Direct Tax in India

Tax Planning Tips

The Central Board of Direct Taxes (CBDT) is responsible for the administration of direct taxation in India. It is a statutory body formed under the Central Board of Revenue Act, 1924 and is a part of the Department of Revenue.

What is Direct Tax?

As the name suggests these taxes are directly paid by the assesse to the government. These are not paid on behalf of the taxpayers but are imposed directly by the regulator. Furthermore, this liability is non-transferable to another taxpayer.

What Are The Different Types Of Direct Taxes?

Here are the different types of direct taxes in the country:

What Are The Benefits Of Direct Taxes?

What Are The Disadvantages Of Direct Taxes?

1. Corporate tax

Such tax is levied on domestic companies that are different from the shareholders. This tax is also payable by foreign corporations whose income arises or is deemed to arise in India. Income earned as interest, royalties, dividends, technical services fees, or gains through the sale of assets based in India is taxable. Corporate tax also includes the following:

  • Minimum Alternate Tax (MAT)

    Levied on zero tax companies whose accounts are prepared as per the guidelines of the Companies Act.
  • Fringe Benefits Tax

    Such direct tax is paid by companies on fringe benefits (drivers, maids, etc.) provided to employees.
  • Dividend Distribution Tax (DDT)

    This tax is levied on any amounts that are declared, distributed, or paid by domestic entities as dividends to the shareholders; foreign companies are exempt from DDT.
  • Securities Transaction Tax (STT)

    This liability arises from income earned through taxable securities transactions.

2. Wealth tax

This liability arises from the ownership of properties and is paid every year based on the market value of the property. Property owners must pay this tax irrespective of whether the property earns them any income or not. Depending on the residential status of the taxpayers, wealth tax is payable by individuals, Hindu Undivided Family (HUF), and corporate taxpayers. Working assets like stock holdings, gold deposit bonds, commercial complex properties, house property rented for more than 300 days in a year, and house property owned for professional or business use are exempt from paying wealth tax.

3. Capital gains tax

This type of direct tax in India is payable on income earned from the sale of investments or assets. Capital assets include investments in homes, art, businesses, shares, bonds, and farms. Capital gains are calculated as the difference between the sale value and the purchase value of these assets. This tax is classified as either short-term or long-term based on its holding period. All assets (except securities) that are sold within 36 months of acquisition are liable to short-term gains. Gains made through the sale of assets that are held for more than 36 months are long-term assets.

  • Four benefits of direct taxes are:
  1. Equity

    Direct taxes are levied on the total income of the taxpayers. Therefore, taxpayers with higher income pay more tax while taxpayers earning less pay lower to no taxes. This makes direct taxation equal and just for the majority of the Indian population.
  2. Progressive

    The primary objective of any government is to achieve equal distribution of wealth. Direct taxes in India play an important role in attaining this equality. These taxes are designed with progressiveness; they are beneficial in reducing income inequalities. The government levies higher taxes on taxpayers who can afford them and uses this money to help the poor, which reduces the income inequality.
  3. Productive

    These types of taxes are productive and elastic. The revenue earned through such taxes automatically increases or decreases depending on the changes in the national wealth of the country.
  4. Economic

    Since taxpayers pay this tax annually, the administrative costs borne by governing authorities for the levy and collection of tax are reduced. This makes the process more economical which is beneficial for the overall growth of the nation.
  • Three disadvantages of direct taxes are:
  1. Tax evasion

    This is probably the biggest disadvantage of such taxes. When there are loopholes in the legal system, the probability of tax evasion through manipulative techniques is higher. Several taxpayers suppress profits by manipulating their financial statements, which reduces their tax liability.
  2. Social conflict

    There is a probability of social conflict because the entire population is not liable to pay these taxes. This may result in criminal acts, inferiority complex among the lower strata, and social injustice.
  3.  Inconvenience

    Filing and submission of direct taxes require the taxpayers to fulfill several formalities and go through numerous procedures. This makes the entire process cumbersome and inconvenient for the taxpayers.
  • Although there are some disadvantages of these taxes, direct tax in India comprises a significant component of the economy. When implemented appropriately, these taxes serve as an excellent way to prevent inflation and sustain price levels.

Related Articles

To learn more about the income tax slabs AY 18-19, click here.

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