Direct tax is an immeasurable part of a country’s taxation since it is imposed on an individual or an organization income, profits and wealth.
Of course, it constitutes a substantial part of revenues for the governments facilitating financing of public services and amenities.
This article examines the definition, classification, principles, advantages, challenges and the relationship of direct tax to economic development.
What is Direct Tax?
A direct tax is collected directly from the taxpayers and without any intermediaries paid to the government. It is a pure financial cost therefore cannot be passed onto another party as is often seen with some other costs.
Principles of Direct Taxation
Direct taxation is based on principles such as:
- Equity: The taxes are paid according to the level of individuals’ capability to pay the taxes.
- Certainty: A taxpayer should be aware of how much he or she owes or should pay at a given period.
- Convenience: The government has no right to demand taxes from people while at the same time they have to endure so much to get to make the payment.
- Economy: It is also important not to spend much money in the process of collecting taxes.
Types of Direct Taxes
1. Income Tax
- Applicable to persons and companies, income tax is payable on the tax base known as taxable income derived from salaries, profits or other receivables. Distributions of tax and rates of exemption differ by the region or country.
2. Corporate Tax
- Imposed on the business entity’s gross income, the corporate tax varies for the domestic and international entities. Extra charges may be imposed.
3. Capital Gains Tax
- It is imposed on gains that arise from the sale of fixed assets such as buildings, shares or bonds. It is sub-divided into two, namely short-term capital gains and the long-term capital gains.
4. Property Tax
- An assessment of person’s property, property tax pays for local government departments like school, road and other services.
5. Wealth Tax
This type of tax has however, been abolished in some countries and include:
- Originally instituted on the base of net worth of individuals, wealth tax was designed to provide control over congregation of wealth at a few hands.
6. Gift Tax
- Imposed over the grants of property without consideration of their value, gift taxes exist at a certain degree of values.
Features of Direct Tax
- Progressivity: The calculation also reveals that the higher-income earners contribute relatively more.
- Transparency: The common public also have some knowledge on their part as taxpayers.
- Administrative Simplicity: Taxes are collected by the government and particularly by the tax department.
Importance of Direct Tax
Direct taxes serve critical purposes, including:
- Revenue Generation: The largest source of government receipts.
- Economic Equity: Redistributes wealth.
- Economic Stability: Used to maintain price levels, that is both inflation and deflation.
- Encouraging Compliance: Encourages compliance with budget proposals of the government among taxpayers.
Advantages of Direct Tax
- Fairness: Based on earning capacity.
- Certainty: Fixed rates and schedules.
- Flexibility: May be flexible to suit the accomplishments of the economic objectives.
- Direct Control: It directly influences the operation of the economy through the regulation all the economic activities that happen in the country.
Challenges in Direct Taxation
- Tax Evasion: More importantly, non-compliance has a direct impact on the company’s revenues.
- Complexity: Oh, how complex laws have compounded the confusion of taxpayers.
- High Administrative Costs: Collection can be expensive.
- Economic Impact: Over-taxation is likely to throttle investment.
Trends in Direct Taxation in the Recent Past
The tax systems of governments globally are changing how direct taxes are administered to become more transparent and effective. Key trends include:
- Digital Taxation: How to deal with revenues from digital offers?
- Simplification: There shall be a reduction in tax rates and a simplification of codes.
- Automation: The use of technology in collection of taxes.
Direct Tax in India
The Indian direct taxes are the taxes that can be regulated by the income tax act,1961. Key features include:
- Income Tax Slabs: Classification based on income in that it re ects the reforms to have progressive rates.
- Tax Deducted at Source (TDS): Promotes the collection of taxes at source of income.
- Exemptions and Deductions: Such initiatives as encouraging saving and investment.
Global Perspective
Direct taxation is not identical all over the world and includes differences in the rates of taxes, in certain regulation requirements, as well as in possible exemptions.
The tax compliance is usually high in developed countries because they have better systems.
The function of Direct Tax in Economic Development
Direct tax contributes to economic growth by:
- Funding Public Services: Provides for development of infrastructure.
- Reducing Inequality: Concave rates reduce the inequality between the rich and the poor.
- Encouraging Investments: The benefits of taxation encourage business operations.
Conclusion
Direct tax is an instrument which the governments have to harness for resource mobilization, to make it fairer, and drive economic growth.
Despite evasion and complexity persisting, technologies and reforms in policy are making the systems of direct taxes more efficient and effective.
Thus, by grasping its details, individuals and business can work effectively to support tax laws to make a difference for nation building.
FAQs
1. What are the main distinctions between direct taxes and indirect taxes?
Direct taxes are levied directly on the individuals or organizations.
such taxes are income tax or property tax etc.
Direct taxes as compared to the indirect taxes are levied directly from one individual to other without any middleman involved.
Direct tax vs Indirect tax
Unlike, direct taxes,
indirect taxes are collected by the intermediaries like retailers, which include GST or excise duty etc.
2. To whom is it applicable?
The Indian Income Tax Act requires all persons, companies, and firms, Hindu Undivided Families (HUF), and any other legal entity that earns an assessable income to pay income tax if their income exceed the limit of exemption recognized by the act.
3. What is the latest date available for the submittance of income tax returns?
For individuals, the due date is generally 31st July, of the assessment year but may be extended by the government.
4. What actually means TDS and what is its full form which is Tax Deducted at Source?
TDS is a system where in the payer reduces a fixed percentage from certain payments made by the payer which include payment for salary, rent, commission etc.
the balance amount is paid to the government.
5. What is Advance Tax?
Advance tax refers to the tax paid in installments during the year of income instead of the tax on total income as computed under the IT Act and assessed as on March 31 of the relevant year if the tax liability in the case of an ‘asstee’ exceeds ` 10,000.
6. Am I entitled to a tax refund if I paid too much on the taxes and duties?
Yes, if you have over paid the taxes, you can get back your money or part of the money which you are undue to pay by filing your income tax return.
7. What are consequences of failure to file income tax returns within the stipulated time?
In India, a Penalty of ₹ 5,000 may be levied if the return is filed after due date but before December 31st and ₹ 10,000 if filed after December 31st is levied for violation of section 234F of Income Tax Act.