As we know, the government receives a substantial amount of money from taxes, which are collected from many parts of our everyday lives. Many parts of our daily lives are subject to various sorts of taxation, including the money we earn, the fuel we buy for our cars, the cell phones we buy for communication, the roads we drive on, and even the simplest things like buying a can of cold drink from the grocery store.
Direct and Indirect Taxes
Having a thorough grasp of the many tax categories used in India is also very important. Direct taxes and indirect taxes make up the bulk of the country's tax system. Our fiscal duties can be better understood by delving into the complex meanings and consequences of these tax categories.
The importance of direct taxes is often emphasized above indirect taxes when students explore the complexities of taxation.
Get your tax basics down before we get to the crucial type.
What Are Direct Taxes?
A direct tax, in its most basic definition, is a kind of tax that people directly pay to the government. People are required by law to pay income tax, which they do by sending money to the income tax department. No other company or individual can claim these taxes as their own.
Who is responsible for collecting direct taxes?
The Indian government's Department of Revenue supervises the Central Board of Direct Taxes (CBDT), which is responsible for collecting and distributing direct taxes. This division is responsible for overseeing the collection and distribution of direct taxes as well as providing the government with advice and recommendations on how to best execute these levies.
Types of Direct Taxes
Income Tax
First and foremost among India's direct taxes is the country's income tax. The income tax slabs used by the IT department to calculate income tax are a yearly levy. Both individuals and corporations send this tax directly to the IT department. Numerous provisions of the IT Act provide taxpayers with tax deductions.
Securities Transaction Tax
Second, there's a little thing called the securities transaction tax that is tacked on to every stock trade. This tax has to be paid even if the deal didn't make any money. The securities exchange receives this tax from brokers, who in turn send it to the government.
Capital Gains Tax
You'll have to pay capital gains tax whenever you have any kind of capital gain. The payment is based on the capital gains and the length of time an investment is held, regardless of whether it's from the sale of property or investments. Based on certain conditions, taxpayers are required to pay either the long-term capital gains tax or the short-term capital gains tax.
What are Indirect Taxes?
Unlike direct taxes, which people pay to the government on a personal level, indirect taxes rely on third parties, for example, product manufacturers and service providers. As an alternative to taxes on income and profits, these levies are placed on products and services. As opposed to direct taxes, intermediaries must remit the money they have collected from end users to the government.
Note that indirect taxes are applicable at the same rate and these do not depend on the income of an individual. The Central Board of Indirect Taxes and Customs (CBIC), which functions similarly to CBDT under the Department of Revenue, is responsible for overseeing indirect taxes.
Types of Indirect Taxes
1. GST, or Value-Added Tax:
Service Tax, Central Excise, and State VAT were among the seventeen distinct taxes merged into the larger indirect Goods and Services Tax (GST). Applying GST to all goods and services by GST council tax bands avoided the cascading effects of the previous tax system.
2. Customs Duty:
All products entering India from abroad are subject to customs duty, which is imposed on them regardless of the mode of conveyance (air, land, or sea).
3. Value-added Taxes:
State governments levy value-added tax (VAT) on products as their value increases throughout the production chain. VAT is a consumption tax. Even though GST mostly superseded VAT, it is still applicable to certain commodities, particularly those with alcohol in them.
The Significance of Direct Taxes in Comparison to Indirect Taxes
A Basis for Fiscal Responsibilities: Direct Taxes
The foundation of a nation's fiscal responsibility is its system of direct taxes, which includes income, wealth, and capital gains taxes. Direct taxes have an impact on people and businesses directly, whereas indirect taxes apply to goods and services. Aligning with ideals of social justice, this guarantees a fair and equal allocation of the tax burden.
1. Equity and Progression
The proportion of income that is subject to taxation increases as one's income increases, since direct taxes are progressive. The progressive aspect of this system guarantees that a larger percentage of the tax burden falls on individuals with higher incomes. On the other hand, indirect taxes, which are frequently regressive, are more detrimental to lower-income groups.
2. Consistent Income
The government's coffers are filled with a steady stream of predictable funds from direct taxation. The government can more precisely predict future revenue streams because taxes are based on the earnings and profits of individuals and enterprises. This consistency promotes economic stability, which enables effective financial planning and fund distribution.
Unraveling the Mysteries of Indirect Taxes
While indirect taxes do help fund government operations, the difficulties inherent in their very nature make them less desirable than direct taxes.
1. Financial Pressures on Low-Income Groups
The Goods and Services Tax (GST) and other indirect taxes disproportionately affect people with lower incomes. The tax rates for necessities and luxury goods are identical, even though both groups spend a lot of money on essentials.
2. Pressures for Inflation
Inflation pressures may build up as a result of indirect taxes and their domino effect. Increasing taxes at various points in the manufacturing and distribution chain can have a chilling effect on consumer spending and, by extension, economic growth.
Conclusion
When it comes to taxation, direct taxes are the backbone of any just and long-term budget plan. Concepts of equity, progressivity, and revenue stability lead to a preference for direct taxes over indirect ones. Understanding the significance of direct taxes is crucial for accountants. When it comes to understanding taxes and money management concepts, pursuing a Certificate Course in Professional Accounting in Ahmedabad from the Six Sense Skill Development Institute can help you navigate the complexity of financial management easily.
