Direct and Indirect Taxes

Introduction
• A fee charged by a government on a product, income, or
activity.
• Taxes in India are of two types, Direct Tax and Indirect Tax.
• Direct Tax, like income tax, wealth tax, etc. are those whose
burden falls directly on the taxpayer.
• The burden of indirect taxes, like service tax, VAT, etc. can be
passed on to a third party.
• Income Tax is all income other than agricultural income levied
and collected by the central government and shared with the
states. According to Income Tax Act 1961, every person, who is
an assesses and whose total income exceeds the maximum
exemption limit, shall be chargeable to the income tax at the
rate or rates prescribed in the finance act. Such income tax shall
be paid on the total income of the previous year in the relevant
assessment year.
 Meaning of Direct Tax
• The term direct tax generally means a tax paid
directly to the government by the persons on
whom it is imposed. A direct tax is borne entirely
by the entity that pays it, and cannot be passed
on to another entity; for example, corporation
tax, income tax, and national insurance
contribution.
• Unlike the consumption taxes, direct taxes are
based on ‘ability to pay’ principle but they
sometimes work as a disincentive to work harder
and earn more because that would mean paying
more tax.
 Direct Taxation in India
Direct taxation in India is taken care by the Central Board of
Direct Taxes (CBDT); it is a division of Department of
revenue under Ministry of Finance. CBDT is governed by
the revenue act 1963.CBDT is given the authority to create
and control direct taxes in India. The most important
function of CBDT is to manage direct tax law followed by
Income Tax department.
In India the tax structure is divided amongst the central
government and state government.
The central government levies taxes on income, custom
duties, central excise and service tax.
While the state government levies tax like state excise,
stamp duty, VAT (Value Added Tax), land revenue and
professional tax.
 Tax Imposing System
• Direct taxes are charged on the basis of
residential status and not on the basis of
citizenship. The assessee are charged based
upon the following factors;

• Resident
• Resident but not ordinary resident.
• Nonresident.
Growth in Direct Tax collection during the Financial Year
2008-09
• Net direct tax collection during the fiscal 2008-09
stands at Rs.338, 212 crore, up from Rs.312, 202
crore during 2007-08, registering a growth of 8.33
percent.
• Growth in Corporate Taxes was 10.84 per cent,
while Personal Income Tax (including FBT, STT and
BCTT) grew at 9.09%.
• Despite economic slow-down and substantial
relief to non-corporate taxpayers, direct tax
collections exceeded the previous year's collection
by about Rs.26, 000 crore.
 Growth In Direct Tax Collection During The Financial Year 2009-
2010
• The net direct tax collections grew by 5.77 per cent
during the first two months of the current fiscal (2009-
2010).
• It was Rs 24,158 crore compared to Rs 22,840 crore at
the same time last year. Corporate tax grew at 5.56 per
cent (Rs 8578 crore against Rs 8126 crore), while
personal income tax (including FBT, STT and BCTT) grew
at 5.92 per cent (Rs 15,559 crore as against Rs 14,690
crore).
• Overall refund outgo during the period increased by
26.19 per cent (Rs 11,375 crore as against Rs 9014 crore)
while refunds to non corporate taxpayers grew by 61.7
 Direct Tax Before Reform
• Direct Tax had a major impact on economic policies, creation of
savings and the trend of investment. There was no proportion
in terms of the impact of direct taxes on the economy and
there relative share in total tax revenues. The system of direct
taxes was very much complex and inefficient because of the
combination of high marginal rates of personal income and
wealth taxation and high rates of corporate profits. The
corporate tax was pretty high. It leads to large scale evasion.
Members Of Parliament and Central Government Ministers get
comparatively low salaries, but they are given a sitting
allowance which is not taxable. Ministers, MP's and other high
ranking government officials get government allocated
accommodation, where the charges are pretty less in
comparison to the prevailing market rate.
 The Impact of Direct Tax Code
• The Finance Minister recently announced the proposed Direct
Tax Code Effective April 2011. The code aims at a
comprehensive reform in the sphere of personal and corporate
taxation.
• There is a great difference between" Code" and the "ACT". The
government is trying to bring in Direct Tax Code" instead of
present system of "Tax under Finance Act“.
• Once tax act is converted into a code it would generally not be
necessary to introduce changes every year along with budget.
This is a reform which the government wants to bring in for the
good of the people.
• The code has proposed no change in the exemption limit of the
personal tax. It remains 1,60,000 for men,1,90,000 for women
and 2,40,000 for senior citizen. Yet percentage of taxation has
been reduced up to income of Rs. 10 lakh.
• On implementation of the code all perks would
considered part of the gross salary for the purpose of
taxation. The impact of that on tax liability of an
individual will be known only when the rules are
prescribed by the income-tax department at a later
date.

But there would be equity in the tax system both

vertically and horizontally across all sectors. The tax
treatment of the perks enjoyed by the government
employee and the private sector employee will be the
same. Till now government sector was in advantage.
 Meaning of Indirect Taxes
• Charge levied by the State on consumption, expenditure,
privilege, or right but not on income or property.
• Customs duties levied on imports, excise duties on
production, sales tax or value added tax (VAT) at some
stage in production-distribution process, are examples of
indirect taxes because they are not levied directly on the
income of the consumer or earner. Since they are less
obvious than income tax (because they don't show up on
the wage slip) politicians are tempted to increase them
to generate more state revenue.
• Also called consumption taxes, they are regressive
measures because they are not based on the ability to
pay principle.