Tax, it's types, direct, indirect

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.

What is Direct Tax?

It is a tax levied directly on a taxpayer who pays it to the Government and cannot pass it on to someone else.

What are the direct taxes imposed in India?

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.

However, both Estate and Wealth taxes are now abolished.

What are the advantages of direct taxes?

Direct taxes do have a certain advantage for a country’s social and economic growth. To name a few,

• 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.

• 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.

What is the most common disadvantage of direct taxes?

Direct taxes come with a handful of disadvantages. But, the very time-consuming procedures of filing tax returns is a taxing task itself.

What is 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.

Let’s discuss a few indirect taxes that were earlier imposed in India:

• 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 wascollected 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.

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