What is Direct tax? – GeeksforGeeks

What is Direct Tax?

Direct tax can be defined as a type of tax in which the incidence and impact of the tax are levied on the same person. It can be further explained as a type of tax in which the liability of paying the tax cannot be shifted to someone else. It is directly paid to the government by the assessee and not to anyone else. Direct Taxes are charged on every source of income earned by any individual or business residing in the country. Income Tax, Wealth Tax, Estate Tax, Corporate Tax, and Capital Gain Tax are some examples of Direct Tax in India.

Direct taxation in India is imposed and regulated by the Central Board of Direct Taxes (CBDT). CBDT has all the authority to frame rules for the purpose of levying direct tax in the country. It also issues various circulars from time to time to clarify any specific problem or doubts.

Direct Tax

Types of Direct Tax:

1. Income Tax: 

Income Tax is a direct tax that is levied on any individual’s or entity’s income. It is directly paid to the government like all the other direct taxes. 

Income Tax is Calculated on?

The net taxable income is considered to calculate the tax liability of the individual or entity based on the income slabs provided by the Income-tax Department for the current financial year. The amount of tax paid depends on the money earned by the individual in that particular financial year. Income Tax for the financial year 2022-23 applies to all residents residing in the country whose annual income exceeds Rs. 2.5 lakh p.a. Income Tax payment, TDS/TCS payment, and Non-TDS/TCS payments can be done to file income tax online.

Who Should Pay Income Tax?

Any individual whose gross total income is over Rs.2,50,000 in a financial year should compulsorily file Income Tax Return (ITR). For senior citizens, the limit is Rs.3,00,000 and for super senior citizens, it is Rs.5,00,000. These are required to pay taxes and file their income tax returns:

1. Artificial Judicial Person
2. Corporate Firms
3. Association of Persons (AOPs)
4. Hindu Undivided Families (HUFs)
5. Companies
6. Local Authorities
7. Body of Individuals (BOIs)

2. Wealth Tax:

The tax levied on the net wealth of super-rich individuals, companies, and Hindu Undivided Families is called Wealth Tax. It was introduced in the late 1950s, with the aim to reduce the inequality of wealth in the country. Wealth Tax was levied on all individuals and Hindu Undivided Families having net wealth above Rs. 30 Lakh. However, it was abolished in the budget 2015 by the government. Instead of Wealth Tax, the government increased the surcharge levied on the ‘super rich’ class by 2% to 12%. Any individual having an income of more than Rs. 1 Crore or higher and any company earning Rs. 10 Crore or higher are considered under the category of ‘super rich’. The market value of all the assets owned by the individual or any firm is considered to calculate wealth tax irrespective of whether they yield any returns or not.

3. Estate Tax:

The tax levied on the right to transfer the property owned by a deceased person on the day of death is called Estate Tax. It takes into consideration all the things that one possesses at the time of death. The properties that are included in calculating estate tax are cash and securities, real estate, insurance, trusts, annuities, business interests, and other assets. 

4. Corporate Tax:

According to Income Tax Act, Corporations have to pay tax on the income earned by them. A corporation can be defined as an artificial person created under the jurisdiction of law having a distinct legal personality and its own signature referred to as the common seal. All companies either domestic or international are liable to pay tax on the income earned. Domestic companies have to pay tax on their universal income and international companies working in India have to pay tax only on the income earned within India. Corporate Tax includes the following taxes:

• Securities Transactions Tax (STT): Any income earned through security transactions is taxable, and Securities Transactions Tax (STT) must be paid on it.
• Dividend Distribution Tax (DDT): DDT is levied on any domestic company who have declared, distributed, or paid any amount as dividends to shareholders. Foreign companies are exempted from this.
• Fringe Benefits Tax: It is levied on companies that provide fringe benefits for maids, drivers, etc.
• Minimum Alternate Tax (MAT):  MAT is levied on companies having zero tax liability and whose accounts are prepared according to the Companies Act.

5. Capital Gain Tax:

Profit earned from the sale of capital assets is known as Capital Gain. Property, Plant and Equipment are all examples of capital assets. Gain on the sale of capital assets is categorised as an income, so they are liable for taxation. Capital Gain tax is levied on the capital gain. It is levied when such an asset is transferred from one owner to another.

Types of Capital Gain Tax:

1. Short-term Capital Gain Tax: Short-term assets can be defined as an asset that is held for less than 36 months. For immovable properties, the duration is 24 months. Short-term capital gain tax is charged on profit generated from the sale of those short-term capital assets. The short-term capital gain is taxed at 20%. 
2. Long-term Capital Gain Tax: Long-term assets can be defined as an asset that is held for over 36 months. Long-term capital gain tax is charged on profit generated from the sale of those long-term capital assets. The long-term capital gain is taxed at 10%. 

All capital gains are liable for taxation but the approach for long-term and short-term capital gain is different.