Direct Taxes and Indirect Taxes in India – Types, Advantages, Disadvantages & Rates

Home Blog Direct Taxes and Indirect Taxes in India – Types, Advantages, Disadvantages & Rates

Overview

The tax system in India has an evolutionary journey be it a direct tax or indirect tax. The income tax was first introduced in 1860 in the pre-independence Union Budget. The income was summarized under four basic heads at that time. Afterward going through various changes in 1961 in consultation with the Ministry of Law finally the Income Tax Act,1961 was passed.

Similarly, the Indirect tax system has also contributed to the growing economy of India. The indirect tax was first introduced in 1944 in the form of excise duty on Indian Products as a measure of protection for goods imported from the UK. Many indirect taxes were then levied in India like CENVAT, State VAT, Service tax, Excise and finally, we have GST which is currently applicable.

Types of Direct Tax

Direct tax burden cannot be transferred to another person, unlike Indirect tax. It is levied on the income of the taxpayer and payable to the tax authority of the Government of India.  The following are types of direct taxes:

  1. Corporate Tax:

It is levied upon the profits of the domestic companies as well as foreign companies. The foreign companies are only liable to pay corporate tax if they have a permanent establishment in India and they are doing business and earning revenue in India. 

The other types of corporate tax include:

  • Minimum Alternative Tax
  • Fringe Benefits Tax
  • Dividend Distribution Tax (Now abolished)
  • Security Transaction Tax

2. Income Tax:

The income of an individual from the five heads is taxable under income tax. It is directly payable to Central Government and also the taxpayer has to declare their income by filing an income tax return (ITR). The rates for Income tax filing are prescribed in rules related to Income tax and generally, slab rates are given.

3.Capital Gain
The other form of direct tax is Capital gain arising out of transfer of capital assets. These assets can be both long-term Capital assets and short term capital assets. These assets are taxable on the basis of the nature of the asset or investment and on the basis of the period of holding.

Advantages and Disadvantages of Direct Tax

The direct tax has various benefits and shortcomings as well. Due to the provisions of Tax deducted and Tax collected at source the evasion of direct tax is less likely to occur and hence direct taxes have more economic value than other taxes. Despite this, the challenging part of direct tax is, that it is charged upon the voluntarily disclosed income by the taxpayer and hence the taxpayer would always try to conceal his income.

The increased population would certainly lead to large direct tax collection but the lump sum amount payable by the taxpayer sometimes pinch them financially and they feel inconvenient about this.

Direct taxes are equitable in nature which means that higher tax slabs for the taxpayer who earns more and lower tax rates for less earning taxpayers.

Types of Indirect Tax

The indirect taxes burden can be shifted to the ultimate consumer of goods or services. It is levied upon goods and services and not on the income of individuals or the profit of the business. With the emergence of GST laws in India, many indirect taxes were integrated into the Goods and Service Tax.

GST has subsumed many indirect taxes that were earlier applicable, although some products in India are still in the purview of the following indirect taxes:

  1. Central Excise Duty:

This was levied upon the manufacturer of goods and the burden of paying the tax shifted to the retailers or wholesalers.

  1. Service tax:

This tax has been completely abolished now and earlier it was charged upon the services provided.

  1. Sales Tax:

These taxes were levied on the sales of goods.

  1. Value Added Tax (VAT):

This is the tax on the value added on goods or services on the manufacturing or distribution of the tax.

The above taxes are not applicable and have been replaced by Goods and services tax w.e.f. 1st July 2017. With the origin of the ‘Goods & Services Tax (GST), the biggest relief so far is clearly the elimination of the ‘cascading effect of tax’ or the ‘tax on tax’ dilemma.

Advantages and Disadvantages of Indirect Tax

The GST has eliminated other indirect taxes and it helped the taxpayer to file GST returns with less compliance as compared to earlier indirect tax returns.

Interstate businesses using e-commerce operators have become easy with the implementation of GST. The unorganized sectors are now regularised under the GST regime and the taxpayer can also opt for a composite scheme under GST for reduced tax liability and rates.

The benefit of the Input tax credit is a whole benefit for the taxpayer avoiding the cascading effect on tax.

Despite of many benefits of GST, it has led to increased business operation costs and other problems.

Many small businesses are still hesitant to maintain online records and take registration under GST as a result they cannot grow in their operations.

Strict penalties are imposed if the GST returns are not filed on time, also one can’t generate e-way bills if the return is not filed resulting in a stoppage to transport of the goods to another state.

Rates under Direct tax and Indirect Tax 

Direct tax

Under income tax laws, slab rates are applicable to the individual. There are two tax regimes prevailing in Income tax namely new tax slab rates (under section 115BAC) and existing tax rates.

Tax Slabs for Individuals for AY 2022-23

New slab rates

 

Existing slab rates

 

Income from Rs 2.5 lakh to Rs 5 lakh

5%

Income from Rs 2.5 lakh to Rs 5 lakh

5%

Income from Rs 5 lakh to Rs 7.5 lakh

10%

Income from Rs 5 lakh to Rs 10 lakh

20%

Income from Rs 7.5 lakh to Rs 10 lakh

15%

Income above Rs 10 lakh

30%

Income from Rs 10 lakh to Rs 12.5 lakh

20%

 

Income from Rs 12.5 lakh to Rs 15 lakh

25%

Income above Rs 15 lakh

30%

 

Tax Slabs for Domestic Company for AY 2022-23

 

Condition

Income Tax Rate (excluding surcharge and cess)

Turnover or Gross Receipt in the previous year 2018-19 not exceed ₹ 400 crores

25%

If opted for Section 115BA

25%

If opted for Section 115BAA

22%

If opted for Section 115BAB

15%

Any other Domestic Company

30%

Indirect tax

The GST rates are decided by the GST Council, it can revise the slab rates of goods and services periodically. The GST rates are usually high for luxury supplies and low for essential goods. In India GST rate for various goods and services is divided into four slabs that is 5% GST, 12% GST, 18% GST, & 28% GST.


Author : Aditi

Date     : 29-Aug-2022


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