Direct tax and indirect tax Upsc

Examples for direct tax and indirect tax

Direct Tax

A direct tax is a tax that is levied on a person’s income or wealth. It is paid directly to the government. The burden of Direct tax cannot be shifted. The tax is progressive and is levied according to the paying capacity of the person.

Here the tax is collected more from the rich and less from the poor.

The plans and policies of the Direct taxes are being recommended by the Central Board of Direct Taxes (CBDT), which is under the Ministry of Finance in the Government of India.

Merits of Direct Taxes

1. Equity

Direct taxes are progressive in Nature that is the rate of tax varies according to the tax base. For example, Income tax satisfies the cannon of equity.

2. Certainty

A Canon of certainty can be ensured by direct taxes. Example: Income taxpayer knows the rate and time to pay the income tax.

3. Elasticity

Direct taxes also satisfies the cannon of elasticity. Income tax is more elastic in Nature. Example: When the Income-tax increases, the tax revenue of the government also get increased.

4. Economy

The cost of collection of direct taxes is relatively low. The taxpayers pay the tax directly to the state.

Demerits of Direct Taxes

1. Unpopular

Direct taxes are generally unpopular as it is inconvenient and less flexible.

2. Affected Productivity

According to many economists, direct taxes may adversely affect productivity. Citizens are willing to earn more income as they have to pay more taxes.

3. Inconvenient

The payers find it inconvenient to maintain accounts, submit returns, and pay taxes in lump sums.

4. Tax Evasion

The burden of direct tax is so heavy, that taxpayers always try to evade it. It leads to the generation of black money, which is harmful to the economy.

Examples of direct tax

Income, corporation, property, inheritance, and gift tax

Indirect Tax

Indirect tax is a tax charged on a person who purchases goods and services and then it is paid indirectly to the government.

Here, the burden of tax can be easily shifted to another person. Indirect tax is levied on all persons equally whether he/she is rich or poor.

Types of Indirect Taxes

1. Excise Duty

Payable by the manufacturer but shifts the tax burden to retailers and wholesalers.

2. Sales Tax

Paid by a shopkeeper or retailer, who then shifts the tax burden to customers by charging sales tax on goods and services.

3. Customs Duty

Import duties levied on goods from outside the country. It is ultimately paid for by customers and retailers.

4. Entertainment Tax

It is paid by Cinema theatre owners, who transfer the burden to the cinema goes.

5. Service Tax

Service Tax is charged on services like telephone bills, insurance premiums, food bills in restaurants, etc.

Merits of Indirect Taxes

(1) Wider Coverage

All people, whether rich or poor have to indirect taxes. It covers more people than direct taxes. In India, everybody pays indirect tax whereas only 2% of people pay income tax.

(2) Equitable

The indirect tax satisfies the canon of equity. When higher tax is imposed on luxuries used by rich people.

(3) Economical

The cost of collection of taxes is less because the producer and retailer collect taxes and payments to the government. The traders act as honorary tax collectors.

(4) Checks harmful consumption

The government imposes indirect taxes which are harmful to health. This kind of taxation is called Sin Tax.

Eg: Tobacco, liquor, etc.

(5) Convenient

Indirect taxes are levied on commodities and services. Whenever consumers make a purchase, they pay tax along with the price. They do not feel the pinch of paying taxes.

Demerits of Indirect Taxes

(1) Higher Cost of Collection

The cost of the collection of indirect taxes is higher than the direct taxes. The Government has to spend huge money to collect indirect taxes.

(2) Inelastic

Indirect taxes are less elastic compared to direct taxes. As indirect taxes are generally proportional.

(3) Regressive

Indirect taxes are sometimes unjust and regressive in nature since both rich and poor persons have to pay the same amount as taxes irrespective of their income level.

(4) Uncertainty

The rise in indirect taxes increases the price and reduces the demand for goods. Therefore, the Government is uncertain about the expected revenue collection. So Dalton says under indirect taxes 2+2 is not 4 but 3 or even less than 3.

(5) No civic Consciousness

As the tax is hidden in the price, the consumers are not aware of paying tax.

GST (Goods and Service Tax)

GST is an Indirect Tax that has replaced many Indirect Taxes in India. The Goods and Service Tax Act was passed in Parliament on 29th March 2017.

The Act came into effect on 1st July 2017; Goods & Services Tax in India is a comprehensive, multistage, destination-based tax that is levied on every value addition.

In simple words, Goods and Service Tax (GST) is an indirect tax levied on the supply of goods and services. This law has replaced many indirect tax laws that previously existed in India.

GST is one indirect tax for the entire country. Under the GST regime, the tax will be levied at the final point of sale. In the case of intra-state sales, Central GST and State GST will be charged. Inter-state sales will be chargeable to Integrated GST.

Destination Based

Consider goods manufactured in Tamil Nadu and are sold to the final consumer in Karnataka. Since Goods & Service Tax is levied at the point of consumption, in this case, Karnataka, the entire tax revenue will go to Karnataka and not Tamil Nadu.

Components of GST

The component of GST is of 3 types. They are CGST, SGST & IGST.

CGST: Collected by the Central Government on an intra-state sale (Eg: Within state/ union territory)

SGST: Collected by the State Government on an intra-state sale (Eg: Within state/union territory)

IGST: Collected by the Central Government for inter-state sale (Eg: Maharashtra to Tamil Nadu).

Nature of Sales tax, VAT, and GST

  1. Sales tax was multipoint tax with cascading effect.
  2. VAT was multipoint tax without cascading effect.
  3. GST is one point tax without cascading effect.

Advantages of GST

  1. GST will mainly remove the cascading effect on the sale of goods and services. Removal of cascading effect will directly impact the cost of goods. Since tax on tax is eliminated in this regime, the cost of goods decreases.
  2. GST is also mainly technologically driven. All activities like registration, return filing, application for refund and response to notice need to be done online on the GST Portal. This will speed up the processes.
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* * All the Notes in this blog, are referred from Tamil Nadu State Board Books and Samacheer Kalvi Books. Kindly check with the original Tamil Nadu state board books and Ncert Books.
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