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Direct Taxes

Introduction

A Direct tax is imposed directly on the taxpayer and paid directly to the government by the ones on whom it is imposed. It cannot be shifted by the taxpayer to someone else.

Income Tax: It is levied on and paid by the same person according to the different tax brackets as defined by the income tax department. It is imposed by the government on all the income that is generated by various entities within their jurisdiction. All individuals and businesses have to file an income tax return every year to determine whether they owe any taxes or are eligible for any tax refund.

Corporate Tax: It is also known as the corporation tax. It is the tax on all the income or gains generated by corporations. It is generally levied on the profits earned. The companies and business organizations are taxed on the income under the provisions of Income Tax rules.


Inheritance (Estate) Tax: An inheritance tax which is also known as an estate tax or death duty is a tax which arises on the death of an individual. It is a tax on the estate, or total value of the money and property, of a person who has died.

Gift Tax: It is the tax that an individual receiving the taxable gift pays to the government.

Advantages of Direct Taxes

Social and economic equity
This form of taxation indicates social justice as it is based on the ability to pay. The economic situation of persons determines the rate at which they are taxed. Also the progressive nature of direct taxation can help reduce income inequalities. This is well depicted by the slabs and exemption limits for different sections like women, individuals and senior citizens.

Certainty of tax to be paid
The tax payer is certain as to how much tax is to be paid, as the tax rates are decided in advance. The same implies for the government where it can estimate the tax revenue from direct taxes.

Economical and lower cost mechanism
Collection of direct taxes is generally economical. Like in the case of personal income tax, the tax can be deducted at source (TDS) from the income or salaries of the individuals. So, the government does not have to spend much in tax collection as far as personal income tax is concerned.

Relatively Elastic
Increase in the income of individuals and companies, leads to increase in the yield from direct taxes also. An increase in tax rates would increase the tax revenues. Thereby, direct taxes are relatively elastic.

Controls inflation
Direct taxes can help control inflation. When the inflation is on the uptrend, the government may increase the tax rate. With an increase in tax rate, the consumption demand may decline, which in turn may help reduce inflation.