What is direct tax and indirect Tax.

Direct Tax  

As the name suggests, are taxes that are directly paid to the government by the taxpayer. It is a tax applied on individuals and organizations directly by the government e.g. income tax, corporation tax, wealth tax etc.

Indirect Tax

Are applied on the manufacture or sale of goods and services. These are initially paid to the government by an intermediary, who then adds the amount of the tax paid to the value of the goods / services and passes on the total amount to the end user.

Examples of these are sales tax, service tax, excise duty etc.

Most important direct tax and indirect tax

Income Tax 

Income Tax is paid by an individual based on his/her taxable income in a given financial year. Under the Income Tax Act, the term ‘individual’ also includes Hindu Undivided Families (HUFs), Co-operative Societies, Trusts and any artificial judicial person. Taxable income refers to total income minus applicable deductions and exemptions.

Tax is payable if the taxable is above the minimum taxable limit and is paid as per the differing rates announced for each tax slab for the financial year.

Corporation Tax

Corporation Tax is paid by Companies and Businesses operating in India on the income earned worldwide in a given financial year. The rates of taxation vary based on whether the company is incorporated in India or abroad.

Wealth Tax

Wealth tax is applicable on individuals, HUFs or companies on the value of their assets in a given financial year on the date of valuation. It is taxed at the rate of 1% of the net wealth of any assesse exceeding Rs 30,00,000.

‘Net wealth’ here includes, unproductive assets like cash in hand above Rs 50,000, second residential property not rented out, cars, gold jewellery or bullion, boats, yachts, aircrafts or urban land. It does not include productive assets like commercial property, stocks, bonds, fixed deposits, mutual funds etc.

Capital Gains Tax

The profits made on sale of property are taxable under Capital Gains Tax. Property here includes stocks, bonds, residential property, precious metals etc. It is taxed at two different rates based on how long the property was owned by the taxpayer – Short Term Capital Gains Tax and Long Term Capital Gains Tax. This deciding period of ownership varies greatly for different classes of property.

Indirect Taxes

Sales Tax

Sales Tax is charged on the sale of movable goods. It is collected by the Central Government in case of inter-state sales (Central Sales Tax or CST) and by the State Government for intra-state sales (Value Added Tax or VAT). The rates of taxation vary depending on the product type.