Types of Taxes: A Guide About Direct and Indirect Tax

Tax can be defined as a fee that is legally imposed on individuals and corporations by government bodies at regional, state and national levels to financially aid government activities. Taxes are levied by the Municipal, State and Central Governments and legally backed-up by the Constitution, the Parliament and the Legislative Assembly. Tax is crucial for the country’s progress, development and sustenance.The different types of taxes that are levied by the government can be broadly classified into Direct and Indirect taxes . A wide array of taxes falls under these two categories, but some taxes that you must know about include:

Property tax is the tax that is paid by the owner of a property semi-annually or annually to the municipal corporation or the local government of the locality. It is a direct tax that is imposed on tangible properties like land, house, shops, rented properties, business buildings etc. It comprises of water, lighting and drainage taxes.In India, the amount collected through property tax is used for the development of the local infrastructures like repairment of roads, construction of schools, maintenance of sanitation systems etc.

Professional tax can be defined as the tax that is imposed by the state government on all salaried individuals. Since professional tax is levied by the state government, the calculation of the tax and the amount collected varies from one state to another.Each state declares a slab on the basis of which the tax is collected. However, the maximum amount of professional tax collected from an individual cannot exceed Rs. 2500.

Cess is a type of tax that is additionally levied on another tax by the central government to raise funds for a specific purpose. The Indian government levies education cess at 2% on the basic tax liability of every individual so as to fulfil its commitment of providing and financing basic and quality education to the poor people of India.To provide secondary and higher education as well, the government levies an additional 1% cess to collect the fund.

stamp duty is the tax payable under Section 3 of the Indian Stamp Act, 1899 on legal documents during the transfer or property or assets. Stamp duty is a legal tax that acts as evidence of any sale or purchase of a property. It is levied by the state government and thus, its rate varies from one state to another.The amount of stamp duty levied depends on the property’s value during its registration. Usually, it is paid by the buyer during the purchase of a property. However, in case of property exchange, it is shared by the buyer and the seller.The fund collected from the aforementioned taxes along with numerous other taxes imposed on individuals by the government help in the growth and development of the economy in the long run.

Benefits of Direct taxes

1. Equality is promoted – since those who earn more are liable to pay a higher amount of tax, it promotes equality between taxpayers.
2. Control inflation – Direct taxes are representative of a country’s economy. While fighting inflation, a higher direct tax can be imposed to restrict consumer demand and bring down inflation.
3. Easy to collect – Many automated procedures have been put in place for pre-filled returns that make it easy for a taxpayer to compute direct taxes.

Benefits of Indirect taxes

1. Large scope – many tourists also end up paying indirect taxes, which adds to the government’s revenue used to build the nation. The scope of indirect taxes is much larger than direct taxes.
2. Item specific – some items can be taxed higher to discourage people from using them while some items can be taxed lower to encourage their use.
3. Easy to collect – the onus of collecting indirect taxes remains on registered entities who have to file regular returns. This also keeps transparency throughout the supply chain.

Disadvantages of Direct taxes

1. Some people may think that earning more will not increase the cost of living as much as the tax burden increases.
2. income taxes discourage savings because there is a tax on every form of income.
3. The income tax regulations in India are extremely complicated.

Disadvantages of Indirect taxes

1. They are very regressive as taxpayers of different economic standings will have to pay the same tax, which may prove to be a bigger burden on less economically stable taxpayers.
2. Some items, like hotels, may charge extremely high rates of GST, increasing the regular expenses of a taxpayer.
3. Indirect taxes often contribute to inflation because it is directly proportional to the price of a product.

1. What is Difference between Direct and Indirect Taxes? The difference between direct and indirect taxes can be explained through various differentiating factors. Here is a table explaining these differences:
2. What are Benefits of Direct and Indirect Taxes? Taxes may seem like an additional burden on the taxpayers, but there are many benefits to them as well.
3. What are Disadvantages of Direct and Indirect Taxes? For most taxpayers, paying taxes may seem like an additional expense. Here are some disadvantages of direct and indirect taxes .
4. Does Goods and Service Tax (GST) fall under direct or indirect tax category? Link Goods and Service Tax (GST) falls under the ambit of indirect tax because it is a tax charged on the consumption of goods and services and not on the income or profit of the taxpayers. It is divided into two parts, one that is distributed equally between the center and the state in the form of the Central GST (CGST) and State GST (SGST). The other part is Integrated GST (IGST) taken by the central government for inter-state transactions.
5. Is TDS a direct tax? TDS (Tax Deducted at Source) is a form of direct tax because it is deducted from the income that a taxpayer earns. The deductor is the one who pays the taxpayer for rendering their services. The responsibility of deducting and paying the tax to the government is on the supplier. It is paid against the PAN of the taxpayer and reflected in their Form 26AS, which is automatically updated in the pre-filled returns. It ensures that the taxpayer doesn’t hide their source of income in any financial year to avoid paying taxes.
6. What is surcharge, and who has to pay it? A surcharge provision has been added to increase the tax liability of those who earn beyond a certain threshold of income. It is a charge on the income tax liability amount. Taxpayers who are individuals, HUFs, Associations of Persons (AOP), Body of Individuals (BOI) or Artificial Judicial Persons are liable to add a surcharge to their income tax liability in the following circumstances. For Domestic and Foreign Companies Surcharge is added to the income tax payable, which means that if a company’s net profit is Rs. 2 crores, the income tax payable will be 30% which is Rs. 60 lakhs. The surcharge will be 7% of 60 lakhs which is Rs. 4.2 lakhs. The cess will be applied on Rs. 64.2 lakhs (income tax + surcharge) to arrive at the final tax payable.

Ready to make the most of your money? Start your tax planning journey now!

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.