Taxation in India

The Indian taxation system is structured such that taxes are levied by both the state and the Central Government. In addition, local authorities levy certain minor taxes as well. In recent years, the Central and numerous State Governments have implemented various policy changes and procedural simplifications aimed at increasing consistency, equality, and automation. Therefore, an individual who earns money and pays taxes (income tax) may not be the only sort of tax the person must pay. If this strikes a chord, it’s not very late to know about the situations in which you are charged for taxes and the types of taxes collected by the government, namely direct tax and indirect tax.

Direct and Indirect Taxes

It is your responsibility as a respectful legal citizen to file your taxes. However, it is also critical to understand the various sorts of taxes in place. All taxes in India may be generally categorized into direct tax and indirect tax. 

• Direct tax is a non-transferable tax levied to the authorities by the taxpayer. It is charged and paid upfront by an individual or organization. It cannot be transferred to some other person or business. Income and corporation taxes are two instances.
• Indirect taxes are those in which the responsibility to pay can be transferred to others. For example, end-users of products and services are subject to indirect taxation. The government levies it on suppliers and manufacturers to purchase, sell, and acquire products.

Benefits of Direct and Indirect Taxes

Direct Tax Benefits 

• In monetary inflation, the authorities might raise tax rates to dampen the demand for products and services.
• It is also believed to be egalitarian since they are established on the progression concept. People with lesser incomes pay less, while those with higher incomes pay more.
• The government uses the greater taxes received from the wealthy to fund new projects for the needy. The projects give revenue sources to low-income people, allowing them to better their living conditions.

Indirect Tax Benefits

• The main difference between direct and indirect tax is their method of collection. In contrast to direct taxes, there has been no documentation or excessive paperwork to submit indirect taxes. 
• Because the impoverished are frequently exempted from direct taxes, indirect taxes guarantee that even the needy participate in nation-building.
• In contrast to direct taxes, which are often paid in one payment, indirect taxes such as GST are paid in small increments.

Types of Direct and Indirect Taxes

When people buy things or use services, they must pay taxes on such transactions or services. At this point, the necessity to grasp various types of taxes and their distinctions emerges. So, below are the main types of direct tax and indirect tax to consider.

Direct Tax Types

• Income Tax: A tax levied on and payable by the same individual based on tax brackets established by the Income Tax authorities.
• Wealth Tax: A tax levied on the worth of a person’s property.
• Corporate Tax: A tax levied on the earnings of businesses and corporations.
• Estate Duty: A tax paid by a citizen in the event of an inheritance.
• Gift Tax: The recipient of a taxable gift must pay taxation.

Indirect Tax Types

• Excise Duty: Paid by the manufacturer, who passes on the tax burden to wholesalers and retailers.
• Customs Duty: Import tariffs put on goods imported from other countries, which are effectively paid for by customers and merchants.
• Service Tax: A tax levied on products and services provided to consumers, including a restaurant bill.
• VAT: It is paid by a retailer or shopkeeper, who then passes the tax liability on to users by imposing sales tax on products and services.
• Entertainment Tax: The theatre owners are liable for the entertainment tax passed on to moviegoers.

NOTE: After the introduction of GST the Excise duty, Service tax and VAT etc are replaced and there are a few exceptional goods and services where still the old taxes are being levied.

Difference Between Direct and Indirect Tax

• Indirect taxes are charged on products or services, while direct taxes are assessed on earnings and activities.
• In the case of direct tax, the tax liability cannot be moved. However, the tax liability is transferred to indirect taxes at the same time.
• Direct taxation is progressive, which means the rate rises with an individual’s revenue and profit. The indirect tax is regressive, which means that the rate remains constant regardless of an individual’s income.
• Although direct tax collection is challenging, indirect tax collection is comparatively simple.

Conclusion

Direct tax and Indirect tax are characterized by the ultimate taxpayer’s capacity to transfer the tax burden to others. Moreover, both taxes are essential for the country since they are inextricably related to the broader economy. As a result, gathering these levies is critical for both the government and the nation’s well-being.