JOIN USBudget 2023 | What is direct tax?
India’ Finance Minister Nirmala Sitharaman is slated to present the Union Budget 2023 on February 1.
With just weeks left for the presentation, the nation would be really keen to know what the minister would do to improve the financial situation of the country.
While the people and institutions keep guessing, here’s an explainer on some of the important terminologies to help understand the budget.
What is direct tax?
Direct tax is that tax which an individual or company pays directly to the ones who impose it. Income tax, corporation tax, wealth tax are a few examples. Unlike indirect tax, they have 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.
Direct tax has the same incidence and impact, meaning that the tax is not transferable outside the tax collector and taxpayer's realm.
The amount of direct tax that one pays will depend on the nature and source of one’s earnings and what bracket or slab their earnings place them in.
Who collects direct taxes?
Depending on the nature of the tax paid, the body collecting direct taxes varies, with one body overseeing 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.