Budget 2022 | What is Direct Tax?

In simple terms, a direct tax is understood as the tax that is directly levied on a taxpayer's earnings

India is just a little over a week away from presenting the 2022 Union Budget which Finance Minister Nirmala Sitharaman will reveal on February 1.

The nation finds itself under extraordinary circumstances, much like anywhere else in the world, due to the Covid-19 pandemic. The economy has also been projected to sink by a record 7.7 per cent in 2020-21 owing to the same.

As the country's businesses and financial institutions brace itself for February 1, here's an explainer on some of the important terminologies to help understand the budget.

What is direct tax?

Direct taxes are the one that falls directly on individuals and corporations. For example, income tax, corporation tax, wealth tax. Unlike indirect tax, it has the same incidence and impact.

Incidence, impact? What's that?

Incidence of tax refers to the initial point of taxation. For example, with flight tickets, the initial point of taxation is likely to be cess levied on aviation fuel that airlines pay for.

The airlines charge a sum that makes up for the initial cess, thus shifting the impact or burden of the tax upon the passenger/customer.

This is how indirect tax works.

However, direct tax has the same incidence and impact, meaning that the tax is not transferrable outside the tax collector and taxpayer's realm.

The amount of direct tax that one pays will depend on the nature and source of their earnings and what bracket or slab their earnings places them in.

Who collects direct taxes?

Depending on the nature of the tax paid, the body collecting direct taxes varies, with one body overlooking all the activities related - the Central Board of Direct Taxes - which was set up in 1924.

Which revenue streams are directly taxed?

Income Tax: Any taxable earning an individual gets over a one-year period is called income tax. It is often the most significant form of revenue for a government.

Income is a broader term that encompasses salary (wages, commissions, salaries, pensions, gratuities), capital gains, income earned from property (by leasing/renting it out to a tenant), or income from other sources (bets, pension amounts received after the pensioner's death).

Corporate Tax: Corporates, just like individuals, are liable to pay taxes for the income that they earn over a one year period. While the brackets may vary depending on the nature of one's corporation or business, the entities are to pay taxes for what they earn, whether that be revenue or profits.

Property Tax: The tax that one pays for any property that they own is referred to as property tax. the manner and the amount that one has to pay as property tax tends to vary from state to state, and sometimes even city to city. A number of factors including the property's age, size, and value determine the amount that is to be paid.

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