Taxes are among the major sources of income for the government. You pay taxes in various ways, on your salary, restaurant meals, multiplex movie tickets, driving your car on the road, and even buying a package of biscuits from a primary store.
You have a responsibility to pay taxes as a citizen of this nation. But understanding the various taxes in the nation is also crucial. Direct and indirect taxes are the two major categories into which we can place all of India’s numerous taxes. So let’s examine these two forms of taxes in greater depth.
To put it simply, a direct tax is a tax that you pay directly to the entity responsible for collecting it. For instance, the government imposes income tax, which you pay to them directly. Many acts govern direct taxes.
The Department of Revenue of India, which is in charge of the CBDT (Central Board of Direct Taxes), oversees the collection and administration of direct taxes. Additionally, the department is responsible for planning and advising the government on how to implement direct taxes.
Here are some of the direct taxes in India:
Income tax is the most common form of direct tax in India. It is based on the income tax slabs of the IT department and the money you make in a financial year. Both people and businesses pay the tax directly to the Income Tax department. But, under various sections of the IT Act, several tax deductions are available to individual taxpayers.
If you trade stocks, a minor component known as the securities transaction tax also is a part of each of your trades. You need to pay this tax whether or not you have gained from the trade. The broker takes this tax from you and gives it to the securities exchange, which then pays the government.
You must pay capital gains tax on every capital gain you make. This capital gain may result from investments or the sale of a property. You need to pay either LTCG (Long-Term Capital Gains) tax or STCG (Short-Term Capital Gains) tax, depending on capital gains and how long you have kept the investment.
The direct tax provides several important advantages, including:
The following are some disadvantages of direct taxes:
Indirect taxes are imposed on services and products as opposed to direct taxes, which are levied on income and profits. One significant distinction between direct and indirect taxes is that you pay direct taxes to the government directly, while an intermediary collects indirect taxes from you, the end consumer. Then, the intermediary must pass this indirect tax to the government.
Contrary to direct taxes, indirect taxes are independent of an individual’s income. As a result, everyone pays taxes at the same rate. In India, the Central Board of Indirect Taxes and Customs (CBIC) is primarily in charge of processing indirect taxes. The Department of Revenue oversees both CBDT and CBIC.
The following are some of the most effective forms of indirect tax in India:
GST subsumed many different indirect taxes, including Service Tax, Central Excise, State VAT, and others. As a result, it is a single, all-encompassing indirect tax applied to all goods and services according to the tax brackets set by the GST Council. One of its significant benefits is that the GST essentially eliminated the cascading or tax-on-tax effect of the former tax regime.
You have to pay customs tax when you buy an imported product from another country. You are responsible for paying the product’s customs duty whether it arrives in India by air, land, or sea. Taxing all goods entering India is the objective of the implementation of this indirect tax.
A value added tax (VAT) is a kind of consumption tax on goods whenever their value increases across the supply chain. The state government imposes it and determines the amount of VAT percentage applied to different goods. VAT is still used on some products, such as those that include alcohol, although GST has mostly eliminated it.
Below is a list of some essential advantages of indirect taxes:
Here are a few drawbacks of indirect tax:
Tax on Returns You Earn Through P2P Lending
In P2P lending, investors earn income in the form of interest on the amount they lend. P2P lending is one of the rapidly growing investment opportunities in India. The fixed maturity peer-to-peer investment plan from LenDenClub offers up to 10–12%* annual returns on your investment. Similar to the interest earned on any other instrument, such as a fixed deposit, the interest income in P2P lending is also taxable. Lenders’ interest income from peer-to-peer lending comes under “income from other sources” and is added to their taxable income.
As you can see, both indirect and direct taxes have advantages and disadvantages. But, both are crucial to the economy. Though people view taxes as an unnecessary burden, they need to realize that they contribute to the nation’s development. Our infrastructure improves, defense grows strong, and we prosper as a nation when we pay taxes.