Direct and Indirect Taxes

The taxation system in India is such that the taxes are levied by the Central Government and the State Governments. Some minor taxes are also levied by the local authorities such as the Municipality and the Local Governments.

Classification of Taxes:

Broadly taxes are divided into two categories:

1. Direct Taxes

2. Indirect Taxes

Direct Taxes

A direct tax can be defined as a tax that is paid directly by an individual or organization to the imposing entity (generally government). A direct tax cannot be shifted to another individual or entity. The individual or organization upon which the tax is levied is responsible for the fulfillment of the tax payment.

The Central Board of Direct Taxes deals with matters related to levying and collecting Direct Taxes and formulation of various policies related to direct taxes.

A taxpayer pays a direct tax to a government for different purposes, including real property tax, personal property tax, income tax or taxes on assets, FBT, Gift Tax, Capital Gains Tax, etc.

Examples of Direct Tax

The different types of direct taxes in India are given below.

Income Tax:

It is levied on the income earned by individuals, Hindu undivided families, or other legal people. In India, it is a progressive tax. To calculate it, we add income from all sources and tax as per the income tax slabs, which are mentioned below:

If the total income exceeds Rs 50 lakh and it is below Rs 1 Crore, then a Surcharge of 10% of income tax will be levied additionally.
If the total income exceeds Rs 1 Crore, then a Surcharge of 15% of income tax will be levied additionally.

Corporate Tax:

They are levied on the income of corporate firms or industries. For taxation purposes, a company is considered a separate entity. Therefore, they have to pay a separate tax apart from the personal income tax of their owner. All Companies registered in India under the Companies Act 1956 are liable to pay corporate tax.

Tax on Wealth and Capital:

Wealth Tax: It was first levied in 1957. It was made on the excess of net wealth (over 30 lakhs rs) of individuals and companies. It was abolished in 2015.
Gift Tax: it was introduced in 1958. It was levied on all donations except the one given by the charitable institution. It was abolished in 1998.
Capital Gain Tax: Capital gain is any profit that arises from the sale of the capital asset. The profit from the sale of any capital is taxed by the government. Capital assets include both moveable as well as immovable properties like land, buildings, houses, jewelry, patents, copyrights, shares, etc. They are of 2 types –
- Short-term capital assets are those assets that are held for not more than 36 months or less.
- Long-term capital assets are those assets that are held for more than 36 months. But from FY 2017-18 onwards – The criteria of 36 months have been decreased to 24 months in the case of immovable property being building, land, and house property.

Indirect Taxes

The term indirect tax has more than one meaning. In the colloquial sense, an indirect tax such as a sales tax, a specific tax, a value-added tax (VAT), or goods and services tax (GST) is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the consumer).

The intermediary later files a tax return and forwards the tax proceeds to the government with the return. In this sense, the term indirect tax is contrasted with a direct tax which is collected directly by the government from the persons (legal or natural) on which it is imposed.

Examples of Indirect Tax

Customs Duty

When commodities are transferred across international boundaries, customs duty is applied as a tariff or tax.
Its goal is to safeguard the country’s economy.
Various sorts of duties are imposed under customs rules, including Basic Duty, Countervailing Duty, Protective Duty, Anti-Dumping Duty, and Export Duty.
Import duties are used not just to generate revenue for the government, but also to regulate commerce.
In India, import duties are calculated on an ad valorem basis.

Sales Tax

In India, a sales tax is a type of tax levied by the government on the sale or purchase of a certain commodity within the country.
Sales tax is levied by both the central and state governments.
It has now been replaced by IGST.

Excise Duty

Excise duty is a commodities tax in the proper sense because it is collected on the manufacturing of products in India rather than the sale of the product.
Except for alcoholic drinks and narcotics, the central government imposes an explicit excise levy.
It has now been replaced by CGST.

Service Tax

In India, a service tax is levied on all services rendered.
In 1994-95, a service tax was imposed on three services: telephone services, general insurance, and stockbroking.
Every year since then, the service net has widened by adding more and more services. We now have a ‘negative list’ exclusion criterion, where some services are excluded from the tax net.
In India, the current rate of service tax was 15% before it was replaced by the Goods and Services Tax.

Value Added Tax

The VAT is constructed in such a way that it eliminates distortions.
As a result, all states and union territories in India have implemented VAT (except UTs of Andaman Nicobar and Lakshadweep).
The tax is imposed on a variety of commodities sold in the state, and the amount is set by the state.
State VAT, which was in effect until July 1, 2017, had replaced the previous Sales Tax of States.
It has now been replaced by SGST.

Dividend Distribution Tax

A dividend is a payment made by a corporation to its stockholders from the company’s profits in a given year. Dividends are income in the hands of shareholders, and they should ideally be subject to income tax.
Dividend distribution tax is a tax levied by the Indian government on Indian corporations based on the amount of dividends paid to shareholders.
DDT was first introduced in 1997, and it was regulated under Section 115 O of the Income Tax Act.
The Finance Minister eliminated the Dividend Distribution Tax in Budget 2020.
The burden of dividend taxation has now been shifted from corporations to individuals.

GST

GST (Goods and Services Tax) is a national indirect tax applied to the manufacture, sale, and consumption of goods and services.
It has supplanted all indirect taxes levied by the central and state governments on goods and services.

About Central Board of Direct Taxes (CBDT):

It is a statutory authority functioning under the Central Board of Revenue Act, of 1963.
The CBDT is a part of the Department of Revenue in the Ministry of Finance.
Functions:
- Its functions include formulation of policies, dealing with matters relating to levy and collection of direct taxes, and supervision of the functioning of the entire Income Tax Department.
- CBDT also proposes legislative changes in direct tax enactments and changes in rates and structure of taxation in tune with the policies of the Government.
Historical Background:
- The Central Board of Revenue, as the Department’s apex body charged with the administration of taxes, came into existence as a result of the Central Board of Revenue Act, of 1924.
- Initially, the Board was in charge of both direct and indirect taxes.
- However, when the administration of taxes became too unwieldy for one Board to handle, the Board was split up into two, namely the Central Board of Direct Taxes and Central Board of Excise and Customs, with effect from 1.1.1964
- This bifurcation was brought about by the constitution of the two Boards u/s 3 of the Central Boards of Revenue Act, 1963.
Structure:
- The CBDT is headed by the Chairman and also comprises six members, all of whom are ex-officio Special Secretaries to the Government of India.
  - Member (Income Tax)
  - Member (Legislation and Computerization)
  - Member (Revenue)
  - Member (Personnel & Vigilance)
  - Member (Investigation)
  - Member (Audit & Judicial)
- The Chairman is the co-ordinating head, and each of the members has been assigned a specialized function.
- The Chairman and Members of CBDT are selected from the Indian Revenue Service (IRS).

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