Taxes are often termed as obligatory contributions to be made by both individuals and companies to the Government or other intermediate authorities. From regional to national, taxes are applicable and levied on various levels to promote the economic growth of the nation. If you are keen on reading tax-related news, you might have heard of the net direct tax collection hitting an all-time high of Rs. 14.09 lakh crore in the FY 2021-22 (Source: IBEF).
But what do this tax and its subtypes mean? In this blog post, we will cover various aspects of direct tax in India.
What is a direct tax?
Direct tax is one of the types of tax where the incidence and impact fall under the same category. In simpler words, it is paid directly by an individual or organization to the entity that imposes it. Also, they are directly imposed by the Government and cannot be paid to any other entity. For example, taxpayers are liable to pay income tax and property tax directly to the government.
Direct taxes are imposed as per the ability-to-pay principle, which says that individuals or entities earning a higher income need to pay more taxes. This may turn out to be discouraging for many as those working hard to earn more have to pay more taxes. Hence, many of them may cap their productivity to minimize their tax outgo.
Types of direct tax in India
Direct tax is primarily classified into four different types, as detailed below:
Income tax
This tax is levied depending on the income of an individual, hence the name. It is calculated as per the provisions defined under the Income Tax Act, 1961, and has to be paid every year to the central government. The applicable income tax rate depends on the net taxable income (prevailing tax bracket). It is levied on different sources of income, such as income from salary, capital gains, house property, business, and others.
In the case of salaried individuals, this type of direct tax may get deducted in the form of TDS (Tax Deducted at Source). For self-employed individuals, it is payable as per the declared income in the ITR.
Recommended Read: TDS Rates for FY 2021-2022: All You Need to Know
Corporate tax
Other than individuals, both Indian and foreign companies are also liable to pay taxes to the government under the Income Tax Act, 1961. For domestic firms, this tax is levied on the net profit. On the other hand, foreign corporations whose profits appear or are deemed to emerge through operations in India are liable to this tax. Besides this, other income of a company (dividends, royalties, and interest) is also taxable.
Currently, companies having a gross turnover of up to Rs. 250 crores are liable to pay this direct tax at the rate of 25% of the net profit. This tax rate is at 30% for companies with a gross turnover of more than Rs. 250 crores.
Besides this, the following table covers other types of taxes that come under the corporate tax:
| Tax Type | Description |
| Minimum Alternative Tax (MAT) | Levied on zero-tax companies that declare little or no income to save taxes |
| Fringe Benefits Tax (FBT) | Imposed on the fringe benefits (drivers, maids, etc.) provided by companies to their employees |
| Dividend Distribution Tax (DDT) | Levied on the dividend paid to the shareholders by a domestic company only |
| Securities Transaction Tax (STT) | Imposed on the income of the companies through taxable securities transactions |
Capital gains tax
This type of direct tax is levied on the income earned from the sale of assets or investments. In general, investments in bonds, shares, homes, businesses, and mutual funds come under capital assets. Based on the holding period of assets, this tax is classified into short-term and long-term capital gains tax.
For businesses, capital assets refer to anything that is not intended to be liquidated or sold during the course of business operation and can be used for more than a year. For example, machinery, commercial vehicles, farms, etc.
The simplest formula for capital gains is:
Capital Gains = Sale Value – Purchase Value
Assets, apart from securities, that are sold within 36 months from the time they were bought come under short-term capital gains. On the other hand, if assets are held for more than 36 months, they are categorized as long-term assets.
Wealth tax
Wealth tax is based on the ownership of properties and their market value and is to be paid annually. If an individual owns a property, this type of direct tax must be paid irrespective of whether the property is used to generate an income.
Furthermore, wealth tax is exempt for assets like stock holdings, gold deposit bonds, and house property.
Recommended Read: All About Corporate Tax in India
Advantages of direct tax
Economic balance
Direct taxes are payable based on the earnings and financial condition of individuals. The Indian government has well-defined income tax slabs along with deductions/exemptions rules to balance out the income inequalities.
Inflation curbing
In case of inflation, the government increases the direct tax rate, which in turn reduces the demand for goods and services. With reduced demand, inflation is bound to fall, and the cycle continues.
Certainty related to tax payment
The direct tax guidelines help individuals in calculating or estimating the tax payable. Both the taxpayers and government know how much tax they are most likely to pay and how much to collect at their respective ends.
Distribution of wealth
Direct tax involvement ensures that the money is properly distributed for public welfare purposes. The government charges more taxes from those who can afford and then utilize it for the benefit of economically-poor sections of society.
What is the Direct Tax Code?
The Direct Tax Code or DTC is drafted to replace the existing Income Tax Act and establish a more efficient and equitable tax system. It aims to stabilize and amend various laws related to direct taxes in India to increase the tax-GDP ratio and ease voluntary compliance. It has 319 Sections and 22 Schedules to provide a stable code for taxation.
Differences between direct and indirect taxes
Similar to direct taxes, there is an indirect tax system prevailing in our country. The following table highlights the differences between direct and indirect taxes:
| Direct Taxes | Indirect Taxes |
| It is levied on income and activities. | It is levied on services and products purchased by the end consumers. |
| The tax burden cannot be shifted. | The burden of tax can be shifted. |
| It is payable directly by the concerned person on which it is imposed. | It is paid by a person who can then recover the same from another person (the end customer). |
| It is paid once the income has reached the hands of the taxpayer. | It is paid before the goods or services are received by the taxpayer. |
| Collecting this type of tax is quite difficult. | The tax collection process is relatively easier. |
| Direct tax examples: Wealth tax, income tax, etc. | Indirect tax examples: custom duty, excise duty, GST, etc. |
More about CBDT
The Central Board of Direct Taxes, also known as CBDT, is a statutory authority that functions under the Central Board of Revenue Act, 1963. It has the responsibility to administer laws related to direct taxes in India and also provides inputs/suggestions for the planning of direct taxes.
Earlier the Central Board of Revenue functioned as the apex body for the income tax department and was in charge of both indirect and direct tax. In 1964, the Board got split into CBDT and Central Board of Excise and Customs.
Recent News About Direct Tax
The CBDT has recently issued an Income Tax Refund of over Rs. 1.86 Lakh crores to more than 2.14 crore taxpayers during the current financial year.
