds, commercial complex buildings, and homes rented out more than 300 days per year.

​​For resident individuals, Hindu Undivided Families (HUF ) (age of 60 years)

Limit of slab

Income tax rate

Up to Rs.2.5 Lakh

Nil

From Rs 250001 to Rs.5,00,000

5% of total income that is more than Rs.2.5 Lakh + 4% cess

From Rs.500001 to Rs.10,00,000

20% of total income that is more than Rs .5 Lakh 12500 + 4% cess

Income above Rs. 10 Lakh

30% of total income, which is more than Rs 10 Lakh 112500 + 4 % cess.


For senior citizens (above 60 years but below 80 years of age)

Limit of slab

Income tax rate

Up to Rs.3 Lakh

Nil

From Rs.300001 to Rs.5,00,000

5% of total income more than 3 Lakh + 4% cess.

From Rs. 500001 to Rs..10,00,000

20% of total income (more than 5 Lakh) Rs. 10500 + 4% cess.

Income above Rs. 10 Lakh

30% of total income( more than 10 Lakh) 110000 + 4 % cess.


For super senior citizens, i.e. resident Indians more than 80 years of age:

Limit of slab

Income tax rate

Up to Rs. 5 Lakh

Nil

From Rs. 500001 to Rs. 1000000

20% of total income that is more than Rs .5 Lakh + 4% cess

Income above Rs. 10 Lakh

30% of total income that is more than 10 Lakh 100000 + 4% cess

 

3. Capital gains tax 

India levies this direct tax on the sale of investments or assets in India. Investments in real estate, works of art, enterprises, stocks, bonds, and farms constitute capital assets. The difference between the sale and acquisition prices gives the capital gains.

Based on the holding duration, this tax is either short-term or long-term. All assets (except securities) sold within 36 months of acquisition are subject to short-term gains taxation. Long-term assets are those acquired via the sale of assets held for more than 36 months. 

Over one-third of India's Tax revenue is generated through people earning more than INR 69 Lakhs to INR 1 Crore 80 Lakhs.

Advantages of Direct Income Taxation

Equity
The government collects direct taxes on the overall income of taxpayers. Consequently, taxpayers with a higher income pay more tax, while taxpayers with a lower income pay less or no tax.
This aspect makes direct taxes fair and equitable for the majority of Indians.

Progressive 
The basic goal of every government is to ensure wealth distribution equity. In India, direct taxes play a significant part in achieving this equality. The progressive nature of these taxes is advantageous in eliminating economic disparities.  

Productive 
These taxes are productive and adaptable. The money generated by these taxes automatically rises or falls in proportion to the country's national wealth. 

Economic 
Since taxpayers pay this tax yearly, it reduces the administrative expenditures incurred by governing bodies for tax imposition and collection.

Disadvantages of Direct Income Taxes:

Tax evasion 
This aspect is perhaps the most significant downside of such taxes. The existing legal loopholes increase the chance of tax evasion using manipulative means. Several people decrease their tax liability by altering their financial accounts to conceal earnings. 

Social conflict 
There is a possibility of societal strife because not all individuals are required to pay these taxes. It may lead to criminal behaviour, inferiority complexes among the lower classes, and societal injustice. 

Inconvenience 
Filing and submitting direct taxes requires the taxpayers to comply with certain formalities and processes. It makes the entire procedure difficult and inconvenient for taxpayers. 

The Bottom Line 

India has long had direct taxation. Direct taxes help redistribute national wealth. The same individual bears the tax burden and its payment. The higher your income, the higher the tax rate, and vice versa. While direct taxes have their cons, they are critical to India's economic growth. These taxes can help preserve price stability and avert inflation if administered properly.

Finology provides a plethora of information for individuals who want to understand more about taxes and desire to pursue it. We believe this will assist readers in obtaining a deeper understanding of Direct tax. Tell us in the comments what you like about the direct tax system in India. 

An Article By -

Shreya Tiwari

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