What are direct and indirect taxes?

Although government is the ultimate collecting agent for both the direct and the indirect taxes, yet the collection of taxes depends on the nature of taxes. Direct taxes (including the income tax, wealth tax and corporation tax) are levied and collected by the central government. The Department of Income Tax is responsible for monitoring the payments of income tax. The liability of paying the tax and any punitive action in case of evasion depends on the tax payer. When the liability to pay the tax and the burden of the tax falls on the same person, it is called a direct tax.

Individuals pay indirect taxes when they purchase goods or use services. Indirect taxes are collected by intermediaries from the person who bears the ultimate economic burden of the tax thus levied.

Following are the examples of direct tax in India:

1. Income tax: Income Tax is paid by an individual based on his/her taxable income in a given financial year. Under the Income Tax Act, the term  ‘individual’  also includes Hindu Undivided Families (HUFs), Co-operative Societies, Trusts and any artificial judicial person. Taxable income refers to total income minus applicable deductions and exemptions. The income tax is decided as per various slabs which are subject to variation in each fiscal year.
2. Corporation tax: This is the tax that is levied on businesses and companies operating in India. It is levied on the basis of earnest income in worldwide operations in a given fiscal year and the rates depend on the physical location of the concern (whether based in India or abroad).
3. Wealth tax: This is a form of direct tax that is levied on individuals, HUFs or companies on the value of their assets in a given financial year on the date of valuation. It does not include productive assets like commercial property, stocks, bonds, fixed deposits, mutual funds etc. and is currently taxed at the rate of 1% of the net wealth of any individual exceeding
   Rs 30,00,000.
4. Capital Gains tax: This form of direct tax is levied on the sale of property and consequent profit. Property here includes stocks, bonds, residential property, precious metals etc. It is taxed at two different rates based on how long the property was owned by the taxpayer – Short Term Capital Gains Tax and Long Term Capital Gains Tax.

Examples of indirect tax in India includes the following:

1. Goods and Services Tax (GST): After subsuming of 17 indirect taxes, government of India implemented the GST law on 1^st July, 2017, varying from state to central governmental levels. At the state level, it covers central excise duty, additional excise duty, service tax, additional custom duties etc. At the central level, it consists of sales tax, entertainment tax, central sales tax, entry tax, purchase tax and luxury tax etc.

2. Tax on alcohol and petroleum products: This is a separate category of indirect taxes and does not come under the purview of GST.

SAVE TAX CALCULATOR

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Calculate your Income tax