Direct Taxation

Direct Taxation Definition:

Direct tax is the tax levied directly on the tax payer.  The tax amount is deducted directly from the income of the tax payer (in other words the income earner).

The term direct tax can be defined from two points of view: one is the colloquial sense and the other the U.S. point of view.

In colloquial sense the direct tax is the tax levied upon the tax payer directly by the government like the income tax. Income tax is deducted from the individual’s salary directly.

According to U.S. constitutional law direct tax is the charge on property by reason of its ownership.
In India, Central Board of Direct Taxes takes care of all the direct tax matters. It is a significant division of Department of Revenue which comes under the Ministry of Finance, Government of India.

Direct Taxation Basis:

Direct taxes are charged on the basis of residential status but not on the citizenship basis. The tax payers are charged based upon the following factors:

  1. Resident
  2. Resident but not ordinary resident
  3. Non resident

Examples of Direct Tax:

Property tax, tax on corporate income, capital gains tax, personal income tax and tax incentives all come under the purview of direct tax.

Direct Taxation Deductions:

Direct tax deduction according to the Indian Budget of the current fiscal year 2009-2010 is as follows:

Up To Earning Tax (%)
Up to Rs. 1,60,000  Nil tax
Up to Rs. 1,90,000 (for women) Nil tax
Up to Rs.2,40,000 (for residents ,65 Yrs or above) Nil tax
Up to
From Rs.1,60,001 - Rs. 300000                 10% tax
From Rs.300001 to Rs. 500000          20% tax
From Rs.500001 & above                         30% tax

In addition,Education Cess of 3% is levied on the total tax amount.

Calculation of Direct Tax:

Direct Taxation Example 1:
For example if a person A gets 7 lacs per annum without any savings, then his income tax will be:
Gross salary  Rs. 7,00,000
Savings under 80C deductions Rs. 0
Upto  Rs. 1,60,000   0% tax
                 7,00,000 – 1,60,000 = 5,40,000
Tax on 1,40,000(Rs.1,60,001 - Rs. 300000) 10% tax = Rs. 14000
               5,40,000 – 1,40,000 =4,00,000
Tax on 2,00,000(Rs.300001 to Rs. 500000) 20% tax = Rs. 40,000
Tax on remaining  Rs. 2,00,000 ( i.e. 5,00,000 and above) 30% tax  =Rs. 60,000
Total tax on the gross income  = Rs.1,14,000
Plus education cess 3%  on total tax = Rs. 3420
Total tax to be paid = Rs. 1,17,420

Direct Taxation Example 2:
A person B who is a woman earns Rs.2,40,000 per year and she has made no tax savings in that year the tax which she has to pay will be:
Taxable income upto Rs.1,90,000 Nil
Remaining amount Rs. 50,000 10% tax = Rs.5000
Plus education cess 3% on Rs.5000 = Rs.150
Total tax = Rs. 5150

Difference Between Direct Tax and Indirect Tax:

Direct tax is type of taxation where in the tax payer is levied a certain percentage of money by the government from the income he earns. It is applicable to all the individuals and business concerns. It has a slab rate which is fixed by the government wherein the income of the person which falls under the prescribed slab has to pay the money.

On the other hand, there are other taxes which are payable on an activity or a commodity. These taxes are called as Indirect taxes. In the colloquial sense indirect taxes such as sales tax, Value added tax, goods and services tax is a tax collected by an intermediary from the person who bears the whole economic burden of the tax (for example the retail store dealer and the customer who buys the product from him). Examples would be fuel, liquor and cigarettes. An excise duty on motor cars is paid in the first instance by the manufacturer of the cars; ultimately he transfers this to the buyer of the car by levying a higher price. So an indirect tax is one which can be shifted or passed on.

On the contrary direct tax cannot be shifted from one person to the other. It is set by the central government. Although direct tax is legal form of taxation, in some countries critics feel that those countries government are using a fair means to extract money from largely earned persons. But it is important to pay direct taxes to avoid vicious circles of black money and tax evasion.

The Advantages of Direct Tax:

The tax burden is not shifted from one person to the other. Less chance of corruption as it is directly collected from source. These taxes serve the emergencies. They develop a sense of understanding among the people who earn most that they should serve the nation.