Direct Tax

What is Direct Tax?

A direct tax is levied directly on individuals or entities by the government based on their ability to pay. This means those with higher income or wealth generally pay more taxes than those with lower income or wealth. Unlike indirect taxes, which are added to the price of goods and services and ultimately borne by consumers, direct taxes are paid directly to the government by the taxpayer.

What are the Different Types of Direct Tax?

In India, there are several different types of direct taxes levied on individuals and entities based on their income or profits. Here are some of the most common ones:

1. Income Tax:

   • This is the most well-known direct tax levied on the annual income earned by individuals and businesses.

   • Individuals pay income tax based on income sources like salary, business income, capital gains, etc.

   • Businesses pay corporate tax on their net profits.

   • Income tax rates vary depending on income levels and filing status, with slabs and deductions available.

2. Capital Gains Tax (CGT):

   • This tax is levied on the profit earned from the sale of capital assets like property, shares, and mutual funds.

   • The rate of CGT depends on the type of asset and the holding period.

   • Short-term capital gains are taxed at a higher rate than long-term capital gains.

3. Corporate Tax:

   • This tax is levied on the net profits of companies registered in India.

   • The current corporate tax rate is 40% for companies with an annual turnover of less than Rs. 100 crore and 42% for companies with a turnover exceeding Rs. 100 crore.

   • Additional surcharges and cess may apply depending on the company's profits.

4. Wealth Tax:

   This tax was levied on the net wealth of individuals exceeding Rs. 5 crore. However, it was abolished by the Indian government in Budget 2015.

5. Gift Tax:

   The gift tax, formerly a direct tax levied on the transfer of specific assets without any consideration, has been eliminated in India. Presently, any income generated from gifts is liable to income tax.

6. Securities Transaction Tax (STT):

   • This tax is levied on the purchase and sale of securities like shares, bonds, and derivatives in the stock market.

   • The rate of STT varies depending on the type of security and the transaction type (buy or sell).

7. Dividend Distribution Tax (DDT):

   This is a tax levied on the company at the time of distributing dividends to its shareholders. The current DDT rate is 15%. However, in the case of certain categories of shareholders, such as foreign institutional investors, the DDT rate may be lower or nil under tax treaties.

8. Estate Tax:

   The estate tax, also referred to as inheritance tax, is a levy on the transfer of an individual's estate or assets after their death. Presently, India lacks a dedicated national provision for estate tax.

What are the Tax Rates for the Different Types of Direct Tax?

1. Income Tax:

   Based on an individual's age and income, they will be categorised into a specific tax bracket. The three distinct tax brackets are outlined below, with rates applicable to the old tax regime.

   Tax slab	Income tax
   Up to Rs.2.5 lakh	Nil
   From Rs.2,50,001 to Rs.5,00,000	5% of the total income that is more than Rs.2.5 lakh + 4% cess
   From Rs.5,00,001 to Rs.10,00,000	20% of the total income that is more than Rs.5 lakh + Rs.12,500 + 4% cess
   Income of above Rs.10 lakh	30% of the total income that is more than Rs.10 lakh + Rs.1,12,500 + 4% cess

   For Senior Citizens Above the Age of 60 years and Below the Age of 80 years:

   Tax slab	Income tax
   Up to Rs.3 lakh	Nil
   From Rs.3,00,001 to Rs.5,00,000	5% of the total income that is more than Rs.3 lakh + 4% cess
   From Rs.5,00,001 to Rs.10,00,000	20% of the total income that is more than Rs.5 lakh + Rs.10,500 + 4% cess
   Income of above Rs.10 lakh	30% of the total income that is more than Rs.10 lakh + Rs.1,10,000 + 4% cess

   For Resident Indians Above the Age of 80 Years (Super Senior Citizen):

   Tax slab	Income tax
   Up to Rs.5 lakh	Nil
   From Rs.5,00,001 to Rs.10,00,000	20% of the total income that is more than Rs.5 lakh + 4% cess
   Above Rs.10 lakh	30% of the total income that is more than Rs.10 lakh + Rs.1,00,000 + 4% cess

   On February 1, 2020, Finance Minister Nirmala Sitharaman introduced a new tax regime. It's important to note that this newly introduced income tax system is voluntary and is an alternative to the current income tax structure.

2. Corporate Tax:

   Domestic Companies Tax Rates:

   • Turnover Less than Rs.250 crore: Corporate tax rate is 25%.

   • Turnover More than Rs.250 crore: Corporate tax rate is 30%.

   Surcharge for Domestic Companies:

   • Taxable Income between Rs.1 crore and Rs.10 crore: Surcharge of 10% is applied.

   • Taxable Income exceeding Rs.10 crore: Surcharge of 12% is applied.

   Cess for Domestic Companies:

   • 4% of the corporate tax is levied as cess.

   International companies:

   • For companies earning less than Rs.1 crore, a corporate tax of 41.2% is imposed, comprising a 40% basic tax and a 3% education cess.

   • Companies earning more than Rs.1 crore face a corporate tax of 42.024%, including 40% basic tax, 2% surcharge, and 3% education cess.

   • Companies with earnings exceeding Rs.10 crore incur an additional 5% surcharge on top of the basic tax.

3. Capital Gains Tax:

   • Short-term capital gains follow the regular tax slabs.

   • Long-term capital gains with indexation benefits are taxed at 20%.

   • Long-term capital gains without indexation benefits are taxed at 10%.

4. Wealth Tax:

   • Wealth Tax is determined based on net wealth, calculated as the sum of all taxable assets minus total debts.

   • The formula for net wealth is Net Wealth = (Sum of all assets) - (Sum of all debt).

   • Net wealth is assessed on March 31 of each year preceding the assessment year.

   • Wealth Tax has been abolished for wealth held as of March 31, 2016, with effect from April 1, 2016.

Explanation for the Direct Tax Codes

The following are the main features of the Direct Tax Code:

1. Single Code for Direct Taxes:

   • Centralizing all direct taxes under a single code establishes a unified taxpayer system.

   • Streamlining compliance features is also achieved through this consolidated code.

2. Taxation Stability:

   • Unlike the current reliance on the Finance Act, the Direct Tax Code sets tax rates within the First and Fourth schedules.

   • Amendments to the schedule require parliamentary approval, ensuring stability.

3. Elimination of Regulatory Functions:

   All regulatory functions are transferred to other competent authorities, eliminating regulatory roles within the Direct Tax Code.

4. Political Contribution Deduction:

   A deduction of 5% on gross total income is permitted for political contributions.

5. Flexibility for Economic Growth:

   Enabling adjustments without constant amendments, a law facilitates accommodating changes for economic growth.

6. Mitigation of Litigation Issues:

   Careful drafting prevents misuse or misinterpretation, eliminating constant litigation concerns.

7. Shift in Fringe Benefits Tax:

   Employees, not employers, bear the burden of fringe benefits tax.

Who is Eligible to Pay Direct Tax?

1. Individuals:

   • Resident, non-resident, or a person of Indian origin meeting Income Tax Act criteria.

   • Includes salaried employees, self-employed professionals, freelancers, and individuals earning taxable income.

2. Hindu Undivided Families (HUFs):

   • Considered a separate tax entity under the Income Tax Act.

   • The Karta (head) is responsible for filing returns and paying taxes on behalf of the HUF.

3. Partnership Firms:

   • Registered under the Indian Partnership Act, 1932.

   • Profits taxed in the hands of partners based on their respective shares.

4. Companies:

   • All types, including domestic and foreign companies in India.

   • Liable to pay corporate tax on profits (public limited, private limited, and one-person companies).

5. Association of Persons (AOPs) and Body of Individuals (BOIs):

   • Entities with individuals, companies, or a combination.

   • Taxed separately, and income is taxed in their hands.

What are the Advantages of Direct Taxes?

1. Economic and Social Balance:

   • Well-balanced tax slabs based on earnings and age.

   • Reflects the economic situation, with exemptions addressing income inequalities.

2. Productivity Boost:

   • Increased workforce and economic activity contribute to higher returns from direct taxes.

   • Direct taxes are viewed as highly productive for government revenue.

3. Inflation Control:

   • During inflation, the government can raise taxes, reducing the demand for goods and services.

   • Tax increase acts as a measure to curb inflationary pressures.

4. Certainty in Taxation:

   • The presence of direct taxes provides a sense of certainty for both the government and taxpayers.

   • Clear knowledge of the amount to be paid and collected enhances predictability.

5. Equal Wealth Distribution:

   • The government charges higher taxes to those who can afford them.

   • Extra funds are directed toward supporting the poor and lower segments of society, promoting wealth distribution.