The Government of India levies two types of taxes on the citizens of India – Direct Tax and Indirect Tax. Indirect taxes are usually transferred to another person after being initially levied as a direct tax. Common examples of an indirect tax include Goods and Services Tax (GST) and VAT. GST is levied on the manufacturers or service providers as a direct tax, which is then transferred to the consumers when it is part of the final price of the goods or services, thus, making it an indirect tax for the consumers.
On the other hand, the burden of the direct taxes cannot be transferred to another person, such as Income Tax, which every individual is supposed to pay directly to the tax authorities in India. Both indirect and direct taxes are vital components that play an essential role in changing the course of the Indian economy.
To understand things better, let us first get our basics clear on the direct tax.
What is a Direct Tax?
Direct taxes, usually levied on a person’s income are paid directly by taxpayers or an organization to tax authorities of the Government of India. The person or the organization in question cannot transfer this type of tax to another person or entity for payment. Some of the examples of direct tax include income tax and corporate tax.
Types of Direct Taxes in India
The various types of direct taxes levied on citizens by the Government Of India are as follows:
1) Corporate Tax
Under the Indian Income Tax Act, 1961, both Indian as well as foreign organizations are liable to pay taxes to the government. The corporate tax is levied on the net profit of domestic firms. Also, foreign corporations whose profits appear or are deemed to emerge through their operations in India are also liable to pay taxes to the Government of India. The income of a company, be it in the form of dividends, interest and royalties, is also taxable.
At present, companies having gross turnover up to Rs.250 crore are liable to pay corporate tax at 25% of the net profit while companies with a gross turnover of more than Rs.250 crore are liable to pay the corporate tax at 30%. Apart from this, other types of corporate tax include the following:
Minimum Alternative Tax (MAT): MAT is imposed on “zero tax companies”, which typically refer to companies that declare little or no income in order to save tax.
Fringe Benefits Tax (FBT): The FBT tax is imposed on the fringe benefits like drivers and maids provided/paid for by companies to their employees.
Dividend Distribution Tax (DDT): An amount that is declared, distributed or paid as dividend to the shareholders by a domestic company is taxed under the Dividend Distribution Tax. It is applicable to domestic companies only. Foreign companies distributing dividends in India do not pay this tax (such dividends are taxable in the hands of the shareholder).
Securities Transaction Tax (STT): The SST is imposed on the income which the companies get through taxable securities transactions. This tax is free of any surcharge.
2) Income Tax
Income tax is perhaps the most well known direct tax imposed by the government on annual income generated by businesses and individuals. The income tax on income generated by the business houses is known as Corporate Tax. Income tax is calculated as per the provisions of Income Tax Act, 1961 and is directly paid to the central government on an annual basis. The income tax rate depends on the net taxable income or the tax bracket. Income tax may be deducted in the form of TDS (tax deducted at source) in case of salaried employees. However, in case of self-employed individuals, the tax is payable on the basis of declared income as per their Income Tax Return subsmission. ITR is basically a statement of income and the tax liability (on the basis of income declared) which is submitted to the Income Tax Department in the prescribed format.
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Also Read: Income Tax Return: How to File, ITR Forms, Due Dates
Income tax is levied on various sources of income including Income from salaries, from capital gains, from business, income from house property or other sources.
3) Capital Gains Tax
The capital assets of an individual refer to anything owned for personal use or for the purpose of an investment. For businesses, the capital asset is anything that can be used for more than a year and is not intended to be sold or liquidated during the course of business operation.
Machinery, cars, homes, shares, bonds, art, businesses and farms are some of the examples of capital assets.
The capital gains tax is imposed on the income derived from the sale of investments or assets. On the basis of the holding period, capital tax is categorised under short-term gains and long-term gains. The formula to calculate the capital gains is:
Capital Gains = Sale Value – Purchase Value
The capital gain is considered as Long Term Capital Gain (LTCG) if
Real Estate Property is sold after 2 years of holding period
Debt funds or any other asset with a holding period of more than 3 years
Equity investments/equity mutual funds with a holding period of more than 1 year
Also Read: Capital Gains Tax: Types, Calculations, Exemptions
Online Payment of Direct Taxes
It is compulsory for all individuals to pay direct taxes. However, the following persons cannot use the physical mode of payment of direct tax and need to pay it through online mode :
All taxpayers, other than companies who are liable to get their accounts audited as per section 44AB
One can visit the relevant government website and can pay taxes online. Mentioned below are steps to pay direct taxes online.
Step1: Visit the official website of NSDL e-Governance, here
Step 2: Choose the relevant challan – ITNS 280, ITNS 281, ITNS 282 or ITNS 283, as per the payment criteria of direct taxes
Step 3: Provide the PAN/TAN, as applicable
Step 4: After the online check of the validity of PAN/TAN, you will be allowed to fill in other challan details
Step 5: Once the challan details are confirmed, you will be directed to the net-banking site for payment
Step 6: After the successful payment, a challan counterfoil will be issued as proof of payment.
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Benefits of Direct Tax
The direct taxation has its share of benefits. Some of them are listed as follows :
1) Economic: The direct tax such as the income tax is collected annually and is mostly deducted at the source. For example, the income tax is deducted from an employee’s salary every month. This saves a great amount of administrative costs as here the employer acts as the tax collector. This system makes the direct tax more economical than other types of taxes where a lot of administrative costs are involved.
2) Productive: The direct taxes are also very productive. The revenue generated from the direct tax is directly proportional to the changes in the national wealth of the country. In simple words, the increase in a country’s population and/or prosperity will consequently increase the returns on direct tax.
3) Certain: In the case of direct taxes, a taxpayer is certain about the amount of tax to be paid. In addition, the tax authorities can also precisely estimate the revenue they can expect from the direct tax. There is no ambiguity in the tax amount as it is decided before the tax submission date. This certainty on the tax amount from both the sides helps in eliminating corruption from the tax collection system.
4) Equitable: The direct taxes are imposed on the basis of a taxpayer’s income. The taxpayers with high income need to pay more taxes compared to the taxpayers with lesser income. In other words, the rich pay more taxes than the poor. This is, however, applicable to all the sections of the society. People belonging to similar economic conditions are taxed at the same rate. The equitable trait of the direct tax serves the purpose of equality and justice across all sections of the population.
5) Progressive: The direct taxes play an important role in reducing the gap of financial inequalities across the country. These taxes are progressive as the government imposes a tax on people according to their income. The money collected from these taxes helps implement policies and rules for the uplift of the poor in the society, helping achieve the aim of social and economic equality.
6) Anti-inflationary: Direct taxes can be used as an anti-inflationary tool to stabilize the price level in the market. It can be used to control the use and demand of products. The increase in demand of the product and services during inflation can be decreased by increasing the direct tax. Doing this will force people at large to spend less money to purchase the products and services, thus, reducing their demand and consequently the inflation rate.
Q. What is the capital gain structure for equity tax or mutual funds?
Ans. At present, LTCG is applicable to equity stocks or mutual funds (non-tax saving) at 10% of net gains when the holding period is more than one year and the net gains on such holdings is more than Rs. 1 lakh. If your holding period is of less than one year then you will be liable to pay Short-Term Capital Gains (STCG) tax at 15% of net profits.
Q. How is the Minimum Alternate Tax (MAT) calculated?
Ans. MAT is imposed on zero tax companies which earn and show profits on its books (P/L statement) but due to certain accounting practices happen to show negligible income in its ITR and hence, effectively pay zero tax. Such difference usually arise because the methods of calculating of profits under Companies Act, 2013 and Income Tax Act, 1961 are different.
In order to reduce such practices of tax-avoidance, the government introduced MAT which is levied on the book profits of the company. Currently, MAT is levied at the rate of 18.5% of the book profits of a company.
It should be noted that the MAT is applicable for all corporate entities, both public and private. However, the provisions of MAT are not applicable to a life insurance company.
Also Read: Know All About Minimum Alternate Tax
Q. What is advance tax and who needs to pay the advance tax?
Ans. As the name suggests, advance tax is the tax which needs to be paid in advance on the basis of estimated income for the year. However, it is not a separate tax. It is just income tax which is paid in advance. Generally, a taxpayer pays income tax at the end of the financial year, when the actual income data is available.
However, if your total tax liability exceeds Rs.10,000 a year, then you should pay it in advance based on the estimated income for the year. In case, if there are variations in your income estimates while making the regular assessment of the year, you can pay the balance tax liability or claim the income tax refund, as the case may be.
Also Read: Advance Tax: Calculations, Dates and Pay Online
Q. When can I claim income tax refund?
Ans. Eligibility For Claiming Income Tax Refund:
If your tax deducted at source (TDS) exceeds the total tax payable on the basis of income, interest income, salary perks, dividends, etc. during the assessment year.
If the same income has been taxed in India as well as in a foreign country with which India has signed a DTAA (Double Taxation Avoidance Agreement) Treaty.
If the advance tax paid is higher than your actual tax liability.
If you made investments in any of the tax saving instruments and this/these were not included at the time of TDS calculation.
If there was an error in the assessment process and after the rectification of the error, your tax liability was recalculated and reduced.