Direct Tax - Definition, What is Direct Tax?

What is a direct tax?

In the simplest terms, a direct tax is directly paid from the hands of the taxpayer to the government reserves. It is levied on the income of the individual who pays it. The direct tax is levied according to the taxable capacity of the people in the country.

This is somehow favorable to the government, as the time involved in estimating the tax value of an individual is largely reduced. This isn't imposed on goods or services, however, The direct tax levied on an individual of a country cannot be passed on to any other person or entity.

Quick Fact - The number of people who are actually paying income tax in India is just (need to check) for the( FY 2019-20)

How is your direct tax determined?

Indian Taxation System follows a fixed calculating method called Slab Rates. Your income tax is determined based on these income slab rates. This slab rate is subject to change year to year. It is however calculated in accordance with the provisions provided under the Income Tax Act, 1961.

These provisions are subject to frequent updations as well, under the supervision of the Indian Central Board of Direct Tax. The most popular form of direct tax includes Income Tax and Wealth Tax.

Income tax rates or tax slab for the assessment year 2021-22

Types of Direct Taxes

• Income tax: Income tax is levied by the government on income generated by businesses and individuals within the jurisdiction. In India, The Income Tax Act, 1961 and the provisions listed under it govern the entire taxation system of India.
• Wealth Tax: A Wealth-tax or capital tax is levied by the government on an individual's total or market value of personal assets. Examples of such personal assets are land, building, luxury vehicles such as aircraft or yachts, jewelry, etc. This tax must be paid regardless to the said property generates income or not. Wealth tax is abolished in budget 2015 ( From FY 2015-16)
• Estate Tax: The value of assets that pass to the heirs after the death of their owner is subject to estate taxes, which are based primarily on the overall value of the assets. Cash, property, stocks, and other movable and immovable assets can constitute such assets. It is abolished w.e.f. 1985.
• Corporate tax: Corporate Income Tax (CIT), is a tax levied by companies on the profits they earn in a financial year, regardless of whether they are domestic or foreign.
• Capital gains tax: Capital gains are taxed as either long-term or short-term capital gains based on the income or profits made from the sale of assets or investments such as bonds and securities.

Role of Direct Tax

Direct Tax is levied on individuals, HUFs (Hindu Undivided Families), companies, firms, etc.

• It helps in reducing the inflation rates of the country
• It is progressive in nature as it is mostly imposed on the rich
• The liability of the tax cannot be shifted
• The direct tax rates don’t vary frequently

Is the collection of direct tax detrimental?

• Evasion of tax is easily possible in case of ineffective administration, who fail at the honest and diligent collection of the tax from the people
• Direct tax entirely depends on the honesty of the taxpayers and thus is uncertain
• The government doesn't entirely rely on direct tax and thus resort to safety with indirect tax
• Enormous time and financial resources are required to collect and maintain this tax
• This psychologically reduces the willingness to work in an individual as the more one earns, the greater must he pay towards direct tax

Considering the above-mentioned terms and elaborated concepts, create a strong idea about direct taxes in your mind and approach this year's tax filing with clarity.