A direct tax is one that is paid directly to the imposing entity by an individual or company. A direct tax cannot be transferred to another person or business. The person or entity who is subjected to the tax is responsible for making sure the tax is paid. Income tax, Corporate tax, Securities Transaction Tax are some of the examples of direct taxes. Direct Tax is an important topic of the UPSC IAS Exam Economy Syllabus.

Direct Tax

• A direct tax is one that is levied directly on the taxpayer and paid directly to the government by those who are subjected to it.
• The Central Board of Direct Taxes is responsible for levying and collecting direct taxes as well as formulating other direct tax policies.
• A taxpayer pays a government a direct tax for a variety of reasons, such as real property tax, personal property tax, income tax or asset taxes, Gift Tax, Capital Gains Tax, and so on.
• Direct Tax is one of the two main sources of revenue for the government. The indirect tax is the other.
• Every fiscal year, direct taxes account for roughly half of the government's revenue.
• To increase revenue, the government sets direct tax collection targets for each fiscal year.

Examples of Direct Tax

Income Tax

• Individuals, Hindu undivided families, unregistered businesses, and other groups of persons are all subject to income tax.
• The nature of income tax in India is progressive.
• Income from all sources is combined together and taxed according to the individual's income tax slabs.
• Different rates of income tax are charged based on the amount of net income. For instance, an income tax of 10% is charged if net taxable income is between Rs 5 to 7.5 lakhs.
• Where the total income exceeds Rs 50 lakh but does not exceed Rs 1 crore, there is a 10% surcharge on income tax.
• Note: Agricultural Income is not taxed

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Corporation Tax

• It is a tax placed on the profits of corporations and business firms. It is also called Corporate tax.

• A firm is recognized as a separate entity for tax reasons and hence must pay a separate tax from its owner's personal income tax.
• Companies that are registered in India under the Companies Act 1956, both public and private, are subject to pay corporate tax.
• As of January 2022, the COrporation tax is at a rate of 22 percent for all domestic companies.

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Minimum Alternate Tax

• The concept of Minimum Alternate Tax (MAT) was introduced to ensure that companies with large profits and substantial dividends to shareholders who were not contributing to the government through corporate tax by taking advantage of the various incentives and exemptions provided in the Income-tax Act paid a fixed percentage of book profit as minimum alternate tax.
• As a result, the government charges a Minimum Alternate Tax, or MAT, on these businesses as an advance tax. As a result, businesses are required to pay at least a certain amount of tax.
• According to the Income Tax Act, if a company's taxable income is less than a particular percentage of its booked profits, that portion of the book profits is automatically considered taxable income, and tax is due.
• As of January 2022, MAT is at a rate of 15 per cent.

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Capital Gain Tax

• A capital gain is any profit or gains derived from the sale of a capital asset.
• Profits from the sale of capital are subject to taxation.
• Land, buildings, houses, jewelry, patents, and copyrights are examples of capital assets.
• Short-term capital asset — A short-term capital asset is an asset that is held for less than 36 months.
• Long-term capital asset — A long-term capital asset is one that has been held for more than 36 months.
• From FY 2017-18 onwards, the 36-month requirement for immovable property (land, building, and house property) has been decreased to 24 months.
• For example, if you sell a house property after owning it for 24 months, any income you receive will be considered as long-term capital gain if you sell it after March 31, 2017.
• However, transportable goods such as jewelry and debt-oriented mutual funds are exempt from this adjustment. If held for more than 36 months, they will be classified as a long-term capital asset.
• The Capital Gains are charged differently for short-term and long-term gains based on the income gained.

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Securities Transaction Tax

• Securities transaction tax is a tax on gains made on the domestic stock exchange on securities such as equities, options, and futures.
• It is a direct tax levied and collected by the central government.
• P. Chidambaram, the former Finance Minister, proposed the Securities Transaction Tax (STT) in 2004.

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Commodities Transaction Tax

• The commodity transaction tax is charged on the buyer and seller of exchange-traded non-agricultural commodity derivatives in India.
• It is calculated based on the contract's size.
• Non-farm items such as metals (gold, silver, and copper) and energy products are among the commodities covered by CTT (crude oil and natural gas).

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Alternate Minimum Tax

• What Minimum Alternate Tax (MAT) is to corporations, Alternate Minimum Tax (AMT) is to limited liability partnerships.
• Other types of commercial organizations, such as partnership businesses, sole proprietorships, and associations of persons, are not subject to this tax.

Estate Duty

• It was first introduced in 1953. It is imposed on all of a person's property when he or she dies.
• The deceased person's entire estate is considered his riches and is subject to taxation.
• Since 1985, the tax has been discontinued.

Wealth Tax

• It was first introduced in 1957.
• It was imposed on individuals, joint Hindu families, and businesses who had an excess of net worth.
• Wef 2015, the tax was abolished.

Gift Tax

• It was first introduced in 1958.
• All donations were subject to the gift tax, with the exception of those made by charitable institutions' government and private enterprises.
• Since 1998, the tax has been discontinued.

Fringe Benefits Tax

• Many corporations provide various bonuses to their employees and keep them beneath their input cost in order to lower the profit on booked entries.
• As a result, profit is reduced, resulting in lower government taxation.
• To counter this, the government enacted the Fringe Benefits Tax (FBT), which is essentially a tax that an employer must pay in lieu of the benefits provided to his or her employees.
• It was an attempt to impose a tax on all benefits that were evading the tax.
• In India's 2009 Union budget, the fringe benefits tax was repealed.

Difference Between Direct and Indirect Taxes

Advantages of Direct Tax

• Economic Balance: The government creates tax bands depending on an individual's wages and age to achieve economic and social balance. The tax rate is set according to the country's economic position. Individuals are excused in order to balance economic disparities.
• Ensures equality: Individuals and businesses with larger profits must pay higher taxes to the government in order for the government to assist the poor and vulnerable in society. This maintains economic equilibrium.
• Gives Certainty: The direct tax provides both the government and the taxpayers with a sense of certainty because the amount of tax that must be paid and collected is known to both the taxpayer and the government.
• Addresses inflation issues: During periods of high inflation, the government raises taxes in order to limit the demand for goods and services, resulting in a fall in inflation.
• Makes Government Accountable: Individuals are aware of the need to pay taxes. As a result, he or she is aware of his or her rights and is engaged in the government's use of taxes. This ensures that the government is held accountable.

Disadvantages of Direct Tax

• Can be easily evaded: Not everyone is eager to pay their taxes. To avoid paying taxes, some are willing to file a fraudulent tax return. Without being held accountable to the law of the state, these people can easily conceal their earnings.
• Tax slabs are arbitrary: Taxes are set arbitrarily by the Finance Minister if they are progressive. It places a significant burden on the poor if it is proportional.
• Obstructs growth: High taxes disincentivize people from saving and investing, causing the country's economy to suffer. It obstructs the growth of businesses and industries, causing them harm.
• Inconvenience: A direct tax has the significant disadvantage of pinching the taxpayer. When a lump sum is taken from his pocket, he feels a sense of his hard-earned money taken away. As a result, paying direct taxes is quite inconvenient.

Conclusion

The government's revenue is currently being hit hard by the coronavirus-driven economic crisis, causing it to raise its borrowings. To mitigate the damage, the government must take proactive efforts to lessen the burden on taxpayers, allowing them to stimulate demand and participate in the economy's growth and development. This, combined with the Vivad Se Vishwas scheme, which establishes a direct tax dispute resolution process, will facilitate the ease of doing business and the country's economic progress.