Taxes are one of the most significant income sources for the government of India. Amount from your salary, watching a movie at the cinema, purchasing any product online or offline, getting fuel into your car from the filling station, and even driving your vehicle on roads, you pay taxes in numerous ways.
Every responsible citizen of the nation must pay the tax honestly to the government, as the government uses the revenues generated from taxes for the welfare and development of the country. But understanding the taxation system and various taxes is equally crucial for us. We must know how and what amount of taxes we pay to the government.
Taxes in India are broadly classified into two categories – they are – Direct taxes and indirect taxes.
In the further part of the article, we will understand both kinds of taxes in detail, but first, we must know what tax is.
What is Tax?
Tax is a mandatory contribution made by individuals or corporations to the government. They pay the tax as per the tax slab under which they fall. Taxes are applied at local as well as national levels. The government generates significant revenue through taxes. They use this generated revenue to raise the citizens’ standard of living and build the country’s economy.
What is a direct tax?
The tax that the taxpayer pays directly to the authorities imposes the tax. It is a non-transferable tax administered and governed by the central board of direct taxation (CBDT). This department also plans and provides input to the government to implement direct taxes in the nation.
Types of Direct Taxes in India
The most common types of direct taxes that are implemented in our country.
1. Income tax
Income tax is the most common form of direct tax. It is imposed on a person’s income in a financial year based on the income tax slab prescribed by the income tax department. The individual or corporate entity pays the tax directly to the IT department.
2. Securities transaction tax
Each stock trading transaction bears a small tax known as security transaction tax, also known as STT. Whether you earn a profit or loss in stock trading is a secondary matter, but paying tax is mandatory. The stock broker collects the tax from you and submits it to the security exchange, which further pays it to the government.
3. Capital gain tax
Whenever you make some capital gains, you must pay capital gain tax. You can acquire capital gain through investment or the sale of a property. It depends upon the capital gains and the duration of the investment; you will have to pay either long-term gains (LTCG) tax or short-term capital gain (STCG) tax.
Advantages of Direct Tax
Direct tax is advantageous for the social and economic growth of the country. The following point can elaborate on the advantages of direct tax in a better way.
It controls inflation:
To balance the monetary inflation government often raises the tax rates. If the government does not offset the inflation, it will result in less demand for goods and services, which ultimately negatively impacts the economy.
Balancing the income inequalities:
Government has a well-defined taxation system with tax slabs, deductions, and exemptions. It helps fill the income inequality gap and balance the economy.
The disadvantage of direct tax
The biggest and foremost disadvantage of direct tax is the time-consuming procedure of filing the tax return.
What is indirect tax?
Contrary to direct tax, which is imposed directly on the income of an individual, indirect tax is levied on goods and services. Thus, a direct tax is directly paid to the government, but an indirect tax is collected by an intermediatory who further passes it on to the government.
The income of any individual does not have any impact on indirect tax; in fact, the tax rate is identical for every individual. The central board of indirect tax and Customs is responsible for handling indirect taxation in India.
Goods and service tax:
GST is the most common form of indirect taxation in India that has subsumed approximately seventeen different indirect taxes like service tax, state vat, sales tax, central excise, etc. It is the single, unified, and most comprehensive indirect tax imposed on all goods and services based on a tax slab prescribed by the GST Council of India.
Custom duty:
Custom duty is imposed on the purchase of imported goods. The tax is payable regardless of whether it reaches you by air, land, or sea. The motive for imposing the custom duty is to ensure that every interest imported to India is taxed.
Advantages of indirect taxes
The following are the advantages of indirect taxes
Cent percent contribution:
Indirect taxes ensures that every individual contributes to the nation’s development. As we know, poor people are usually exempted from direct taxes but pay indirect taxes for every product or service they purchase.
Convenience:
Paying and collecting direct tax is a time-consuming and cumbersome process, but indirect tax is paid in every purchase, thus making the process of paying tax easy.
The disadvantage of indirect tax
Regressive:
Indirect tax is regressive in nature. Though it ensures that every individual has paid the tax, it needs to be more equitable. People from different income groups pay the same rate of tax.
Raise the product’s price –
Tax, when added to the product price, makes it more expensive.
Less transparent –
Indirect taxes are included in the MRP of a product or service; hence the taxpayer is usually unaware of the amount of tax they are paying on it.
Conclusion
Direct tax and indirect tax are both important for development as it helps the government to generate revenues which it further uses to develop the nation in various aspects. Thus, gathering these levies is essential for both the government and the overall growth of the country.
