Types of Taxes: Direct & Indirect Taxes in India
Updated: Nov 13
The state and federal governments impose taxes on individuals as a mandatory expense. They are one of the main sources of funding for the government, which aids in the development of our nation's infrastructure and economy. You must therefore pay taxes as a responsible citizen. But it's also important to understand the various taxes that India has incorporated into its tax structure. In this article, we will explain different types of direct and indirect taxes in India.
Table of Contents
Direct Taxes
A direct tax is one that is paid to the imposing authority (usually the government) directly by an individual or organisation. It is not possible to transfer a direct tax to another person or organisation. Tax payment fulfilment is the responsibility of the person or entity that is subject to the tax. The Central Board of Direct Taxes handles issues pertaining to the imposition and collection of direct taxes as well as the creation of other direct tax-related policies. Real estate tax, personal property tax, income tax, FBT, gift tax, capital gains tax, and other taxes are among the several reasons why a taxpayer pays direct taxes to the government.
Indirect Taxes
There are multiple meanings for the term "indirect tax." According to common usage, an indirect tax, also known as a sales tax, special tax, value-added tax (VAT), or goods and services tax (GST), is a tax that is collected from the individual who ultimately bears the financial burden of the tax (such as the customer) via an intermediary (such a retail establishment). After filing a tax return, the intermediary sends the government the tax revenue along with the return. In this context, an indirect tax is compared to a direct tax, which is collected by the government directly from the individuals (natural or legal) that it is levied against.
Types of Taxes in India
The following table illustrates different types of taxes in India, categorised under direct, indirect, and other taxes:
Direct Taxes | Indirect Taxes | Other Taxes |
Income Tax | Sales Tax | Property Tax |
Corporate Tax | Service Tax | Registration Fees |
Securities Transaction Tax | Octroi Duty | Toll Tax |
Capital Gains Tax | Custom Duty | Education Cess |
Gift Tax | Value Added Tax (VAT) | Entertainment Tax |
Wealth Tax | Goods & Services Tax (GST) | Professional Tax |
Types of Direct Taxes
Income Tax: It is a kind of tax levied on earnings and profits for the year. The most prevalent type of direct tax is income tax. As the name implies, income tax is a levy imposed by the central government on the money that people and companies make during a specific fiscal year. However, the amount of money you earn under various income categories determines how much you must pay in income tax. Additionally, individuals whose annual income exceeds the basic exemption limit for them are subject to income tax for a fiscal year.
Corporate Tax: A direct tax on the profits of businesses registered in India is called corporate tax. In India, the current corporate tax rate is 40% for foreign businesses and 30% for domestic businesses. Additionally, businesses are eligible for a number of exemptions and deductions that can lower their effective tax rate.
Securities Transaction Tax (STT): STT is a tax imposed on the buying and selling of securities on authorised Indian stock exchanges, including stocks, mutual funds, and derivatives. The type of security being traded affects the STT rate. For instance, the STT rate for futures contracts is 0.005%, whereas the STT rate for equity shares is 0.1%.
Capital Gains Tax: Capital gains tax (CGT) is levied on earnings from the sale of assets like stocks, bonds, real estate, and other investments. The asset's holding duration and the kind of asset being sold determine the CGT rate in India. For example, long-term capital gains (LTCG) on equity shares are not subject to taxation, whereas short-term capital gains (STCG) are taxed at a rate of 15%.
Gift Tax: Originally enacted in 1958, the Gift Tax Act levied a 30% tax on presents such as stocks, jewellery, and real estate. But in 1998, this tax was repealed. Presently, presents from relatives and local government officials are free from taxes. Gifts from other people that total more than Rs. 50,000 are fully taxed.
Wealth Tax: The Wealth Tax Act states that 1% of an individual's net worth over Rs. 30 lakhs must be paid in taxes. It was terminated in the 2015 budget announcement. Since then, it has been replaced with a 12% surcharge for anybody who makes more than Rs. 1 crore annually. It also applies to businesses that make more than Rs. 10 crores annually.
Types of Indirect Taxes
Sales Tax: A consumption tax imposed on the sale of goods and services is known as the sales tax. It is usually expressed as a percentage of the item's retail cost. The vendor collects the sales tax and sends it to the government.
Service Tax: Services rendered by businesses are subject to service tax, which is levied at a rate of 15%. While businesses pay upon invoicing regardless of bill payment, individual service providers pay when bills are resolved. To prevent confusion, restaurants add a service tax of 40% of the entire amount.
Customs Duty & Octroi: Imported commodities are subject to customs duty, which ensures that goods entering the nation are taxed. Similar in intent, Octroi is enforced by state governments and focuses on the movement of products across Indian state borders.
Excise Tax: In India, manufactured commodities are subject to excise duty, sometimes referred to as Central Value Added Tax (CENVAT). Because it solely applies to domestically made items, it is different from customs duty. The Central Excise Rule restricts the transfer of excisable commodities from the manufacturing location without duty payment by requiring them to be paid.
Value-Added Tax: All phases of the supply chain are subject to VAT, or commercial tax, with the exception of zero-rated goods like food and necessary medications. State governments, which set their own tax rates on products sold within their borders, apply VAT.
Goods and Service Tax: At every point of the supply chain, commodities and services are subject to the consumption-based GST tax. Using the tax credit mechanism, it can be deducted from the GST that is assessed on a subsequent supply. One important change to India's indirect tax system is the GST.
Differences between Direct and Indirect Taxes
Direct Taxes | Indirect Taxes |
Levied on income and conducted activities. | Levied on products and services. |
Tax burden cannot be shifted. | Tax burden cannot be shifted. |
The concerned person directly pays these taxes. | One person pays indirect taxes but recovers them from another person. The person who actually bears the tax burden is ultimately the consumer. |
Paid only after the taxpayer receives an income. | Paid before the service or goods reach a taxpayer. |
Progressive in nature. | Regressive in nature |
Advantages and Disadvantages of Direct Taxes
Advantages | Disadvantages |
Progressive in nature, with individuals with lower incomes paying lower taxes than people with higher incomes. | Fraudulent practices through which taxpayers often avoid taxes or pay lower taxes.
|
Lowers inflation and curbs inequalities. | Complex and time-consuming documentation process. |
Sense of certainty for the government and taxpayers as they know what and when to be paid. | The burden cannot be moved to anyone else in the chain. |
Advantages and Disadvantages of Indirect Taxes
Advantages | Disadvantages |
Every Individual contributes to building the nation. | Increase in prices of goods and services |
Collected easily from the end consumer. | Consumers do not have knowledge of the taxes paid. |
Fair Distribution of tax, with essential goods being charged lesser compared to luxurious items. | Regressive in nature. |
The burden of paying is moved to the end consumer. | The amount received in tax is unpredictable as the tax depends on the goods and services purchased. |
Benefits of Paying Taxes
According to the Indian tax system, paying income tax may be required, but it is very advantageous for those who file their income tax returns and receive taxable salaries, particularly those that exceed the required exemption amount. Also, there are numerous advantages to filing taxes under the Indian tax system even if your income is below the basic exemption amount. The following are some benefits of timely tax payment:
When you apply for a loan, whether it be a home loan or a car loan, major banks ask for a copy of your income tax returns. According to guidelines established by the Indian tax system, income tax returns from the preceding two to three years may be used to obtain a larger loan amount. ITR data are requested in order to determine a borrower's capacity to repay a loan based on his income.
One can only request any refunds owed from the Income Tax Department after filing an ITR. The Indian tax system states that refunds from different savings instruments may be available for this kind of claim, even if the income falls under the tax exemption level.
Those who work as consultants, independent contractors, business owners, or partners in firms are not eligible to use Form 16. ITR file receipts may be used as proof of income if the annual income surpasses the basic exemption threshold set by the Indian tax system. Additionally, ITR receipts are helpful for any commercial or financial transaction that is approved by the Indian tax system.
The majority of foreign embassies need income tax returns for the prior years to be shown during visa interviews. Consulates in the US, UK, Europe, and Canada view it as a must, although those in the Middle East and South East Asia do not always request ITR papers. These ITR filings serve as proof that you are not leaving the country to evade taxes under the Indian tax system.
Conclusion
According to the Indian tax system, both direct and indirect taxes are important for the nation because they are closely related to every aspect of its economy. For the sake of the country's welfare, the government must collect these various taxes. Depending on the kind of tax levied, the federal and state governments in India collect both direct and indirect taxes in accordance with the directives of the tax system. By investing in a tax-saving instrument during the fiscal year and filing your ITR on time, you may ensure that you save the most money on taxes possible in accordance with the guidelines set forth by the Indian tax system.
FAQ
Q1. What is the tax structure in India?
India has a federal tax system with three tiers. This system is composed of local municipal bodies, state governments, and the federal government. Further, taxes are classified mainly into direct and indirect taxes.
Q2. Which type of tax is custom duty?
An example of an indirect tax is customs duties. It is applicable to all imported items as well as some goods that are exported from the nation. Ensuring that all products entering India are subject to taxation is the primary goal of this tax. Import taxes are imposed on items that are imported. Export duties, conversely, are taxes imposed on goods that are exported. The Customs Act 1962 states that there are several sorts of customs duties in India, including education cess, anti-dumping duty, protective duty, and necessary customs duty.
Q3. Which type of tax is Corporation tax?
One type of direct tax is the corporation tax. Profits from a company's operations, whether domestic or foreign, are subject to corporate tax. The range of corporate tax rates is 15% to 40%.
What are the types of taxes under Indian GST?
In India, there are four different kinds of GST:
Union Territory Goods and Services Tax, or UTGST
Q4. What is wealth tax?
One kind of direct tax imposed on the net worth of both individuals and HUFs was the wealth tax. In 2016, it was eliminated.
Q5. Is Gift tax direct or indirect tax?
The Income Tax Act imposes gift tax. Therefore, it is a direct tax. If a gift is worth more than Rs. 50,000, it is subject to taxation at the regular slab rates.
Q6. What type of tax is property tax?
The tax that a property owner pays to the municipal corporation is known as property tax. It is a direct tax since the property owner is required to pay it and it is not transferable.
Q7. What is tax deducted at source?
The tax collected by the individual making the payment is known as the tax deducted at source. It is gathered from specific payments, such as interest, commission, rent, and wage.
Q8. Does failure to pay taxes carry any penalties?
Any individual or legal company that fails to pay taxes may be subject to varying degrees of penalties from the government under the Indian tax system. The tax category that was avoided determines the penalty. As a result, the Indian tax system mandates that the entire amount of taxes due be paid, and in addition, fines and interest are levied as penalties.
Q9. What type of tax was Kharaj?
According to Islamic law, non-Muslims usually pay this individual Islamic tax on agricultural land. You may be unfamiliar with this tax. The reason for this is because Alauddin Khilji levied a 50% kharaj tax on the northern regions of India in the 7th and 8th centuries. Kharaj, another kind of land tax, ranged from one-third to half of the yield.
Q10. What is the difference between direct and indirect taxes?
An individual's income or fortune is subject to a direct tax. A person who uses products or services is subject to an indirect tax.
Q11. Who is liable to pay direct tax?
Both people and businesses are subject to direct taxes under the Income Tax Act. Those who are subject to direct taxes are responsible for paying them. For instance, property taxes, asset taxes, income taxes, etc.
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