Budget 2019: How to understand direct tax and indirect tax better

What are direct taxes?

Direct taxes are taxes which an individual or an organisation pays directly to the government. It is imposed directly and cannot be transferred to any other entity for payment. For instance, income tax, land tax, and personal property tax.

The government's two main revenue sources are direct and indirect taxes. Direct taxes form about 50 percent of the government's revenue share every fiscal. The government sets direct tax collection targets for every financial year to enhance revenue.

The revised estimate for direct tax collection for 2018-19 was hiked by Rs 50,000 crore from the Budget estimate of Rs 11.50 lakh crore. The government had managed to meet its direct tax collection target in 2017-18 with the actual mop-up at Rs 10.02 lakh crore. The contribution of direct taxes in the total tax collection in 2016-17 has fallen below 50 percent to 49.66 percent for the first time since 2006-07.

Direct tax is calculated on the basis of the ability of a taxpayer to pay, which means that the higher his capability of paying is, the higher his taxes are.

The direct taxation is overseen by Central Board of Direct Taxes in India (CBDT). The CBDT, which is responsible for the administration of the direct tax laws, was formed as a result of the Central Board of Revenue Act, 1924. It is part of the revenue department coming under the Union finance ministry. The CBDT is the hub and nexus of all the direct tax-related news and enforcement. The body is headed by a chairman consisting of 6 members who are also special secretary to the government.

 Budget 2019: How to understand direct tax and indirect tax better

Representational image. Reuters

What are indirect taxes?

An indirect tax is collected by one entity in the supply chain (usually a producer or retailer) and paid to the government, but it is passed on to the consumer as part of the purchase price of a good or service. The consumer is ultimately paying the tax by paying more for the product. They are defined by contrasting them with direct taxes. Indirect taxes can be defined as taxation on an individual or entity, which is ultimately paid for by another person. The body that collects the tax will then remit it to the government. But in the case of direct taxes, the person immediately paying the tax is the person that the government is seeking to tax.

Import duties, fuel, liquor and cigarette taxes are all considered examples of indirect taxes. By contrast, income tax is the clearest example of a direct tax, since the person earning the income is the one immediately paying the tax. Admission fees to a national park is another clear example of direct taxation. Some indirect taxes are also referred to as consumption taxes, such as a value-added tax (VAT).

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Updated Date: Jul 05, 2019 07:29:43 IST