Direct Taxes in India
A direct tax is a tax that is paid directly by an individual or organization to the government. It is a tax on income or wealth, as opposed to a tax on goods and services (indirect tax). Examples of direct taxes include income tax, property tax, and corporate tax. Direct taxes are generally progressive, meaning that the tax rate increases as the income or wealth of the taxpayer increases. The idea behind this is that those who have more should contribute more to the government's revenue. Direct taxes are collected by the government directly from the taxpayer, either through withholding from income, estimated tax payments, or direct payment. They are a major source of revenue for governments around the world and are often used to fund public services such as education, healthcare, and infrastructure.
Types of Direct Taxes
The various types of direct tax that are imposed in India are mentioned below:
Income Tax:
In India, income tax is a direct tax that is levied on the income earned by
· individuals, · Hindu Undivided Families (HUFs), · partnership firms, · companies, · and other entities.
The Income Tax Act, 1961, is the legislation that governs income tax in India. It is the primary source of revenue for the Indian government. The income tax system in India is progressive, meaning that higher income earners are taxed at a higher rate. The income tax rates for individuals and HUFs for the financial year 2021-22 are as follows:
Income up to Rs. 2.5 lakh: Nil
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. 7.5 lakh to Rs. 10 lakh: 15%
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%
In addition to the above rates, a cess of 4% is also applicable on the income tax payable by all taxpayers. It is the responsibility of taxpayers to file their income tax returns (ITRs) with the Income Tax Department on or before the due date. The due date for filing ITRs varies depending on the type of taxpayer and the amount of income earned during the financial year. Late filing of ITRs can result in penalties and interest charges. Taxpayers can also claim various deductions and exemptions under the Income Tax Act, such as deductions for investments in specified instruments like Public Provident Fund (PPF), National Pension Scheme (NPS), and life insurance premiums, etc.
Corporate Tax: Corporate tax in India refers to the tax levied on the income or capital of companies or businesses operating in India. In India, the corporate tax rate varies depending on the size of the company and its income. The current corporate tax rate in India is 25% for companies with an annual turnover of up to INR 400 crore ($54 million) and 30% for companies with an annual turnover exceeding INR 400 crore. However, a lower rate of 15% is applicable for new manufacturing companies that are set up after October 1, 2019, and start production before March 31, 2023.
Securities Transaction Tax (STT):
In India is a tax that is levied on the purchase or sale of securities such as stocks, futures, and options. The tax was introduced in India in 2004, and it is levied on both the buyer and the seller of securities. The STT is currently charged at the following rates:
0.1% of the transaction value for delivery-based equity transactions
0.025% of the transaction value for intraday equity transactions
0.01% of the premium or the strike price for options contracts
0.05% of the premium or the strike price for futures contracts
The STT is payable by the buyer and the seller of the securities and is collected by the stock exchange or the clearing corporation. The tax is payable on the transaction value and is calculated on a per-transaction basis. The STT has been introduced to curb speculative trading in the stock markets and to discourage short-term trades. The tax is a significant source of revenue for the Indian government and is an essential component of the country's tax system.
Dividend Distribution Tax (DDT):
In India, dividend distribution tax (DDT) is a tax imposed on companies for distributing dividends to their shareholders. Prior to the Union Budget of 2020, the DDT was levied at a rate of 15% on the amount of dividend declared, distributed, or paid by the company. However, the Union Budget of 2020 abolished the DDT and instead made dividends taxable in the hands of the shareholders. This means that now, dividends are subject to tax at the applicable rate based on the individual's income tax slab. As per the current tax laws, the dividend income of individuals and Hindu Undivided Families (HUFs) exceeding Rs. 5,000 in a financial year is taxable as per the following rates:
For individuals and HUFs in the tax bracket of up to 20%: Dividend income is taxable at a rate of 10%.
For individuals and HUFs in the tax bracket of over 20%: Dividend income is taxable at a rate of 30%.
It is important to note that dividend income received from mutual funds is also subject to tax at the applicable rate, as per the income tax slab of the individual or HUF. Additionally, dividend income received from foreign companies is also taxable in India, subject to the Double Taxation Avoidance Agreement (DTAA) between India and the country where the foreign company is based.
Minimum Alternate Tax (MAT):
Minimum Alternate Tax (MAT) is a type of tax that is levied in India on companies that have reported profits in their financial statements but have paid little or no tax due to various exemptions, deductions, and incentives offered by the government. MAT was introduced in India in 1996 as a way to ensure that companies pay a minimum amount of tax regardless of the deductions they avail. The current rate of MAT in India is 18.5% (including surcharge and cess), which is applicable to companies and their branches. However, companies that have a turnover of less than Rs. 50 crore in a financial year are exempted from paying MAT. The calculation of MAT is based on the book profit of a company, which is arrived at by adding back certain items to the net profit after tax. The tax is then calculated as 18.5% of this book profit. MAT is a controversial tax as it is seen as a disincentive for companies to invest and grow, especially in the initial years of operation when they may not have enough profits to pay MAT. However, it is also seen as a way to ensure that companies do not avoid paying taxes altogether by taking advantage of various exemptions and deductions
Capital Gains Tax:
In India, capital gains tax is levied on the profits earned from the sale of a capital asset such as property, shares, mutual funds, etc. The tax is applicable on the difference between the sale price and the cost of acquisition of the asset. The tax rate on short-term capital gains (assets held for less than 36 months) is the same as the individual's income tax rate. For long-term capital gains (assets held for more than 36 months), the tax rate is 20% for individuals and 10% for companies. However, there are certain exemptions and deductions available for long-term capital gains under the Income Tax Act. For example, if the proceeds from the sale of a residential property are invested in buying or constructing another residential property, the tax liability can be deferred. Similarly, investments in specified bonds and mutual funds can also provide tax benefits. It is important to note that capital gains tax is applicable only when the capital asset is sold or transferred. If the asset is inherited, there is no capital gains tax liability for the inheritor. It is advisable to consult with a tax professional or financial advisor to understand the capital gains tax implications of specific investments and transactions
Direct Tax Code
The Direct Tax Code or DTC was mainly drafted to replace the Income Tax Act of 1961. The main aim of DTC is to establish a more equitable, effective, and efficient direct tax system. DTC was also drafted to amend and stabilise all laws that are related to direct taxes so that the tax-GDP ratio increases and voluntary compliance becomes easy.
Explanation of the Direct Tax Codes
The key features of the Direct Tax Code are explained below:
All direct taxes have a single code: By bringing all direct taxes under one code, a single, unified taxpayer system can be brought into effect. All compliance features can also be unified under one code.
Stability: Currently, based on the Finance Act of the relevant year, taxes are formed. However, under the Direct Tax Code, the tax rates are being made between the First and Fourth schedule of the DTC. Any changes to the schedule can be made by passing an Amendment Bill before the Parliament.
Regulatory Functions are eliminated: Other regulatory authorities must handle all regulatory functions.
Political contributions : 5% of the gross total income that can be deducted will be made towards political contributions.
Flexibility: A law has been created so that changes and requirement to grow the economy can be accommodated without having to make amendments on a constant basis.
Constant litigation problems have been eliminated: Special care has been put forth so that the code is not misused or misinterpreted in order to avoid contradiction and ambiguity.
Fringe benefits Tax : The tax is levied on employees rather than employers.
Advantages of Direct Taxes
The main advantages of Direct Taxes in India are mentioned below:
1. Fairness: Direct taxes are generally based on a person's ability to pay, so those who earn more pay more. This means that the tax system is fairer than one where everyone pays the same amount. 2. Progressive: Direct taxes are usually progressive, meaning that as income increases, the rate of taxation also increases. This helps to redistribute wealth and reduce income inequality. 3. Predictable: Direct taxes are usually predictable, as they are based on a fixed percentage of income or value of assets. This makes it easier for individuals and businesses to plan for their tax liabilities. 4. Simplicity: Direct taxes are relatively simple to understand and calculate. Unlike indirect taxes, there are no complex rules regarding which products are taxed and at what rate. 5. Encourages compliance: Direct taxes can encourage compliance because they are based on an individual's income, which is usually easy to verify. This helps to reduce tax evasion and increase government revenue. 6. Flexibility: Direct taxes can be adjusted easily to respond to changing economic conditions. For example, tax rates can be increased during times of inflation or decreased during times of economic recession to help stimulate the economy.
Overall, direct taxes can be an effective way to raise revenue for the government, while also promoting fairness, progressiveness, simplicity, and compliance.
Disadvantages of Direct Taxes
Direct taxes have several disadvantages, some of which are:
1. Complexity: Direct taxes can be complex and difficult to understand, which can lead to confusion and errors. Filing taxes can also be time-consuming and require a lot of effort. 2. Economic disincentive: Direct taxes can create a disincentive to work and earn money. When individuals or businesses are taxed heavily, they may be less likely to work harder or take on more risk. 3. Inequality: Direct taxes can be regressive, meaning that lower-income earners are disproportionately affected. This can lead to greater income inequality and social unrest. 4. Tax evasion: Direct taxes can be easier to evade than indirect taxes. People may underreport their income or engage in other forms of tax evasion, which can lead to lower revenue for the government. 5. Administrative costs: Direct taxes require a significant amount of administrative resources to collect, process, and audit. This can lead to higher costs for the government and delays in processing tax refunds.
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FAQs on Direct Tax
Q1: What is Direct Tax in India? A: Direct Tax is a type of tax that is levied on the income or wealth of an individual or organization. Examples of direct taxes include income tax, corporate tax, wealth tax, and capital gains tax. Q2: Who is liable to pay Direct Tax in India? A: Any individual or organization whose income exceeds the basic exemption limit set by the government is liable to pay Direct Tax in India. The liability to pay Direct Tax also depends on the type of income earned, such as salary income, business income, capital gains, etc. Q3: What is the basic exemption limit for Direct Tax in India? A: The basic exemption limit for Direct Tax in India is determined by the government and is subject to change every year. As of the financial year 2022-23, the basic exemption limit for individuals below 60 years of age is Rs. 2.5 lakhs, for senior citizens (60-80 years of age) it is Rs. 3 lakhs, and for super senior citizens (above 80 years of age) it is Rs. 5 lakhs. Q4: How is the Direct Tax calculated in India? A: Direct Tax in India is calculated based on the income earned by an individual or organization during the financial year. The tax rates are set by the government and vary based on the income slab an individual or organization falls under. The tax rates are different for individuals, HUFs, companies, firms, LLPs, etc. Q5: What are the different types of Direct Taxes in India? A: The different types of Direct Taxes in India include income tax, corporate tax, wealth tax, and capital gains tax. Q6: What is Advance Tax in India? A: Advance Tax is a system of paying Direct Tax in India where the taxpayer is required to pay the tax in advance in installments rather than waiting till the end of the financial year to pay the entire tax liability. Q7: What is TDS in India? A: TDS stands for Tax Deducted at Source, and it is a system of collecting Direct Tax in India where the person making a payment is required to deduct tax at a prescribed rate and deposit it with the government on behalf of the person receiving the payment. Q8: How can I file my Direct Tax Returns in India? A: Direct Tax Returns can be filed in India through the income tax e-filing portal, either manually or through an authorized intermediary like a Chartered Accountant. The income tax return needs to be filed before the due date, which is usually July 31st of the assessment year for individuals and September 30th for entities that are required to get their books of accounts audited.
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