Direct tax is a form of monetary levy that an individual or organization pays directly to the government. It finds usage in various domains such as income tax, real property tax, personal property tax, or taxes on assets. For instance, an individual taxpayer pays direct taxes to the government for a variety of purposes.
Components of Direct Tax
Collection of data from the Financial Year 2022-23, as of mid-June, showcases a 45% increase in direct tax collections over the previous year. As part of the net direct tax collection, the largest share is the Corporation Tax, followed by Personal Income Tax (PIT) including Security Transaction Tax (STT).
Significance of Direct Tax
Direct taxes are essential due to several reasons. The principle of ability to pay lies at the heart of these taxes, ensuring equity or justice in the allocation of tax burden. Moreover, they’re progressive in nature, reducing income and wealth gaps, and leading to social equality. With the automatic fluctuation of revenue from direct taxes in line with the nation’s income or wealth, they prove to be elastic and productive. More predictable and precise than indirect taxes, direct taxes involve minimal cost of collection due to annual lump-sum collection, allowing for fiscal economy.
Direct taxes carry additional benefits like civic education, creating a sense of duty among citizens. These taxes can also act as effective anti-inflationary fiscal policy tools, controlling excessive purchasing power during inflation.
Government Measures to Promote Direct Tax Efficacy
The government has launched various initiatives to optimize direct taxes. The Finance Act, 2020 presents optional concessional rates for individuals and co-operatives for income tax, provided they abstain from certain exemptions and incentives. Under the Vivad se Vishwas Scheme, declarations for settling lingering tax disputes are currently being filed – a move which will be economically beneficial for both government and taxpayers.
Moreover, to expand the tax base, new transactions have been introduced under Tax Deduction at Source (TDS) and Tax Collection at Source (TCS), including huge cash withdrawal, foreign remittance, luxury car purchase, e-commerce participation, sale of goods, acquisition of immovable property, etc. One more initiative in the form of ‘Transparent Taxation – Honoring The Honest’ platform aims at enhancing transparency in the income tax system and also empowering taxpayers.
Different Types of Direct Tax
There are several kinds of direct taxes. Corporation Tax, levied on a company’s operating earnings post-deduction of expenses, is one of them. The rate varies from one type of company to another, with domestic and foreign corporations subject to different tax rates.
Dividend Distribution Tax (DDT) is the tax paid on the dividends distributed to shareholders by a company. However, this has been abolished in Budget 2020, shifting the taxation from companies to investors.
Minimum Alternate Tax (MAT) was introduced to counter the increase in tax evasion by companies leveraging various provisions of Income-tax Law.
Security Transaction Tax (STT) is a direct tax levied on listed securities purchased and sold on recognized Indian stock exchanges.
Impact and Challenges of Evasion
Tax evasion, specifically black money creation, has major financial repercussions. It results in loss of revenue for the government and affects the economic growth of the country. Taxation is a primary income source for the government, controlling the economy’s resources to a certain extent. Hence, tax evasion or black money becomes a significant concern for the Indian government.