Direct Taxes: Definition, Significance, and Implications

When it comes to the world of taxation, direct taxes hold a prominent position. These taxes are paid directly by individuals to the government, playing a vital role in generating revenue. Unlike indirect taxes, which are collected through intermediaries, direct taxes establish a direct link between taxpayers and the governing authorities. In this blog post, we will bring forth the concept of direct taxes, shedding light on their definition, significance, and the entity responsible for their administration.

An insight into the forefront of Direct Taxes

At the forefront of overseeing the levy and collection of direct taxes is the Central Board of Direct Taxes (CBDT). This governmental body assumes a crucial role in formulating tax policies, implementing regulations, and ensuring compliance with the provisions of direct taxation. Our aim is to unravel the complexities of direct taxes, providing you with a comprehensive understanding of this essential component of the tax system.

Unfolding who is eligible to direct tax

1. ITR-1 Form: This form is designated for salaried individuals whose annual income from salary, residential property, other sources, and agriculture is below Rs 50 lakh.

2. ITR-2 Form: Individuals and HUFs (Hindu Undivided Families) without income from gains and profits of professions or businesses should use this form for tax filing.

3. ITR-3 Form: Designed for individuals and HUFs with income derived from gains and profits of profession or business, this form is specifically tailored to meet their tax filing requirements.

4. ITR-4 Form: Individuals, HUFs, and firms (excluding LLP) with a total income of less than Rs 50 lakh, including income computed under Sections 44AD, 44ADA, and 44AE related to profession and business, should utilize this form for tax filing.

5. ITR-5 Form: This form applies to entities and individuals other than companies and HUFs. Taxpayers falling under this category should use this form when filing their income tax returns.

6. ITR-6 Form: Specifically designed for companies that are not eligible for exemptions under Section 11 of the Income Tax Act, this form is mandatory for their tax filing obligations.

7. ITR-7 Form: Individuals, including firms, who are required to furnish their return under Sections 139(4A), 139(4B), or 139(4D) of the Income Tax Act, must use this form for tax filing purposes.

8. ITR-4 Form (Applicable for certain persons and companies): Persons and companies obligated to furnish their return under Sections 139(4A), 139(4B), 139(4C), or 139(4D) should exclusively choose this form for their tax filing requirements.

In the financial year 2023-24, there have been revisions in the presumptive taxation limits for small businesses and professionals. Under section 44AD, the new limit for small businesses is INR 3 crore, compared to the previous limit of INR 2 crore. Similarly, for professionals under section 44ADA, the new limit is INR 75 lakh, while the old limit was INR 50 lakh. These revised limits aim to provide relief and flexibility for small businesses and professionals in their tax obligations.

In a bid to bolster start-ups, the government has introduced measures to offer tax relief. Notably, the date of incorporation for income tax benefits has been extended from March 31, 2023, to March 31, 2024.

This grants start-ups incorporated within this period eligibility for income tax benefits. Furthermore, the time limit for set-off and carry forward of losses has been stretched from seven years to 10 years from the date of incorporation. This affords start-ups an extended timeframe to utilize losses for offsetting future profits. It is worth mentioning that shareholders holding a minimum of 51% shareholding are permitted to retain their shares when carrying forward and setting off such losses. These measures seek to provide favorable tax provisions for start-ups, fostering their growth and sustainability in the business ecosystem.

Detailed light on the various classifications of Direct Taxes

Wealth Tax:

Wealth tax is an annual payment that is determined by the ownership of properties and their market value. Irrespective of whether the property generates income or not, individuals are required to pay wealth tax if they own such properties.

Corporate taxpayers, Hindu Undivided Families (HUFs), and individuals are liable to pay wealth tax based on their residential status. However, certain assets are exempt from wealth tax, including gold deposit bonds, stock holdings, house properties that have been rented for more than 300 days, and properties owned for business and professional purposes. It is important to understand the specific criteria and exemptions related to wealth tax to ensure compliance with the tax regulations.

Income Tax:

Income tax is an obligatory payment based on an individual's age and earnings. The Government of India establishes various tax slabs that determine the applicable amount of income tax. It is essential for taxpayers to file their Income Tax Returns (ITR) annually. Depending on the information provided in the ITR, individuals may be eligible for a tax refund or may have to pay additional taxes. Failure to file ITR can result in significant penalties imposed on individuals. Therefore, it is crucial to comply with the requirement of filing an ITR to avoid any adverse consequences.

Minimum Alternate Tax (MAT):

For companies that report zero taxable income based on their regular financial statements prepared in accordance with the Companies Act, they are still liable to pay Minimum Alternate Tax (MAT). This tax provision ensures that even if a company has no taxable income, it is required to pay a minimum amount of tax calculated on its book profits. MAT serves as a safeguard to prevent companies from completely avoiding their tax obligations.

Corporate Tax:

Domestic companies and foreign corporations earning income in India are liable to pay corporate tax.

Estate Tax:

Estate tax is paid based on the value of an individual's estate after their death.

Securities Transaction Tax (STT):

STT applies to income from taxable security transactions.

Dividend Distribution Tax (DDT):

DDT is levied on domestic companies distributing dividends to shareholders. Foreign companies are exempt from DDT.

Fringe Benefits Tax:

In the case of companies providing additional benefits to their employees, such as maids and drivers, they are subject to the levy of Fringe Benefits Tax. This tax is specifically imposed on the value of the fringe benefits offered by the company.

Capital Gains Tax:

It is a direct tax paid on income from the sale of assets or investments. Capital assets include farms, bonds, shares, businesses, art, and homes. The tax is classified as long-term or short-term based on the holding period. Short-term gains apply to assets sold within 36 months, while long-term gains apply to properties held for more than 36 months.

FAQs:

Q1: What is property tax and who imposes it?

Property tax (house tax) is a local tax imposed by state municipal corporations on owners of immovable properties to maintain the local surroundings in a specific area.

Q2: What is corporation tax, and who is obligated to pay it?

Corporation tax is a direct tax paid by companies to the federal government. It is an income tax based on the revenue earned by the company.

Q3: What defines direct taxes?

Direct taxes are taxes that individuals pay directly to the government, without any intermediary.

Q4: Who holds the responsibility for the administration and collection of direct taxes, and what is their governing authority?

The Central Board of Direct Taxes (CBDT) is responsible for the administration and collection of direct taxes.