Governments are frequently en- couraged to rely less on direct taxes and more on indirect taxes, an issue that has recently received considerable attention in. regressions. – «A decrease of about 1% in the Tax to GDP ratio would imply a percentage point increase in. GDP per capita level in the long run» (OECD). Standard theory of the optimal mix of direct and indirect taxation implicitly assumes that compliance is not influenced by the framing of the taxes.
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CHAPTER 6. DIRECT AND INDIRECT TAXES. A tax may be defined as a " pecuniary burden laid upon individuals or property owners to support the government. The choice between direct and indirect taxes has contributed to a Over the last three decades the average ratio of direct to indirect taxes for a sample of countries has been pellwillfigalus.gq Fölster. Study Note 1: Canons of Taxation- Indirect taxes. Basis for Taxation. Direct Taxes and Indirect Taxes. Features of Indirect.
For example, income taxes are collected from the person who earns the income.
By contrast, indirect taxes are collected from someone other than the person ostensibly responsible for paying the taxes. In law, the terms may have different meanings. Indirect taxes are imposed on rights, privileges, and activities. Thus, a tax on the sale of property would be considered an indirect tax, whereas the tax on simply owning the property itself would be a direct tax. The distinction can be subtle between direct and indirect taxation, but can be important under the law.
India has a well-developed tax structure with clearly demarcated authority between Central and State Governments and local bodies.
Central Government levies taxes on income except tax on agricultural income, which the State Governments can levy , customs duties, central excise and service tax. Local bodies are empowered to levy tax on properties, octroi and for utilities like water supply, drainage etc. In last years, Indian taxation system has undergone tremendous reforms. The tax rates have been rationalized and tax laws have been simplified resulting in better compliance, ease of tax payment and better enforcement.
The process of rationalization of tax administration is ongoing in India. Direct Taxes A direct tax is one paid directly to the government by the persons on whom it is imposed. This is a tax that, however oppressive in its nature, and unequal in its operation, is certain as to its produce and simple in it collection; it cannot be evaded like the objects of imposts or excise, and will be paid, because all that a man hath will he give for his head.
Examples include some income taxes, some corporate taxes, and transfer taxes such as estate inheritance tax and gift tax. Different direct taxes are as follows:.
Tax on Corporate Income 2. Capital Gains Tax 3. Personal Income Tax 4. Tax Incentives 5. Double Taxation Avoidance Treaty. Indirect Taxes The term indirect tax can be defined from different views.
In the colloquial sense, an indirect tax is the charge that is collected by intermediary like retail store from the individual who holds the actual economic burden of the tax like customer. The intermediary files a tax return and eventually passes to the government. The indirect tax can be alternatively defined as the charge that is paid by one individual at the beginning, but the burden of which will be passed over to some other individual, who eventually holds the burden.
Different indirect taxes are as follows:. Excise Duty 2. Customs Duty 3.
Service Tax 4. An assessment year begins on 1st April of every year and ends on 31st march of next year. For example, the current assessment year has begun on 1st April, and will end on 31st March, Provided that, in the case of a business or profession newly set up, or a source of income newly coming to existence in the said financial year.
The previous year shall be the period beginning with the date of setting up of the business, or as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year. This is an inclusive definition, which indicates that the term assessment includes reassessment, in addition to its normal meaning.
Normally, an assessment means the process of determining and computing the amount of income and the tax due of a person. The computation of income and tax is to be done in accordance with the provisions of the Income Tax Act.
A person is liable to pay tax as well as interest for late payment of tax or penalty for concealment of income, fraud under the Income Tax Act. Therefore, an assessee basically means a person liable to pay tax or interest or penalty. Assessee is a person:. Income tax Every Government derives revenues by levying taxes. Indirect taxes are in the form of customs duty, excise duty, value added tax, service tax, etc. These indirect taxes are levied irrespective of the level of income of a person.
On the other hand, direct taxes are levied directly based on the income of the person. Thus, income tax is a direct tax. Of all the direct taxes, the maximum revenue to the Government is from income tax. The law relating to it is contained in the Income Tax Act, The Income Tax Act is the machinery, which determines which persons are liable to tax.
It also determines in respect of which incomes they are liable to tax. These incomes are classified under various heads and then taxed.
They are as follows:. For the purpose of this clause, an association of persons or a body of individuals or a local authority or an artificial judicial person shall be deemed to be a person, whether or not such person or body or authority or judicial person was formed or established or incorporated with the object of deriving income, profits and gains.
It determines the extent and scope of income, which is chargeable to tax. There are three broad categories of persons: Thus, if any item of income is exempt under the provisions of the Act, it is to be excluded from the scope of income.
Resident and Ordinary Resident A Resident and Ordinary Resident is taxable in respect of any income, from whatever source derived, which: During the previous year c Accrues or arises to him outside India, during the previous year.
Resident but not Ordinary Resident A person not ordinarily resident in India, is taxable is respect of any income, from whatever source derived, which: Indirect taxes: Examples of indirect taxation include customs duties, motor vehicles tax, excise duty, octroi and sales tax. Indirect taxes are collected both by the central and state governments but mainly by the central government.
Advantages: i Indirect tax is fairly easy to collect.
Direct and Indirect Taxes
A high rate of tax on tobacco can, for example, affect smoking habits. But they spend money on goods and services. This adds to the tax revenue of the government.
They can avoid paying the tax by not consuming the goods which are being taxed. Disadvantages: i Indirect taxes are regressive. The study covered twelve years period from financial year to This research is based on secondary data collected from various newspapers, books, research papers, Union Budget and Economic Survey, Ministry of Finance and other websites and other published resources. The researcher has used various tools for analysis like average, Simple percentage technique and diagram presentation.
Data have been represented in tabular forms and line charts. The present study is also to attempts the role of direct and indirect tax in development of Indian economy.
The study clearly shows that taxes plays an important role in Indian economy development. The researcher concluded that there has been increase in the tax revenue but still there are certain inadequacies which need to be improved.
All the activities which constitutes growth and development needs finance. Government raises finance through various activities like fees, fines and taxes etc. Tax, in general, is the imposition of financial charges upon a person by the Government of India or their respective state or similar other functional equivalents in a state.
In India, taxation has been used as a powerful instrument of fiscal policy. Taxation alone constitutes more than one-half of total budget resources.
Tax is permanent instrument for collecting revenues. The collection of taxes is divided into direct and indirect tax. This tax liability has to be paid by the taxpayer directly and cannot be transferred to any other entity for payment. Examples of direct taxes are Income tax, Wealth tax and Corporation tax. Income Tax As per Income Tax Act , every person Individuals, Companies, Hindu undivided families, Firms, Cooperative Societies and all other artificial judicial persons whose total income exceeds minimum exemption limit is liable to pay income tax at the rates prescribed in the act.
It is not a voluntary payment but an enforced contribution that is why tax is known as financial charge or levy.
Direct and Indirect Tax: Merits and Demerits | Economics
Corporate Tax Income tax levied on companies is called Corporate Tax. This tax is Levied on companies who exist as separate entities from their shareholders. Foreign companies are taxed on income that arises, or is deemed to arise, in India.
It is charged on royalties, interest, gains from sale of capital assets located in India, fees for technical services and dividends.
It Includes Dividend Distribution Tax DDT which is a tax levied on any amount declared, distributed or paid as dividend by any domestic company.
International companies are exempt from this tax. Wealth Tax Wealth tax is charged on the benefits derived from property ownership. The same property will be taxed every year on its current market value. Wealth tax is charged whether the property in earning an income or not.
Direct and Indirect Taxes in India
The tax is levied on the individuals, HUFs, and companies alike. Chargeability depends on residential status. All gifts received by a person in excess of Rs. But it was abolished with effect from 1st October, But in , a new provision was added in the Income Tax Act An indirect tax may increase the price of a good so that consumers are actually paying the tax by paying more for the products.
Some Examples of important Indirect taxes imposed in India are as under: Central Excise Duty It is the tax which is charged on excisable goods that are manufactured in India and are for domestic consumption. It is mandatory to pay Central Excise duty on the goods manufactured, unless if they are exempted.
Service Tax The Service Tax is levied on the gross or aggregate amount charged by the service provider on the receiver. Customs Duty Customs Duty is a tariff or tax imposed on goods when transported across international borders.
The purpose of it is to protect the country's economy, jobs by controlling the flow of goods, especially the restrictive and prohibited goods, in and out of the country.As per the exception to the 2nd condition in Sec 6 1 , an Indian citizen settled abroad becomes resident in India only when his stay in India during the previous year is days or more.
Funds borrowed on April 1, , Rs. Maryland Income Tax Rates. In order to investigate the impact, secondary data were collected from financial reports to of companies regarding textile sector.
Log In Sign Up. The tax revenue is generated by imposing: Print Worksheet:
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