In India, all individuals and corporate entities are required to pay taxes, regardless of their income or the goods or services they purchase. Taxes are a type of regular, obligatory payment made to the federal and state governments. It is also regarded as the government’s main source of income, aiding in the development of the nation’s economy.
India’s taxes can be broadly divided into two types: direct taxes and indirect taxes.
What is Direct Tax?
A direct tax is one that the taxpayer pays directly to the entity responsible for collecting it. In this case, the taxpayer must pay the tax and cannot assign this obligation to another party. The Central Board of Direct Taxes (CBDT) is in charge of collecting and overseeing direct taxes in India. The Department of Revenue, which advises the government on the application of direct taxes, oversees CBDT.
Types of Direct Taxes in India
Income tax is the most typical type of direct tax because it is paid to the government directly. The income that is earned during a fiscal year is subject to income tax. The tax is paid based on the IT department’s income tax slabs.
Tax on Capital Gains:
Any person who has capital gains must pay tax to the government on those gains. Land or investments like stocks can result in capital gains. The capital gains tax is assessed as long-term capital gains (LTCG) or short-term capital gains (STCG) depending on how long the investor held the investments (STCG).
STT: Securities Transaction Tax
Whether or not there are profits to be had from the trading of securities, anyone who engages in it must pay securities transactions tax.
Please note that Estate and Wealth taxes have now been abolished.
Pros:
- Helps in curbing inflation.
- Considered equitable for all classes of people.
- Directly increase the revenue of the government.
Cons:
- The documentation process is cumbersome.
- The collection of direct taxes is complex.
- Evasion is quite possible.
- Restricts investments.
Types of Indirect Taxes in India
GST (Goods and Services Tax)
In India, a variety of other indirect taxes, including value-added tax, service tax, excise duty, purchase tax, and more, have been replaced by the GST, the most prevalent example of an indirect tax. GST, which is imposed on goods and services based on the tax slabs established by the GST Council of India, is the single, unified, and most comprehensive indirect tax.
Duty on Customs:
You will be charged customs duty if you buy any goods or services from abroad. Whether the product arrived to you by air, sea, or land, you must still pay this duty. Therefore, customs duty is an indirect tax that is imposed to ensure that all goods entering India are taxed.
The country’s entire tax system has undergone a significant transformation since the implementation of the GST. The various indirect taxes that were previously required, including the VAT, service tax, sales tax, and others, have all been eliminated. The GST really lives up to its tagline, “One Nation, One Tax, One Market.”
Pros:
- Every individual contributes.
- Payment is very convenient for taxpayers.
- The collection of taxes is quite easy.
Cons:
- Regressive in nature.
- Makes the goods and services expensive.
- Less transparent for end-consumers
What Are the Key Differences Between Direct And Indirect Taxes?
Now that we are aware of what direct and indirect taxes in India are and what they are used for. Let’s examine how indirect and direct taxes differ from one another. The differences between direct and indirect taxes are detailed in the table below.
To sum up
The primary distinction between direct and indirect taxes in India has already been covered. Therefore, as a responsible Indian citizen, pay your taxes on time rather than viewing them as a burden. Utilize tax deductions to their fullest extent at all times, but don’t forget to pay your annual tax obligations as taxes, whether direct or indirect, are vital to the advancement of our economy.
Frequently Asked Questions
How can I determine whether a tax is direct or indirect?
In every way, direct and indirect taxes are diametrically opposed. Direct taxes are imposed on one’s income and profits and are paid directly to the government. Indirect taxes, on the other hand, operate completely differently and are paid to the government whenever one makes any purchases of goods or services.
Are direct and indirect taxes paid at different rates?
Yes, rates for direct taxes are determined by income and profits, but rates for indirect taxes are uniform for all taxpayers.
What kinds of direct taxes are there?
Direct taxes include, among others, capital gains tax, securities and transaction tax (STT), and income tax.
