Direct Tax - Meaning, Types & Tax Rates

Advantages of Direct Taxes

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

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.

Tax Rates for 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:

For senior citizens who are above the age of 60 years and below the age of 80 years:

For resident Indians who are above the age of 80 years (Super Senior Citizen):

In addition to the existing tax slabs mentioned above, the Finance Minister Nirmala Sitharaman has introduced a new tax regime on 1st February 2020. However, it should be kept in mind that the new income tax regime is optional and is an alternative for the existing income tax regime. The income tax slabs for the FY 2020-21 under the new regime can be summed up as follows:

New Income Tax Slab for Individuals

Note: The income tax rates mentioned above are optional.

Corporate Tax

The tax rates for domestic and international companies are mentioned below:

Domestic companies:

1. 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%.
2. A surcharge of 10% of the taxable income is levied in case the taxable income is between Rs.1 crore and Rs.10 crore.
3. In case the taxable income of the company is more than Rs.10 crore, the surcharge that is levied is 12%.
4. 4% of the corporate tax is levied as cess.

International companies:

1. 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.
2. 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.
3. In case companies earn more than Rs.10 crore, a surcharge of 5% is levied apart from the basic tax.

1. Capital Gains Tax

1. According to the normal tax slabs, short-term capital gains is levied.
2. In case Capital Gains Tax is computed considering indexation benefit, the long-term capital gains that are levied are taxed as 20%.
3. In case Capital Gains Tax is computed without considering indexation benefit, the long-term capital gains that are levied are taxed at 10%

1. Wealth Tax

1. 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.
2. The formula for net wealth is, Net Wealth = (Sum of all assets) - (sum of all debt).
3. The value of net wealth is considered on March 31 of every year that immediately precedes the assessment year.
4. 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:

1. 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.
2. 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.
3. Regulatory Functions are eliminated: Other regulatory authorities must handle all regulatory functions.
4. Political contributions: 5% of the gross total income that can be deducted will be made towards political contributions.
5. 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.
6. 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.
7. Fringe benefits tax: The tax is levied on employees rather than employers.