Direct tax

Meaning :
A direct tax is paid directly by an individual or organization to an
imposing entity. ...Direct taxes are different from indirect taxes,
where the tax is levied on one entity, such as a seller, and paid by
another, such as a sales tax paid by the buyer in a retail setting.
• Key examples of direct taxes are
• Income tax
• Wealth tax
• Corporation tax
1. Income tax

is the most common and most important tax that an Indian must pay.
It is charged directly on the income of a person.
The rate at which it is charged varies, depending on the level of income.
It’s charged to individuals, co-operative societies, firms, companies,
Hindu Undivided Families (HUFs), trusts and any artificial judicial person.
Income tax is charged on an income known as “taxable income”, which is
:
Taxable income = (total income) – (applicable deductions and
exemptions).

The different heads of income under which income tax is chargeable are:
Income from house and property.
Income from business or profession.
Income from salaries.
Income in the form of capital gains.
Income from other sources.
Income Slabs (under 60 years) Tax Rates

Taxable income under Rs.2,50,000. NIL.

10% of the amount by which the taxable

Taxable income between Rs.2,50,000 and income exceeds Rs.2,50,000.
Rs.5,00,000. Less: Tax Credit u/s 87A – 10% of taxable
income (up to a maximum of Rs.2,000).

Taxable income above Rs.5,00,000 and Rs.25,000 plus 20% of the amount by
Rs.10,00,000. which the taxable income exceeds

Rs.1,25,000 plus 30% of the amount by

Taxable income above Rs.10,00,000. which the taxable income exceeds
Rs.10,00,000.
For individual residents between 60 and 80 years of age:
Taxable income under Rs.3,00,000.
NIL.
Taxable income between Rs.3,00,000 and Rs.5,00,000.
10% of the amount by which the taxable income exceeds Rs.3,00,000.
Less: Tax Credit u/s 87A – 10% of taxable income (up to a maximum of Rs.2,000).
Taxable income between Rs.5,00,000 and Rs.10,00,000.
Rs.20,000 plus 20% of the amount by which the taxable income exceeds Rs.5,00,000.
Taxable income above Rs.10,00,000.
Rs.1,20,000 plus 30% of the amount by which the taxable income exceeds Rs.10,00,000.
For Individual residents above 80 years of age:

1. Income Slabs Tax Rates

2. Taxable income under Rs.5,00,000.
3. Taxable income between Rs.5,00,000
and Rs.10,00,000.
4. Taxable income above Rs.10,00,000.
NIL.
20% of the amount by which
taxable income exceeds Rs.5,00,000.
Rs.1,00,000 + 30% of the amount by
which taxable income exceeds
Rs.10,00,000.

Amounts invested in certain specific investments like EPF, PPF, NSC, Tax Saving FDs, etc.
are eligible for deductions under Section 80C up to Rs.1,50,000 per year.
2. Corporate Tax
Levied on companies who exist as separate entities from their shareholders.
Foreign companies are taxed on income that arises, or is deem to arise, in India.

It is charged on royalties, interest, gains from sale of capital assets located in India,
fees for technical services and dividends.

Includes Minimum Alternative Tax (MAT) which was introduced to bring Zero Tax
companies under the income tax net, whose accounts were made in accordance
with the Companies Act.

Includes Fringe Benefit Tax (FBT) which is a tax that companies pay on the fringe
benefits provided (or deemed to have been provided) to employees.

Incudes Dividend Distribution Tax (DDT) which is a tax levied on any amount
declared, distributed or paid as dividend by any domestic company. International
companies are exempt from this tax.

Includes Securities Transaction Tax (STT) which is a tax levied on taxable securities
transactions. There is not surcharge applicable on this.
3. Wealth tax is charged on the benefits derived from property ownership.
The same property will be taxed every year on its current market value.

Wealth tax is charged whether the property in earning an income or not.

The tax is levied on the individuals, HUFs, and companies alike.

Chargeability depends on residential status.
4. Capital Gains Tax
Taxed on the income derived from the sale of assets or investments.

Capital investments cover homes, farms, businesses, works of art, etc.

Capital gains = (money received from sale) – (cost of capital investment).

Categorized as short-term gains (gains on assets sold within 36 months of

acquisition) and long-term gains (gains on assets sold after 36 months of
acquisition and holding).

Voluntary tax that is paid by the taxpayer when the asset it sold.
Meaning of Indirect Taxes
Indirect tax is a type of tax collected by the government from an intermediary such as
manufacturer or retailer.
List of Indirect Taxes or Examples of Indirect Taxes:
VAT
Excise Duty: Payable by the manufacturer who shifts the tax burden to retailers and
wholesalers.
Sales Tax: Paid by a shopkeeper or retailer, who then shifts the tax burden to
customers by charging sales tax on goods and services.
Custom Duty: Import duties levied on goods from outside the country, ultimately paid
for by consumers and retailers.
Entertainment Tax: Liability is on the cinema owners, who transfer the burden to
cinemagoers.
Service Tax: Charged on services rendered to consumers, such as food bill in a
restaurant.
Service Tax:
Service tax is applied generally at the rate of 12.36%, which has been revised to 14% from April
2015.
This type of indirect tax is levied by the service tax provider and paid by the recipient of the
services. However, in some cases the liability for the tax is divided between the recipient as well
as the provider of service.
There is also a provision for abatement of service tax if the final price is a mixture of services as
well as material, such as restaurant bills.
In general, restaurants levy service tax on 40% of the bill amount as 60% of the amount is
considered to be cost of materials. Service taxes fall under the ambit of the central government.
Manufactured Goods:
The central government collects excise duties on manufacture of goods subject to clearance of
the products from warehouse or factory.
As such, this tax can be said to apply on clearance of goods from storage rather than being
applied on the sale of the manufactured goods.
Excise duties are further divided into 4 categories, of which basic excise duty is levied for the
most part while the others are levied only in special cases.
Excise duty
excise duty is a type of tax, charged on the goods produced within the country. It is a tax on
the production or sale of a good . This tax is now known as the central value added tax.

Basic excise duty: This is the most common type of excise duty which is levied on goods
manufacturing and falls under the Central Excise Act, 1944. This tax is exempted in special cases
such as manufacture of salt or export of manufactured goods of less than Rs.1.5 crores overall
value per year, among others. The excise duty rates vary from product to product.

Special excise duty: Levied on a small list of items and falls under Central Excise Tariff Act, 1985.
Textile duties: As the name suggests, only applicable on specific textile goods and falls under the
Additional Duties of Excise Act, 1978.

Goods of special importance: This is levied as per the Additional Duties of Excise Act, 1957 on
specific goods mentioned under the article.

National calamity contingent duty (NCCD): This is levied on goods like cigarettes, chewing
tobacco, pan masala , mobile phones and crude oil, and is applicable U/S 135 of the Finance Act,
2001.

Sales tax:
A sales tax is a tax paid to a governing body for the sales of certain goods and services. Usually
laws allow (or require) the seller to collect funds for the tax from the consumer at the point of
purchase. When a tax on goods or services is paid
Imported Goods:
Imported goods are charged taxes as per excise duties. This is further divides in specific duties
and ad-valorem duties.
Specific duties: These are applicable on all individual components of a good imported into the
country, for instance a cloth imported from abroad will be charged excise per meter of the
material, or laptops imported will be charged excise on each unit of the order.
Ad-valorem duties: These are levied on the overall value of goods exported or imported. For
instance, 10% of the overall bill of imported clothes or 10% of the overall order value for
laptops.
Anti-dumping duties: These are levied so as to shield the domestic market against foreign goods
dumped at very low or below cost prices. For instance, plastic products imported from China,
which can be cheaper than the domestic market rates.
Countervailing Duty of Customs: This is another type of excise duty used to help Indian
produced goods sell on a level playing field. This is additional to the ad-valorem or specific
duties already applied on goods.
Goods Sold:
Finally, goods sold directly to consumers are levied Value Added Taxes (VAT), which is collected
by the respective state government on intra-state sales, as well as Central Sales Tax, which is
collected by the central government on inter-state sales.
Every state levies its own VAT figure, which usually lies between 5% and 12.5%. There may be
some exceptions to this tax as per state laws.
Service Tax
Service tax refers to tax collected by the government of
India from certain service providers for providing certain
services.
The person who pays service tax can be either a service
provider or a service receiver or any other person who is
responsible for providing certain services.

Service tax is a kind of indirect tax because the

service providers pay the tax and recovers it from the
service receivers who receive or purchase the taxable
services.
It is a kind of tax that you pay to the government for
enjoying different services received from various service
providers.
 Direct tax Indirect tax
Direct tax is referred to the type of tax that is Indirect tax is levied on an individual who
levied on an individual’s wealth and income and consumes products and services and is paid
is paid to the government directly indirectly to the government as the price of
the particular product or service comprises of
the tax amount as well
Direct Tax is progressive in nature Indirect tax is regressive.
Examples of Direct Tax includes Wealth Tax, Example of Indirect Tax includes VAT or
Property Tax, Income Tax, Import and Export Value Added Tax, Service Tax, Central Sales
Duties and Corporate Tax. tax, Custom Duty, Excise Duty, Security
Transaction Tax and so on.
Tax evasion (avoidance)is possible with Direct Tax evasion is not the case with Indirect Tax.
Tax
Direct Tax helps to reduce inflation Indirect tax promotes inflation.
Direct Tax is collected from and imposed on Indirect Tax is collected from those
assessee” (means a person by whom any tax or consumers of products and services but is
any other sum of money is payable under this deposited and paid by the Assessee.
Act, ) such as Individuals, Hindu Undivided
Family, Firm, Company and so on.
Burden of Direct Tax cannot be shifted can be shifted in case of Indirect tax.
Advantages of Direct Tax
(i) Equitable:
The burden of direct taxes cannot be shifted. Hence equality of sacrifice can be
attained through progression. Of course, the very low incomes can be exempted. This
cannot be achieved- by taxes on commodities which fall with equal force on the rich
and the poor. The tax raises the price of the commodity, and the price of a commodity
is the same for every person, rich or poor.
(ii) Economical:
The cost of collection of direct taxes is low. They are mostly collected “at the source”.
For instance,-the income tax is deducted from an officer’s pay every month. This saves
expense. The employer acts as an honorary tax collector. This means great economy.
(iii) Certain:
In the case of a direct tax, the payers know how much is due from them and when. The
authorities also know the amount of revenue they can expect. There is certainty on
both sides. This minimizes corruption on the part of collecting officials.
(iv) Elastic:
If the State suddenly stands in need of more funds in an emergency, direct taxes can
well serve the purpose. The yield from income tax or death duties can be easily
increased by raising their rate. People cannot stop dying for fear of paying death
duties.
(v) Productive:
Another virtue of direct taxes is that they are very productive. As a community grows
in numbers and prosperity, the return from direct taxes expands automatically. The
direct taxes yield a large revenue to the State.
(vi) A means of developing civic sense.
In the case of a direct tax, a person knows that he is paying a tax, he feels conscious of
his rights. He claims the right to know how the Government uses his money and
approves or criticizes it. Civic sense is thus developed. He behaves as a responsible
citizen.
Disadvantages of Direct Taxes:
(i) Inconvenient:
The great disadvantage of a direct tax is that it pinches the payer. He
‘squeaks’ when a lump sum is taken out of his pocket. The direct- taxes
are thus very inconvenient to pay. Nobody can help feeling the pinch.
(ii) Evadable:
The assessee can submit a false return of income and thus evade the
tax. That is why a direct-tax is “a tax on honesty.” There is a lot of
evasion. Many of those who should be paying taxes go scot-free by
concealing their incomes.
(iii) Arbitrary:
If taxes are progressive, the late of progression has to be fixed
arbitrarily; and if proportional, they fall more heavily on the poor. Thus,
both are bad. The rate of taxes depends upon the whim of the Finance
Minister. This is arbitrary.
(iv) Disincentive:
If the taxes are too heavy, they discourage saving-sand investment. In
that case the country will suffer economically. A high level of taxation
discourages investment and enterprise in the country. It inflicts a lot of
damage, on business and industry.

Advantages of Indirect Taxes:

(i) The Poor Can Contribute:
They are the only means of reaching the poor. It is a sound principle that
every, individual should pay something, however little, to the State. The
poor are always exempted from paying direct taxes. They can be
reached only through indirect taxation.
(ii) Convenient:
They are convenient to both the tax-prayer and the State. I he tax-payers
do not feel the burden much partly because an indirect tax is paid in
small amounts and partly because it is paid only when making
purchases. But the convenience is even greater due to the fact that the
tax is “price-coated”.
It is wrapped in price. It is like a sugar-coated quinine pill. Thus, a
tobacco tax is not felt when it is included in the price of every cigarette
bought. It is convenient to the State as well which can collect the tax at
the ports or at the factory.
(iii) Broad-based:
Indirect taxes can be spread over a wide range. Very heavy direct
taxation at just one point may produce harmful effects on social and
economic life. As indirect taxes can be spread widely, they are more
beneficial and suitable.
(iv) Easy Collection:
Collection takes place automatically when goods are bought and sold. A
dealer collects the tax when he charges a price. He is an honorary tax
(v) Non-evadable:
They cannot be evaded, as they are a part of the price. They can be
evaded only when the taxed article is not consumed, and ‘his may not
always be possible’

(v) Elastic:
They are very elastic in yield, imposed on necessaries of life which have
an inelastic demand. Indirect taxes on necessaries yield a large revenue,
because people must buy these things.

(vi) Equitable:
When imposed on luxury or goods consumed by the rich, they are
equitable. In such cases, only the .Veil-to-do will pay the tax.
(vii) Check Harmful Consumption: .
By being imposed on harmful products, they can check consumption of
harmful commodities. That is why tobacco, wine and other intoxicants
are taxed.
Disadvantages:
(i) Regressive:
Indirect taxes are not equitable. For instance, salt tax in India fell more
heavily on the poor than on the rich, as it had to be paid at the same
rate by all. Whether a rich man buys a commodity or a poor man, the
price in the market is the same for all. The tax is wrapped in the price.
Hence, rich and poor pay the same amount, which is obviously unfair.
They are thus; regressive.
(ii) Uncertain:
Unless indirect taxes are imposed on necessaries, we cannot be sure of
the revenue yield. In the case of goods, with an elastic demand, the tax
might not bring in much revenue. The tax will raise the price and
contract the demand. When the thing is not purchased, the question of
the tax payment does not arise.
(iii) Raising Prices Unduly:
They cause the price of an article to rise b; more than the tax. A fraction
of the money unit cannot be calculated, so ever middleman tends to
charge more than the tax. This process is cumulative.
(iv) Uneconomical
The cost of collection is quite heavy. Every source o production has
to be guarded. Large administrative staff is required to administer
such taxes. This turns out to be a costly affair.
(v) No Civic Consciousness
These taxes do not develop civic consciousness, because many times
the tax-payer does not even know that he is paying tax. The tax is
concealed in the price.
(vi) Harmful to Industries
They discourage industries if raw materials are taxed. This will raise
the cost of production and impair their competitive capacity.
1.Goods that are manufactured in India and meant for domestic consumptions are
taxed by
a) Sale tax
b) Corporation tax
c) Excise Duty
d) Service tax

2. Value added tax is levied on _ _ _ _ _ _

a) Essential Commodities
b) Expensive Goods
c) Commodities of Mass consumption
d) All the Above

3. Companies and Organizations are taxed as per their business transaction under _ _ _
___
a) Business Tax
b) Sale tax
c) Corporation Tax
d) Income tax
4. Goods that are manufactured in India and meant for domestic consumptions are
taxed by
a) Sale tax
b) Corporation tax
c) Excise Duty
d) Service tax

5. Value added tax is levied on _ _ _ _ _ _

a) Essential Commodities
b) Expensive Goods
c) Commodities of Mass consumption
d) All the Above

6. Companies and Organizations are taxed as per their business transaction under _ _ _
___
a) Business Tax
b) Sale tax
c) Corporation Tax
d) Income tax