IIMS, PUNE

Finance Specialization – Batch 23-25

Direct and Indirect Taxation (Semester 2)

Study Material- Unit 2

Direct Tax: It is defined as the tax imposed directly on a taxpayer and is required to be paid to the
government. Also, an individual cannot pass or assign another person to pay the taxes on his behalf.
Some of the direct taxes imposed on an Indian taxpayer are:
 Income tax- it is the tax applicable on the income earned by an individual or taxpayer.
 Corporate tax- this is the tax applicable on the profits earned by companies from their
businesses.

What Is Direct Tax?

As stated earlier, you pay these taxes directly. The government levies such taxes directly on an individual
or an entity and it cannot get transferred to any other person or entity. There is only one such
federation that winks at the direct taxes, i.e. the Central Board of Direct Taxes (CBDT) governed by the
Department of Revenue. The CBDT has, to assist it with its sense of duties; the backup of several acts
that preside over several aspects of the direct taxes.

Direct taxes are one type of taxes an individual pays that are paid straight or directly to the government,
such as income tax, poll tax, land tax, and personal property tax. Such direct taxes are computed based
on the ability of the taxpayer to pay, which means that the higher their capability of paying is, the higher
their taxes are.

Example of Direct Taxes

As mentioned above, one good example of direct taxes is a person’s income tax. Usually, income tax is
filed annually, although deductions from one’s salary can be done on a monthly basis. If, for example, an
individual incurs tax amounting to $30,000 a year for his annual salary of $120,000, the $30,000 is his
direct tax.

Advantages of Direct Tax in India

Direct tax collection provides a boost to the economy of India. Below are a few advantages of direct tax:

 In the case of direct taxes, persons are taxed as per various rates in the income tax act.
Depending on the income of the taxpayer, every person is charged separately. This enables a
sense of not being overcharged even if the income of a person is low.
 It allows the taxpayer to evaluate and finalize the taxes before it’s even paid. This is dependent
on the total income of the taxpayer. As long as the income of the taxpayer is unchanged, it’s
very unlikely their outflow will increase.
 As per the relevant rules and regulations in force, tax outflow can be higher or lower as per the
rates decided by the government.
 Depending on the age and total income of the taxpayer, various slab rates are defined by the
government. This ensures that income inequalities are balanced out.

Types of Direct Taxes

  Income Tax
 Corporate Tax
 Property Tax

1. Income tax
It is based on one’s income. A certain percentage is taken from a worker’s salary, depending on how
much he or she earns. The good thing is that the government is also keen on listing credits and
deductions that help lower one’s tax liabilities.

According to the Constitution of India, income tax is a central subject. Income Tax on all types of income,
other than agricultural income is charged and collected by the Central Government. Income Tax is tax on
income.

The Income Tax Act, 1961 has been brought into force with effect from 1st April, 1962. It applies to the
whole of India (including Jammu and Kashmir). Since then several amendments of far-reaching nature
have been made in the Income Tax Act by the Finance Acts of every year. Besides this, amendments
have also been made.

Features of Income Tax

1. Income Tax is charged on the income of previous year, at a rate which is prescribed by the
Finance Act for the relevant assessment year.

2. The Finance Act is passed every year by the Parliament in the form popularly known as “Budget”

3. Income Tax is levied on a person in relation to his income of the previous year.

4. The tax payer’s liability is determined with reference to his residential status in the previous
year or accounting year.

5. Liability to income tax arises only where the total income in the accounting year exceeds the
maximum tax free amount prescribed by the Finance Act to that relevant year.

6. The rates of income tax are progressive and incidence of tax increases with the rise in income.

7. It is compulsory to deduct the tax at source and to pay it to the Government Treasury.

Objectives of Income Tax

The objectives of income tax may be summarized as follows:
1. To reduce inequalities in the distribution of income and wealth.

2. To bring out a greater measures of equity between different classes of tax payers.

3. To achieve the twin objectives of higher yields with reduction in inequalities.

4. To accelerate the temp of economic growth and development of the country.

 5. To maintain reasonable economic stability in the force of long run inflationary pressure and
short run international price movements.

6. To make available of funds for economic development.

7. To reduce extreme inequalities in wealth, income and consumptions standards with

undetermined productive efficiency, offence, justice and political stability.

8. To encourage investment in new capital goods.

9. To channelize investment into those sectors which contribute the most of economic growth.

2. Corporate Tax: -

In India, taxes on income, wealth, Capital Gains are some of the most significant taxes paid by
customers. Corporate houses too, be it domestic or foreign, are required to pay taxes in order to run
their business. One of the may taxes that corporates are required to pay to the Indian government is
corporate tax or company tax.

What is Corporate Tax?

Corporate tax is a form of direct tax levied on profits earned by businessmen in a particular period of
time. Various rates of corporate taxes are levied for different levels of profits earned by business houses.
Corporate tax is generally levied on the revenues of a company after deductions such as depreciation,
COGS (Cost of goods sold) and SG&A (Selling general and administrative expenses) have been taken into
account.

Corporate tax or company tax can be assumed as an Income Tax for income earned by businesses. Many
countries levy corporate tax in order to smooth out the tax process for enterprises. Different countries
have different rules that apply to taxing of income.

Corporate tax in India is levied on both domestic as well as foreign companies. Like all individuals
earning income are supposed to pay a tax on their income, business houses too are supposed to pay as
tax a certain portion of their income earned. This tax is known as corporate tax, corporation tax or
company tax.

For the purpose of tax calculation, companies in India have been broadly divided into the following two
categories.

 Domestic Corporate:
Any company that is Indian is called as domestic company or if the company is foreign but the control
and management is wholly situated in India then also it is termed as a domestic company. An Indian
company means a company registered under the Companies Act 1956

 Foreign Corporate:
Any foreign company is one that is not of Indian origin and has some part of control and management of
affairs located outside India
Benefits of corporate tax in India
Along with knowing what is a corporate tax in India, it is also important to understand its various
benefits:
 Corporate tax is a highly important aspect of every tax structure, especially for developed
countries where alternate sources of revenue are small. Corporate taxes are rather high, so
significant amounts of money are collected for public programs.
 Perhaps notably, corporate income taxes are a primary backstop for personal income taxes. The
more corporation taxes are reduced, the more rich citizens move their profits from the category
of personal tax to corporate forms to meet the reduced rate of corporate tax. The longer they
do so, the more governments find they need to slash income taxes on the powerful to avoid it.
The entire tax structure is squeezed, pushed down by corporate tax.
 Globally, companies rest on unused, uninvested capital deposits worth trillions of dollars.
Cutting taxes on them is like spinning a string: it isn't going to raise spending or production.
Others contend too that corporate taxation is an important democratic cap on excessive
corporate control.

3. Property tax
Property tax is charged on properties such as land and buildings and is used for maintaining public
services such as the police and fire departments, schools and libraries, as well as roads.

Definition: Property tax is the annual amount paid by a land owner to the local government or the
municipal corporation of his area. The property includes all tangible real estate property, his house,
office building and the property he has rented to others.

Description: In India, the municipal corporation of a particular area assesses and imposes the property
tax annually or semi annually. The tax amount is based on the area, construction, property size, building
etc. The collected amount is mainly used for public services like repairing roads, construction schools,
buildings, sanitation

Central government properties and vacant property are generally exempt. Property tax comprises taxes
like lighting tax, water tax and drainage tax.

Property tax is the amount that is paid by the landowner to the municipal corporation or the local
government for his/her area. The tax must be paid every year. Property, office buildings, and residential
homes that are rented out to third parties are considered real estate assets.

Property tax is charged by the government on all tangible real estate that an individual owns. These real
estate assets could include residential homes, office buildings and premises rented out to third parties.
It also known as house tax.

Taxes are a government's principal source of revenue, with the amount of money collected dictating the
resources accessible to residents. Every property is a taxable asset, and the property tax is an annual
sum paid to the government by the property/landowner. Depending on government policy, this tax
could be paid to the local state government or the Municipal Corporation.
In this sense, "property" refers to any physical real estate under an individual's possession, which
includes houses, office buildings, and premises rented to third parties. Property tax as a concept has
been around for centuries and is recognized all across the world, with records dating back to the Middle
Ages of farmers and peasants paying tax on their land.

Types of Property
Property in India is classified into four categories, which help the government estimate tax based on
certain criteria. The different property divisions in the country are mentioned below.
1. Land – in its most basic form, without any construction or improvement.
2. Improvements made to land - this includes immovable manmade creations like buildings and
godowns.
3. Personal property – This includes movable man-made objects like cranes, cars or buses.
4. Intangible property