Benjamin Franklin once said: "Two things are certain in life: death and taxes". This amount, deducted from your salary, keeps the state and its services going and is a compulsory contribution made by every legal person and organization. Taxes are an essential element in promoting the nation's economic functioning and growth.
The tax structure in India is three tiered and includes the central government, the state governments and the local authorities.
Under the Indian tax system, different taxes apply to individuals and organizations. However, the two major categories of taxes in India are direct taxes and indirect taxes.
It can be overwhelming to get your taxes done and learned about them. This quick guide can help you understand the basics and make it a little easier to understand
What are direct taxes?
As the name suggests, direct taxes are levied direct on taxpayers. It is a type of tax where the impact and incidence of the tax fall into the same category.
Direct taxes work according to the efficiency principle, i.e. as a percentage of the taxpayer's income. This monetary principle states that people who have larger sources of income or who have higher incomes should pay higher taxes. This ensures a fair distribution of wealth.
Direct taxes in India are overseen by the Central Board of Direct Taxes (CBDT), which was established as a result of the Central Board of Revenue Act of 1924.
What types of direct taxes are there in India?
There are broadly two Kinds of direct Taxes that are as follows:
Income tax
Income tax levied under the Income Tax Act of 1961 is property tax paid by an individual based on taxable income in a given fiscal year.
The tax rate is determined according to the relevant tax tables for the respective fiscal year. Taxable income refers to total income minus applicable tax deductions and exemptions. Persons in this case are also Hindu Undivided Family (HUF), companies, companies, cooperatives and trusts.
Corporation tax
Both private and public companies registered in India under the Companies Act 1956 are subject to corporation tax. Corporate income tax is the amount paid on the income they earned in a given fiscal year.
A 5% surcharge applies if the net income is in the range of Rs 1 crore to Rs 10 crore. If the net income exceeds Rs 10 cr, a 10% surcharge will be applied.
In the case of foreign companies, license fees or fees that they receive in a predefined period are taxed at 50%. A tax of 40% is levied on all other income. A 2% surcharge applies if the net income is in the range of Rs 1 Cr to Rs 10 Cr. If the net income exceeds Rs 10 cr, the supplement is increased to 5%.
An education tax of 3% is levied on the sum of income tax and surcharge, regardless of the amount of net income. Border relief is granted to both domestic and foreign companies with a net income of over Rs 1 cr and Rs 10 cr.
What are indirect taxes?
Taxes levied on goods and services are called indirect taxes. It is a type of tax where the incidence and impact of taxation are not borne by the same company. In the case of indirect taxes, the tax burden can be passed on from the taxpayer to another legal entity or natural person.
Indirect taxes are generally collected from suppliers or manufacturers who pass them on to the end user. Taxes are levied on the manufacture, sale, import, and even purchase of goods and services. The applicable indirect tax may increase the price of the products. That can be complex and awkward to try Types and Provisions of Indirect Taxes in India.
The indirect taxes were tightened after the introduction of the uniform tax on goods and services (GST).
the Types of indirect taxes contain:
- Goods and services tax (GST)
The goods and services tax law in India is a comprehensive, multi-level, target-based tax that is levied at every stage of the value chain from the manufacturer to the consumer. The GST is a nationwide uniform domestic indirect tax law.
Before the tax on goods and services could be introduced, the structure of indirect tax in India was inefficient and complicated, overloaded with different levies at different stages.
GST has subsumed the following indirect taxes:
VAT, service tax
Excise duty
Additional customs fees
Customs clearance
Amusement tax
Octroi
Luxury tax
Central sales tax
Under the GST regime, taxes are levied at every point of sale. For domestic sales, the central GST and the state GST are calculated. Interstate sales are at the expense of Integrated GST.
Customs duty is defined in the Customs Act of 1962 and enables the government to impose tariffs on imports and exports, prohibit the export and import of goods, impose procedures for import and export, and regulate criminal offenses, penalties, assessments, etc.
Customs matters fall under the Central Board of Excise & Customs (CBEC). The CBEC, in turn, is a division of the Finance Department of the Treasury. CBEC also formulates guidelines regarding the collection or collection of tariffs, customs evasion, smuggling prevention and administrative decisions related to customs information.
What is the difference between direct and indirect taxes?
If the delimitation between the types of tax is still unclear, the following simplified table provides more clarity about the implementation and value of both types of tax:
| Direct tax | Indirect tax |
It is levied on income and activities performed. | It is levied on products or services. |
| It is paid directly by the person concerned, i.e. the tax burden cannot be passed on. | The tax burden is passed on to the end consumer of goods or services. |
It is paid after the income enters the taxpayer's hands. | It is paid before goods or services reach the taxpayer. |
| Tax collection can be cumbersome and grueling and can be circumvented without proper administration. | The process of collecting taxes is relatively easier and leaner. |
Direct taxes can contain inflation. | Indirect taxes can lead to inflation. |
last words
You cannot escape tax liability directly or indirectly. Of all types of taxes, income tax seems to be gobbling up a large chunk of your hard-earned money. Fortunately, Income Tax Act is a doctrine of prescribed ways that you can save taxes on certain expenses so that it isn't too heavy on your pocket. Read more about tax saving strategies here.