Did you know: the difference between direct and indirect taxes
The Union Budget for financial year (FY) 2017-18 will be presented in a few days. A significant part of the budget announcements is about how much tax will be levied in the forthcoming FY. Taxes are levied in India by both the central and the state governments. Some taxes are also levied by local authorities, such as the municipalities. However, only the central government can levy direct taxes. State governments and local bodies can only levy indirect taxes. Let’s look at direct and indirect taxes in some detail.
As the name suggests, these taxes are paid directly by the taxpayer to the government. In also means that direct taxes cannot be transferred or shifted to another person. Thus, unlike indirect taxes, the burden of the direct taxes falls on the individual who earns a taxable income; it cannot be transferred to others. These are levied on and paid by individuals, Hindu Undivided Families (HUFs), Trusts, co-operative societies and companies, and include taxes such as: income tax, corporate tax, wealth tax, gift tax and expenditure tax.
Income tax is paid by individuals based on their annual income, which decides their tax slab. At present, individuals with a taxable income (total income minus deductions) of Rs2.5 lakh per annum and below the age of 60 years are exempt from paying direct taxes. For senior citizens (above 60 years), this limit is Rs3 lakh per annum. For very senior citizens (above 80 years), this limit is Rs5 lakh per annum.
Here, the incidence and impact of taxation does not necessarily fall on the entity on which it is imposed: the taxpayer can transfer the burden of this tax to someone else.
Indirect taxes have the effect of raising the price of the products on which they are imposed. Examples would be value-added tax (VAT), which is levied on goods that you buy.
Initially, VAT is levied on the manufacturer, who then transfers this tax burden to the consumers by including it in the retail price of that commodity.
Some of the other indirect taxes are service tax, customs duty, central excise, sales tax and entertainment tax.
The goods and services tax (GST), which the government aims to implement from July this year, would also be an indirect tax.
The GST would replace several indirect taxes and aims to streamline the indirect tax system in the country.