What Is Direct Tax? Definition, Benefits And Types Explained
By June 17, 2024, the government collected INR 4.63 trillion in direct tax for the FY 24-251. These collections grow at the rate of 21% over one year and contribute a great deal towards the country’s revenue.
But what is direct taxation? How does it affect people and businesses? For more about the tax system, benefits and types of direct tax in India continue reading.
About Direct Tax
In simple words, taxes help the government to raise money. The funds raised are used to pay for the country’s healthcare, infrastructure, education and defence, among other public services.
The tax collection can be of two main types: direct and indirect.
The topic of discussion is about direct tax. As the name says, they are paid straight to the central authority. These levies are based on income or profits. The Central Board of Direct Taxes is the regulator.
The direct system is progressive in nature and follows the ability-to-pay concept. This means that people with higher incomes pay more. While, at the other end of the scale, those with lower income have lower tax rates. This system makes sure everyone pays according to what they can earn. It aims to be fair and just for everyone.
Difference Between Direct Taxation And Indirect Taxation
As noted earlier, direct taxes are paid directly to the Centre. Indirect ones work differently.
Indirect tax applies to goods and services purchased and not income. Consumers pay it when they buy products or services. GST or the Goods and Service Tax is an example of an indirect tax. The seller of the good or service collects the tax charges from the buyer and then pays it to the central authority.
Different Types Of Direct Taxes In India
These are some of the main direct tax types:
- Income Tax: Payable by individuals, Hindu Undivided Families, Partnerships and Association of Persons. The criteria are outlined in the Income Tax Act. Income and age are the payment determinants.
- Corporate Tax: Companies operating within the country pay on the profits that they earn. The Finance Act determines the rates.
- Capital Gains Tax: The levy is on the income from trading capital assets. It can be long or short-term, on a holding period basis.
- Securities Transaction Tax: It applies to trading listed securities on the exchange. Paying responsibility rests with both parties to the transaction.
- Dividend Distribution Tax: It is for dividends paid. Initially, the companies used to pay dividend distribution tax. However, after the Finance Act 2020, the tax is now on investors2.
- Gift Tax: It used to be separate. But now gifts are taxed as part of income tax. Now, if you get a large gift, you include it in your income. You then pay income tax on it.
What Are The Tax Rates For The Different Types Of Direct Taxes?
For the annual year 2024–25, the income tax slabs for other than 60+ citizens are3:
Tax Regime | Income Slab (INR) | Tax Rate |
Old Tax Regime | Up to INR 2.5 lakh | Nil |
2.5 - 5 lakh | 5% above INR 2.5 lakh | |
5 - 10 lakh | INR 12,500 + 20% above INR 5 lakh | |
10 lakh + | INR 1,12,500 + 30% above INR 10 lakh | |
New Tax Regime | Up to INR 3 lakh | Nil |
3 - 6 lakh | 5% above INR 3 lakh | |
6 - 9 lakh | INR 15,000 + 10% above INR 6 lakh | |
9- 12 lakh | INR 45,000 + 15% above INR 9 lakh | |
12-15 lakh | INR 90,000 + 20% above INR 12 lakh | |
Above INR 15 lakh | INR 1,50,000 + 30% above INR 15 lakh |
To know more about the different tax slabs: Income Tax Slab FY 2023-2024 (AY 2024- 2025) & Exemption (New & Old Regime Tax Rates)
Corporate tax slabs for the same time frame4:
Condition | Domestic Companies (%) | Foreign Companies operating in India (%) |
Total Turnover/Gross Receipts for 2020-21 ? INR 400 crores | 25 | - |
Any other Domestic Company | 30 | - |
Approved Royalty or Technical Service Fees between 1961-1976 | - | 50 |
Any other income | - | 40 |
For domestic companies opting for Sections 115BA, 115BAA, and 115BAB, tax rates are 25%, 22%, and 15%, respectively5.
Eligibility Of Direct Taxation In India
In India, various entities must pay direct taxes. Here are the main categories:
Individuals: Includes both residents and non-residents, who are salaried or self-employed. It also includes freelancers making taxable pay.
Hindu Undivided Families: Treated as separate tax entities. The Karta, or family head, pays on behalf of the family.
Partnership Firms: Constituted in accordance with the 1932 Indian Partnership Act. The partners contribute based on their respective shares.
Companies: All types, including domestic and foreign companies, must pay corporate tax on profits. One-person businesses, public and private limited, fall under this category.
Association of Persons and Body of Individuals: Consists of individuals or companies with a common objective. These entities are taxed separately.
The Importance Of Direct Tax
Direct taxes come with several benefits. These advantages make them a crucial part of a country's taxation system.
- Equity: Direct taxes are fair. People with higher incomes pay more taxes. Those with lower incomes pay less. This system ensures that everyone contributes based on their ability to pay.
- Progressiveness: The approach also helps lessen income disparity. The system uses the wealthy to support the poor. As a result, wealth is distributed more fairly in the population.
- Productivity: As the economy grows, the revenue from these taxes increases. This automatic adjustment helps the government manage its finances effectively.
- Economic Efficiency: Collecting direct taxes is cost-effective. Since taxpayers pay annually, administrative costs are lower. This efficiency benefits the overall economy by reducing unnecessary expenses.
- Certainty: Taxpayers know how much they need to pay and when. The government also knows how much revenue to expect. This clarity helps in better financial planning for both parties.
What Is The Direct Tax Code?
The Direct Tax Code is a plan to swap the old Income Tax Act of 1961. The idea first came up in 2009. It has undergone many revisions. A special task force submitted the latest draft in 2019. It strives to reduce litigation and make filing tax returns simpler.
The new rule wants to get rid of many complicated exemptions and deductions. It uses clear and simple language. This helps taxpayers understand their obligations better.
Conclusion
Direct taxes are essential for financing public services and growing the economy. They promote fairness by requiring higher contributions from those with greater ability to pay. Understanding the various types, rates, and benefits of direct taxes helps taxpayers comply and plan better, supporting overall economic growth.
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Frequently Asked Questions On Direct Tax
- Is GST a direct tax?
No, GST is not a direct tax. It is an indirect tax. People pay GST when they buy goods and services. The seller then passes this tax to the government. Direct taxes are paid on income or profits, but GST is included in the price of items you buy. When a supplier buys any goods, he pays indirect tax on it, so when he sells it and collects the tax from the consumer, he takes the credit of what he had paid and pays the final amount, after adjustment to the government. - What are the objectives of direct tax?
The goal of direct taxes is to help the government's income. This money funds public services like healthcare and education. Direct taxes also aim to balance the economy. They have set tax rates based on how much people earn. Income disparity can be decreased by raising taxes on the wealthy. The system also helps curb inflation by adjusting tax rates. - What are the advantages of direct tax?
Direct taxes are fair. People with higher incomes pay more, while those with lower incomes pay less. They help reduce income inequality. The system is predictable, so both taxpayers and the government are aware. Collecting direct taxes is also cost-effective. It supports important public services.
References:
- Press Information Bureau <https://tinyurl.com/ycx29kpx>
- Mutual Funds Sahi Hai <https://tinyurl.com/mryawf2a>
- Income Tax Department <https://tinyurl.com/2n2yk3ek>
- Income Tax Department <https://tinyurl.com/3cp3dth7>
- Income Tax Department <https://tinyurl.com/4cd3mnn9>
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