What is the period for which a person's income is considered for purpose of Income tax?

Income earned in the twelve months contained in the period from 1st April to 31st March of the Financial Year is considered for calculating Income Tax.

What is the disadvantage of direct tax?

One disadvantage of direct taxes is that they can be seen as a burden on individuals or entities, as they directly reduce taxpayers’ disposable income or profits.

How does the Government collect Income-tax?

Taxes are collected by the Government through three means: a. Voluntary payment by taxpayers into various designated Banks. For example, Advance Tax and Self-Assessment Tax paid by the taxpayers; b. Taxes deducted at source from the income of the receiver; c. Taxes collected at source It is the constitutional obligation of every person earning income to compute his income and pay taxes correctly.

Is Income tax Act applicable only to residents?

No, the Income tax Act applies to all persons who earn income in India, whether they are resident or non-resident.

What is Direct Tax: Meaning, Types, & Differences from Indirect Tax

Home

Services

Products

Help

Get App

This article is also available to read in

Hindi

04 DECEMBER, 2023

Introduction:

Taxation is a major source of revenue for any government. It is a means of economic transformation and socio- economic development of the country. Broadly speaking, there are two types of taxes in India - Direct taxes and Indirect taxes.

What is Direct Tax

A Direct tax is a type of tax that is imposed directly on individuals and entities based on their income or wealth. Levies like income tax, corporation tax, etc. fall under the ambit of direct taxes. These taxes are governed by the Central Board of Direct Taxes (CBDT).

As mentioned above, Direct taxes are directly levied on individuals and entities based on their income or profit earned without any intermediary. This results in the taxpayer or the person on whom the liability of paying such direct tax is imposed, to pay/discharge such liability by himself.

One of the key features of Direct taxes are that it works on a progressive basis, which means higher the income of the taxpayer, higher would be their taxes. For instance, individuals earning higher income, pay higher income tax as compared to individuals with lower income. Failure to pay taxes on time may result in interest and penal consequences and imprisonment.

What is Indirect Tax

Indirect tax is a tax levied on the consumption of goods and services. It is not directly levied on the income of the person. Here, the consumer of goods and services is required to pay the taxes along with the price of goods and services. Examples of Indirect taxes include – GST, VAT, excise duty etc. These taxes are governed by the Central Board of Indirect Taxes and Customs (CBIC)

Types of Direct taxes:

Now that we have a basic understanding of what is direct tax, let us have a look at what are the different types of direct taxes in India. A few of them are enumerated herein under:

Type of Direct tax	Governing Act	Overview
Income Tax (Individuals and entities other than companies)	Income tax Act, 1961	It is a levy imposed on the income of Individuals or a Hindu Undivided Families (HUFs) or other taxpayers like Association of Persons (AOP), Body of Individuals (BOI), Partnership Firms and LLP. Above person is required to assess their taxable income from various sources i.e. salaries, House Property, business, capital gain, other sources after taking benefits of any deduction available. Various tax slab rates are notified by the Government depending on the Individual’s income and their age. One needs to compute the tax liability in accordance with the rates so prescribed. A Return of Income to this effect is required to be filed by the taxpayer annually. Failure to do so, may attract penalties.
Corporate Tax	Income tax Act, 1961	Corporate tax is a tax levied on Companies. The companies need to assess the income from various sources i.e business, capital gains etc. and calculate taxable income accordingly. The term “Companies” referred above, includes both domestic as well as foreign company. While the domestic company is taxed on its worldwide income, the foreign company is taxed in respect of profits arising out of or from its operations in India. Specific rates of taxes for both domestic as well as foreign company are notified by the government.
Securities Transaction Tax (‘STT’)	Securities Transaction Tax Act	STT is a tax imposed on purchase and sale of listed securities such as equity shares, equity oriented units, futures, options, units of business trust etc. The tax is payable by the buyer/seller depending on the type of transaction.

Type of Direct tax

Governing Act

Overview

Income Tax (Individuals and entities other than companies)

Income tax Act, 1961

It is a levy imposed on the income of Individuals or a Hindu Undivided Families (HUFs) or other taxpayers like Association of Persons (AOP), Body of Individuals (BOI), Partnership Firms and LLP.
Above person is required to assess their taxable income from various sources i.e. salaries, House Property, business, capital gain, other sources after taking benefits of any deduction available.
Various tax slab rates are notified by the Government depending on the Individual’s income and their age. One needs to compute the tax liability in accordance with the rates so prescribed.
A Return of Income to this effect is required to be filed by the taxpayer annually. Failure to do so, may attract penalties.

Corporate Tax

Income tax Act, 1961

Corporate tax is a tax levied on Companies. The companies need to assess the income from various sources i.e business, capital gains etc. and calculate taxable income accordingly.
The term “Companies” referred above, includes both domestic as well as foreign company.
While the domestic company is taxed on its worldwide income, the foreign company is taxed in respect of profits arising out of or from its operations in India.
Specific rates of taxes for both domestic as well as foreign company are notified by the government.

Securities Transaction Tax (‘STT’)

Securities Transaction Tax Act

STT is a tax imposed on purchase and sale of listed securities such as equity shares, equity oriented units, futures, options, units of business trust etc.
The tax is payable by the buyer/seller depending on the type of transaction.

Who is eligible to pay Direct tax?

Following category of persons are required to pay direct taxes:

Taxpayers	Overview
Individuals	Resident individuals, Non-Resident Individuals, Persons of Indian Origin who meet the criteria of taxpayer are required to pay taxes. This includes salaried employees, self-employed professionals, freelancers etc.
Hindu Undivided Families (HUFs)	HUFs by virtue of law are considered as a separate tax entity. The Karta, or the head of the HUF, is responsible for filing tax returns and paying taxes on behalf of the HUF.
Partnership Firms/ Limited Liability Partnership Firms (LLPs)	Partnership firms/ LLPs are eligible to pay taxes. The profits of partnership firms/LLPs are taxed at prescribed rates.
Association of Persons (AOP), Body of Individuals (BOI)	AOPs and BOIs are entities consisting of individuals, companies, or a combination thereof, with a common objective. They are subject to tax as separate entities, and the income is taxed in their hands.
Companies	All types of companies, including domestic companies and foreign companies operating in India, are liable to pay corporate tax on their profits. This includes public limited companies, private limited companies, and one-person companies.

Benefits of Direct tax:

There are multiple advantages of direct tax to the Country. Some of them are as follows:

Economic and Social Balance – The Government implements balanced tax slabs depending on individual’s income and age to achieve economic and social equality. Exemptions are also provided to address income inequalities and ensure fairness to all.
Productive – Direct taxes are highly productive. The revenue generated from these taxes are directly proportional to the changes in the national wealth of the country. Higher the income generating population, higher would be the return on direct taxes.
Certainty – Direct taxes provide clarity and certainty to both taxpayers and the government. Taxpayers know the amount they are required to pay, while the government has a predictable source of revenue. As a result, this helps both the taxpayer and the tax authority in the overall planning of the expenditure and eliminating corruption.
Progressive – Direct taxes play an important role in reducing the gap of financial inequalities across the country. As stated above, they are progressive in nature – i.e. higher the income of the taxpayer, higher is the tax outflow. The money collected from these taxes are mainly utilised for the welfare of the poor and for upliftment of society.

Direct Taxes vs. Indirect Taxes

While we have learnt on what is direct tax, we shall now briefly touch upon what is Indirect tax and the key differences between the two.

Indirect tax is a tax levied on the consumption of goods and services. It is not directly levied on the income of a person.
One needs to pay the taxes along with the cost of the goods at the time of purchase/manufacture.
A few examples of indirect taxes are – GST, VAT, excise duty etc.

Key differences betweenDirect taxes and Indirect taxes are as under:

Parameter	Direct Tax	Indirect Tax
Tax imposition	On income or profits of the taxpayer	On goods and services
Course of payment	Taxpayer pays the taxes directly to the government	Taxpayer pays the taxes to the government through an intermediary
Paying Entity	Individuals and businesses	End to end consumers
Rate of tax	The rate of tax is decided by the government based on profit and income	The tax rates are same for everyone depending on the type of goods and services
Nature of taxation	Progressive	Fixed