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Types of taxes and distinction between direct & indirect tax


Types of taxes and distinction between direct & indirect tax

One of the biggest sources of income for the Indian government is taxes. These taxes are levied in different ways- from your salary, when you pay for meals at a restaurant, when you pay tolls to drive your car on roads, or when you purchase groceries from a general store.

While it is our duty to pay taxes as responsible citizens of the country, it is equally important for us to know the different types of taxes that are levied on us. Taxes in India can be broadly classified into two types- direct tax and indirect tax.

What is Tax?

Taxes are termed as an obligatory contribution made by individuals or corporations falling under the tax slab, to the Government of India. From local to national, taxes are applicable on all levels in India and are considered to be one of the major sources of income for the Government.

The government levies taxes on the citizens of the country to produce income for business projects, enhance the country’s economy, and lift the standard of living of the nationals. The government’s authority to levy tax in our country is drawn from the Constitution of India that deals out the supremacy to levy taxes to the State as well as Central governments. All the taxes levied within the country require being backed by an escorting law passed by the State Legislature or the Parliament.

What Is Direct Tax?

Simply put, a direct tax is a type of tax that you pay directly to the authority that imposes the tax. For example, the government imposes income tax, and you pay it directly to the government. Direct taxes cannot be transferred to any other person or entity. In India, the Central Board of Direct Taxes (CBDT) is responsible for the administration of direct taxes.
Examples Of Direct Taxes In

Income Tax

This tax is imposed on your income earned during a financial year. The income tax payable is calculated based on the income tax slabs of the IT department. Individuals as well as businesses have to pay income tax directly to the government. Individual taxpayers can claim several tax deductions that are available under different sections of the Income Tax Act, especially section 80.

Securities Transaction Tax

Each trade made on the stock exchange carries a small tax known as the securities transaction tax or STT. Irrespective of whether you made a profit or loss, you will have to pay the STT. The stockbroker collects this tax and passes it on to the securities exchange. The exchange then pays it to the government.

Capital Gains Tax: Each time you earn capital gains, you will need to pay capital gains tax. Capital gains can be earned from investments or the sale of a property. Based on the capital gains earned and the duration of the investment, you will have to pay either LTCG (Long-Term Capital Gains) tax or STCG (Short-Term Capital Gains) tax.

What Is Indirect Tax?

While the government imposes direct taxes on income and gains, indirect taxes are imposed on the consumption of goods and services. Unlike direct taxes, indirect taxes are generally collected from the end consumer through an intermediary. The intermediary is then responsible to pass on the tax to the government. The indirect tax rate is the same for everyone and does not depend on the individual’s income. The Central Board of Indirect Taxes and Customs (CBIC) is responsible for managing indirect taxes in India.

Examples Of Indirect Taxes In India

Goods and Services Tax (GST)

GST is a single and comprehensive indirect tax that is levied on all goods and services as per the slabs laid down by the GST council. With GST, the government has eliminated the cascading tax-on-tax effect of the old regime.

Customs Duty

You are required to pay customs duty when you purchase goods that need to be imported from a foreign country. The intention of imposing customs duty is to ensure that every product entering the country is taxed.

Value Added Tax (VAT)

VAT is imposed on products whenever their value goes up throughout the supply chain. VAT is imposed by the state governments. They decide the percentage of VAT to be imposed on different goods. While GST has eliminated VAT in most cases, it is still imposed on certain products such as alcohol.