Direct and Indirect Taxes

Tax is a mandatory fee imposed upon individuals or corporations by the Central and the State Government to help build the economy of a country by meeting various public expenses. Taxes are broadly divided into two categories; Direct and Indirect taxes.

Some of the important direct taxes imposed in India are mentioned below:

• Income Tax: It is imposed on an individual who falls under the different tax brackets based on their earning or revenue and they have to file an income tax return every year after which they will either need to pay the tax or be eligible for a tax refund.
• Estate Tax: Also known as Inheritance tax, it is raised on an estate or the total value of money and property that an individual has left behind after their death.
• Wealth Tax: Wealth tax is imposed on the value of the property that a person possesses.
• Securities Transaction Tax: If you are involved in stock trading, each of your trade also has a small constituent known as the securities transaction tax. Irrespective of whether you made money on the trade or not, you will have to pay this tax. The broker collects this tax from you and passes on to the securities exchange, which then pays it to the government.

• Capital Gains Tax: Every time you make capital gains, you will be required to pay capital gains tax. This capital gain could come from the sale of a property or from investments. Based on the capital gains and the duration for which you held the investment, you will be required to pay either LTCG (Long-Term Capital Gains) tax or STCG (Short-Term Capital Gains) tax.

Advantages

• Social and economic balance: Based on every individual’s earnings and overall economic situation, the Government has well-defined tax slabs and exemptions in place so that the income inequalities can be balanced out.
• It curbs inflation: The Government often increases the tax rate when there is a monetary inflation which in turn reduces the demand for goods and services and as a result of descending demand, the inflation is bound to condense.

Disadvantages of Direct Taxes

• Considered a Burden: As taxpayers are required to pay direct taxes like income tax in a single lump sum every year, they are considered a burden. Moreover, even the documentation process is generally complex and time-consuming.
• Evasion is Possible: While the government has made tax evasion very difficult now, there are still many fraudulent practices through which individuals and businesses can avoid or pay lower taxes than they should.
• Restrains Investments: Due to the imposition of direct taxes like securities transaction tax and capital gains tax, a lot of people avoid investing. So, in a way, direct taxes restrain investments.

Indirect Tax

It is a tax levied by the Government on goods and services and not on the income, profit or revenue of an individual and it can be shifted from one taxpayer to another.

Earlier, an indirect tax meant paying more than the actual price of a product bought or a service acquired. And there was a myriad of indirect taxes imposed on taxpayers.

Used to earlier and still exist:

• Customs Duty: It is an Import duty levied on goods coming from outside the country, ultimately paid for by consumers and retailers in India.
• Central Excise Duty: This tax was payable by the manufacturers who would then shift the tax burden to retailers and wholesalers.
• Service Tax: It was imposed on the gross or aggregate amount charged by the service provider on the recipient.
• Sales Tax: This tax was paid by the retailer, who would then shifts the tax burden to customers by charging sales tax on goods and service.
• Value Added Tax (VAT): It was collected on the value of goods or services that were added at each stage of their manufacture or distribution and then finally passed on to the customer.

GST as Indirect Tax

With the implementation of GST, we have already witnessed a number of positive changes in the fiscal domain of India. The various taxes that were mandatory earlier are now obsolete, thanks to this new reformed indirect tax. Not just that, GST is making sure the slogan “One Nation, One Tax, One Market” becomes the reality of our country and not just a dream.

That said, with the dawning 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’ quandary.

Cascading effect of tax is a situation wherein the end-consumer of any goods or service has to bear the burden of the tax to be paid on the previously calculated tax and as a result would suffer an increased or inflated price.

Under the GST regime, however, the customer is exempted from the tax they would otherwise pay as a result of the cascading effect.

Benefits of Indirect Tax

• Poor Contributes Too: It is essential for the country that every individual contributes towards its development.As the poor are often exempt from paying direct taxes, the indirect taxes ensure that even poor contribute towards nation-building.
• Convenience: Unlike direct taxes which are generally paid in a lump-sum, indirect taxes like GST are paid in small amounts. When you purchase a product or service, a small amount of GST is already included in the price, and this makes its payment more convenient for the taxpayers.
• The collection is Easy: If you want to know what is the difference between direct and indirect tax, one of the biggest of them is how they are paid. Unlike direct taxes, there are no documents or complex procedures involved in paying indirect taxes. You are required to pay the tax right when you purchase a product or service.