Direct Tax in India

A type of tax where the impact and the incidence fall under the same category can be defined as a Direct Tax. The tax is paid directly by the organisation or an individual to the entity that has imposed the payment. The tax must be paid directly to the government and cannot be paid to anyone else.
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The Central Board of Direct Taxes (CBDT) oversees direct taxation in India. The CBDT was formed as a result of the Central Board of Revenue Act, 1924. The department is responsible for overseeing the direct tax laws and is a part of the Department of Revenue in the Ministry of Finance. The Central Board of Direct Taxes also provides suggestions and inputs for the planning and handling of all direct taxes in India.

What are the different types of Direct Taxes?

The various types of direct taxes that are imposed in India are mentioned below:

  • Income Tax: Depending on an individual’s age and earnings, income tax must be paid. Various tax slabs are determined by the Government of India which determines the amount of Income Tax that must be paid. The taxpayer must file Income Tax Returns (ITR) on a yearly basis. Individuals may receive a refund or might have to pay a tax depending on their ITR. Huge penalties are levied in case individuals do not file their ITR.
  • Wealth Tax: The tax must be paid on a yearly basis and depends on the ownership of properties and the market value of the property. In case an individual owns a property, wealth tax must be paid and does not depend on whether the property generates an income or not.

Corporate taxpayers, Hindu Undivided Families (HUFs), and individuals must pay wealth tax depending on their residential status. Payment of wealth tax is exempt for assets like gold deposit bonds, stock holdings, house property, commercial property that have been rented for more than 300 days, and if the house property is owned for business and professional use.

  • Estate Tax: It is also called as Inheritance Tax and is paid based on the value of the estate or the money that an individual has left after his/her death.
  • Corporate Tax: Domestic companies, apart from shareholders, will have to pay corporate tax. Foreign corporations who make an income in India will also have to pay corporate tax. Income earned via selling assets, technical service fees, dividends, royalties, or interest that is based in India are taxable. The below-mentioned taxes are also included under Corporate Tax:
    • Securities Transaction Tax (STT): The tax must be paid for any income that is earned via security transactions that are taxable.
    • Dividend Distribution Tax (DDT): In case any domestic companies declare, distribute, or are paid any amounts as dividends by shareholders, DDT is levied on them. However, DDT is not levied on foreign companies.
    • Fringe Benefits Tax: Companies that provide fringe benefits for maids, drivers, etc., Fringe Benefits Tax is levied on them.
    • Minimum Alternate Tax (MAT): For zero tax companies that have accounts prepared according to the Companies Act, MAT is levied on them.
  • Capital Gains Tax: It is a form of direct tax that is paid due to the income that is earned from the sale of assets or investments. Investments in farms, bonds, shares, businesses, art, and home come under capital assets. Based on its holding period, tax can be classified into long-term and short-term. Any assets, apart from securities, that are sold within 36 months from the time they were acquired come under short-term gains. Long-term assets are levied if any income is generated from the sale of properties that have been held for a duration of more than 36 months.

Tax Rate for the Different Types of Direct Taxes

  • Income Tax: Depending on the individual’s age and salary, he/she will fall under a particular tax slab. The three different tax slabs are mentioned below:

For resident individuals and Hindu Undivided Families (HUFs) who are below the age of 60 years:

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 who are 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 who are 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
  • Corporate Tax: The tax rates for domestic and international companies are mentioned below:

Domestic companies:

    • In case the turnover of the company is less than Rs.250 crore, the corporate tax that is levied is 25%. However, if the turnover of the company is more Rs.250 crore, the corporate tax that is levied is 30%.
    • A surcharge of 10% of the taxable income is levied in case the taxable income is between Rs.1 crore and Rs.10 crore.
    • In case the taxable income of the company is more than Rs.10 crore, the surcharge that is levied is 12%.
    • 4% of the corporate tax is levied as cess.

International companies:

    • In case companies are earning less than Rs.1 crore, a corporate tax of 41.2% is levied. The corporate tax includes 40% basic tax and 3% education cess.
    • In case companies are earning more than Rs.1 crore, a corporate tax of 42.024% is levied. The corporate tax includes 40% basic tax, 2% surcharge, and 3% education cess.
    • In case companies earn more than Rs.10 crore, a surcharge of 5% is levied apart from the basic tax.
  • Capital Gains Tax
    • According to the normal tax slabs, short-term capital gains is levied.
    • In case Capital Gains Tax is computed considering indexation benefit, the long-term capital gains that are levied are taxed as 20%.
    • In case Capital Gains Tax is computed without considering indexation benefit, the long-term capital gains that are levied are taxed at 10%
  • Wealth Tax
    • Depending on the net wealth, Wealth Tax is levied. Net wealth can be calculated by the sum of all taxable assets minus the total debt that is owed.
    • The formula for net wealth is, Net Wealth = (Sum of all assets) – (sum of all debt).
    • The value of net wealth is considered on March 31 of every year that immediately precedes the assessment year.
    • However, with effect from 1 April 2016, for wealth that was being held as of 31 March 2016, Wealth Tax has been abolished.

Direct Tax Code

The Direct Tax Code or DTC was mainly drafted to replace the Income Tax Act of 1961. The main aim of DTC is to establish a more equitable, effective, and efficient direct tax system. DTC was also drafted to amend and stabilise all laws that are related to direct taxes so that the tax-GDP ratio increases and voluntary compliance becomes easy.

Explanation of the Direct Tax Codes

The key features of the Direct Tax Code are explained below:

  • All direct taxes have a single code: By bringing all direct taxes under one code, a single, unified taxpayer system can be brought into effect. All compliance features can also be unified under one code.
  • Stability: Currently, based on the Finance Act of the relevant year, taxes are formed. However, under the Direct Tax Code, the tax rates are being made between the First and Fourth schedule of the DTC. Any changes to the schedule can be made by passing an Amendment Bill before the Parliament.
  • Regulatory Functions are eliminated: Other regulatory authorities must handle all regulatory functions.
  • Political contributions: 5% of the gross total income that can be deducted will be made towards political contributions.
  • Flexibility: A law has been created so that changes and requirement to grow the economy can be accommodated without having to make amendments on a constant basis.
  • Constant litigation problems have been eliminated: Special care has been put forth so that the code is not misused or misinterpreted in order to avoid contradiction and ambiguity.
  • Fringe benefits tax: The tax is levied on employees rather than employers.

What are the Advantages of Direct Taxes in India?

The main advantages of Direct Taxes in India are mentioned below:

  • Economic and Social balance: The Government of India has launched well-balanced tax slabs depending on an individual’s earnings and age. The tax slabs are also determined based on the economic situation of the country. Exemptions are also put in place so that all income inequalities are balanced out.
  • Productivity: As there is a growth in the number of people who work and community, the returns from direct taxes also increases. Therefore, direct taxes are considered to be very productive.
  • Inflation is curbed: Tax is increased by the government during inflation. The increase in taxes reduces the necessity for goods and services, which leads to inflation to compress.
  • Certainty: Due to the presence of direct taxes, there is a sense of certainty from the government and the taxpayer. The amount that must be paid and the amount that must be collected is known by the taxpayer and the government, respectively.
  • Distribution of wealth is equal: Higher taxes are charged by the government to the individuals or organisations that can afford them. This extra money is used to help the poor and lower societies in India.

Even though there are a few disadvantages, direct taxes play a very important role in India’s economy. If these taxes are brought into effect appropriately, they could play a huge role in sustaining price levels and to prevent inflation.

Frequently Asked Questions:

  1. How can I save on my taxes?

    It is possible to have a portion of your income viewed as or deemed non-taxable – by investing it in certain funds, investments and policies which are income tax deductible.

  2. What are some of the investments that I can make to save on Income Tax?

    Investments under Section 80C, 80CCC and 80D are directly exempt from taxation – like some tax saving fixed deposits, investments in National Savings Certificates (NSCs), insurance policies, EPF and PPF schemes, etc.

  3. What is TDS?

    TDS is Tax Deducted at Source. Before you receive your pay, a certain amount is deducted as tax through the method of TDS.

  4. What is an assessment year?

    An assessment year is a 12 month period that starts on the 1st of April, up to the 31st of March the next year.

  5. Are all incomes and receipts considered as taxable income?

    No, there are two types of receipts – 1. Revenue receipts and 2. Capital receipts. All revenue receipts are taxable unless specifically exempted and all capital receipts are exempted unless specifically taxed.

  6. What are the rules relating to taxation of gifts?

    Gifts exceeding over Rs.50,000 are taxable unless received from:

    • A relative.
    • On occasion of marriage.
    • Under will or by inheritance or in contemplation of the death of the payer.

News About Direct Tax

  • Task force for direct tax laws to submit report by 31 May

    An extension of 3 months has been given to the task force which was set up under the Central Board of Direct Taxes (CBDT) for replacing the existing Income Tax Act and drafting a new direct tax law. This extension is till 31 May 2019. The task force’s current term expired on 28 February. The extension was sought by the panel citing certain operational reasons and other requirements. The Finance Minister, Arun Jaitley, has approved the extension. A new member of the task force has been co-opted – Pragya Sahay Saxena, who is a joint secretary in the CBDT. The other existing members are the chairman and regional managing partner of EY India, Rajiv Memani; retired IRS and advocate, GC Srivastava; consultant, ICRIER, Mansi Kedia; practising tax advocate Mukesh Patel; and chartered accountant, Girish Ahuja. The CBDT works under the Ministry of Finance and frames policies for the Income Tax Department. The task force’s assignment is to draft direct tax laws that are in alignment with international norms, that incorporate international best practices, while being relevant to the country’s economic needs.

    4 March 2019

  • CBDT warns taxpayers of penal action for any misuse of the revised tax return provision

    Under Section 139(5) of Income Tax Act, a revised tax return can be filed for the previous year if an assessee discovers any omission or wrong statement therein. Post demonetisation, there is a fear that taxpayers may take advantage of the provision, and revise the return of income filed for earlier assessment years for manipulating their income, cash-in-hand, profits, etc. The CBDT has warned taxpayers that they may be penalised, and prosecuted in the case of drastically altered forms.

    26 December 2016

  • Direct Tax Collections Registers Strong Growth

    The government’s collection of direct tax exhibited an increase of 15.1% from April to November 2016, contrasted with the same 8-month period last year. The indirect tax corpus rose by 26.2% during the same time period.

    The net revenue from direct tax aggregated to Rs.4.12 lakh crore by November. This is 48.7% of the total direct tax budget estimate for the financial year 2016-17. The net revenue from indirect tax came up to Rs.5.52 lakh crore, that’s 71.1% of the total indirect tax budget estimate for the financial year.

    The Reserve Bank, however, has reduced its growth forecast for the current financial year from 7.6% to 7.1% by 50 basis points.

    10 December 2016

  • Government sees Growth in Direct and Indirect Tax in First Half of Fiscal Year 2016 – 17

    The government’s tax collection agency reported an increase in indirect tax collection by 26.7% and an increase in direct taxes collection by 10.6% between April to October 2016. At the end of October the total direct and indirect tax collection stood at Rs.8.62 lakh crore, which is more than half of the expected Rs.16.26 lakh crore target set for the end of the 2016 fiscal year. The government is targeting a 12.64% growth in direct taxes at Rs.8.47 lakh crore and a 10.8% growth in indirect taxes at Rs.7.79 lakh crore by the end of the fiscal year 2016 – 17. The direct tax collection till the end of October amounted to Rs.3.77 lakh crore and indirect tax collection amounted to Rs.4.85 lakh crore. Direct tax includes personal income tax and corporate tax. Indirect tax includes service tax and excise duty. Corporate Income Tax (CIT) saw an increase of 11.6% and Personal Income Tax (PIT) saw an increase of 18.6% till the end of October 2016. After rebate adjustments net CIT growth stood at 5% and PIT stood at 18.4%. Excise duty saw a growth of 45.4% between April to October and service tax saw a growth of 26.9% during the same period.

    14 November 2016

  • CBDT will be issuing appreciation certificates to more than 10 lakh taxpayers

    The Income Tax department has stated that it is going to issue appreciation certificates to more than ten lakh individuals. Already more than 8 lakh taxpayers have received their certificates of appreciation.

    CBDT has sent out such certificates when taxes are cleared and taxpayers do not have an outstanding amount. The appreciation letter marks the very first step taken by the government for communicating with the tax payers.

    25 October 2016

  • Direct Tax as well as Indirect Tax collection both jump in the first quarter

    The first quarter of this fiscal saw a jump for both direct as well as indirect taxes. While direct taxes were up by 9 per cent indirect taxes saw a huge jump of 26 per cent for the first quarter of financial year 2016-17. Indirect taxes grew on account of a huge jump in excise duty collections. Rs.4.08 lakh crore were collected as indirect tax in the first quarter. The net increase in excise duty collection was 46 per cent. Refunds for direct taxes increased by 27 per cent and as a result of this there was a decrease in net growth of corporate tax.

    23 October 2016

  • CBDT Launches 5 Unilateral Advance Pricing Agreements

    Last Friday, The Central Board of Direct Taxes (CBDT) made a statement saying that it had implemented five unilateral advance pricing agreements (APAs) with the Indian taxpayers. A roll back provision is included in one of these agreements while these signings being include has lead the number of advance pricing agreements by the CBDT to reach 103, according to a finance ministry statement.

    The APA scheme, was launched in the Income Tax Act in 2012. The main target of this provision was to allow taxpayers who are involved in transfer pricing to be able to specify the methods of pricing as well as stating or earlier deciding the prices of international transactions.

    27 September 2016

  • Net Direct Tax collections for FY17 April-Aug rises 15% to Rs. 1.89 lakh crore

    Robust income tax collections has led to an increase of 15% in net direct tax collections during the five month period between April and August, for the financial year 2016-17. The tax collected during this interval stands at 1.89 lakh crore.

    Direct taxes, which are inclusive of personal income tax and corporate income tax, collected during the first five months is 22.30% of the full fiscal budget estimates. The gross CIT collections grew by 11.55% while PIT collections increased by 31.76%.

    However, tax refunds totalling Rs. 77,080 crore have been furnished during this period. This amount is 22.18% higher than the refunds issued for the same period last year. The government forecasts that Rs. 8.47 lakh crore will be collected from direct taxes this fiscal. Indirect taxes will contribute Rs. 7.79 lakh crore, as well.

    13 September 2016

  • CBDT to use Direct Emails to Reduce Turnaround Time for Tax Disputes

    In an effort to reduce the vast number of direct tax litigations the Income Tax department has undertaken the endeavour of writing personally to over 2.59 Lakh taxpayers asking them to avail a scheme that will provide a one-time resolution to their tax disputes. To reduce the turnaround time, the CBDT will be using emails to communicate with the aggrieved taxpayers. The CBDT has estimated that each income tax commissioner will have close to 300 to 400 appeals pending before them. They are instructed to email the assesses urging them to take up the scheme and also discuss the benefits of the said scheme. The direct tax resolution scheme will be open till 31st December and since the assesses are known, the publicity drive for the same will be on a much smaller scheme.

    28 August 2016

  • Tax Collections Up Considerably During Q1 2017

    There is some pleasing news from the taxman. At the end of Q1 (April-June) in the current financial year, about 14.6% of the tax targets set during the annual budget was achieved during the first three months of the current fiscal.

    While the direct tax collection rose by 24.79% from the corresponding quarter last year, the hike in indirect tax collection rose by 30.8% at the end of quarter 1. Tax from direct sources during this quarter was around Rs.1.24 lakh crore while indirect taxes clocked Rs.2 lakh crore. Corporate tax registered a growth of 13.5% and income tax inched up by 29.8% during the first quarter of the current fiscal.

    The main reason for increase in collections can be attributed to advance tax payments from individuals made in the previous budget.

    20 July 2016

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