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Direct Taxation:
Let us look into what direct taxation is in general and how does direct taxation work in India. Direct taxation is the type of taxation in which any individual or any organization would be made liable to pay the taxes directly to the concerned authority. By authorities, we mean the respective government. One of the examples of direct taxation is the Income-tax that a company or person pays to the government as per their respective tax slabs as and when they are required to do so. Generally, direct taxes are imposed on these taxable incomes of organizations and individuals. Some of the other direct taxes include property taxes, the tax imposed on various assets etc., which comes under the umbrella of wealth tax when compared to income tax.Secondly, an External audit which is contrary to the internal audit, is done by the auditors who are not parties to the respective auditors of the concerned company.
The purpose of this kind of external audits is to make sure there are no biases in the process of reviewing or analyzing the company’s financials or the misstatements in the financial statements.
Thirdly, an Internal Revenue Service audit is an audit where their purpose is to analyze the accuracy or the certainty of any taxpayer’s return individually or in any corporate organization.Coming to the Indian Scenario, the Income-tax act of 1961 regulates various direct taxes in India. As per the Income-tax act of 1961, direct taxes includes the taxes levied on corporate organizations (corporate tax), which earns profits, and it is also levied on the income generated by any individual or an organization out of their business (income tax).
Thirdly, an Internal Revenue Service audit is an audit where their purpose is to analyze the accuracy or the certainty of any taxpayer’s return individually or in any corporate organization.
Types of Direct Taxes in India:
Taxes that are to be paid by the corporate organization such as companies etc. can be brought under the purview of corporate taxes, which includes
- taxes on securities transaction (incomes received out of securities transaction),
- on dividend distribution (dividends received or paid by the shareholders to the company and such will not apply to foreign companies),
- fringe benefit taxes (taxes levied on benefits paid or given to employees by employer) and
- Minimum alternate taxes (applies to companies with zero tax as per companies act)
As mentioned earlier, direct taxes on individuals would include the taxes on their income and also on the amount of wealth or properties or assets that he/she possesses. Income taxes in India are applied as per tax slabs – based on the age and amount of income. For example, if a person earns an income of around 5 lakh per year, then the percentage of tax would range to 5%. Similarly, the slabs will apply depending on their income as per the income tax act of 1961. Filing of tax returns by an individual is seen to be a must-compliance in India.As part of wealth tax, the taxes are levied on an annual basis based on the market value of the properties in possession. Gold deposits and holding, stocks, commercial properties etc., are excluded from the wealth tax applicability in India. Estate taxes are also levied in India based on the market value of an estate held by an owner during or after his lifetime.
Indirect Taxation:
Having seen what direct taxes are and how it works, it is essential to determine what indirect taxes are, how is it different from direct taxes and how does it work. Indirect taxes, as the name suggests, are levied on the consumers of any services or goods. One major difference between direct and indirect taxes is the transferability of tax liability from one person to another, which means that direct taxes are not transferrable from one party to another, whereas indirect taxes are transferrable. To further clarify this, let us assume that the service provider of electricity has the liability to pay indirect taxes to the government, and the service provider shall charge an extra amount within the rate of service to every consumer. So, once the consumer pays the electric charge to the service provider along with a certain percentage of tax, such amount shall be paid by the service provider to the government.
Here there is transferability of taxes occurring.Thirdly, an Internal Revenue Service audit is an audit where their purpose is to analyze the accuracy or the certainty of any taxpayer’s return individually or in any corporate organization.
Service tax, VAT, excise duty etc., forms various types of indirect taxes.
- Service taxes are levied by anybody who gave service to any consumer.
- Excise duty is levied on any manufacturer who has manufactured a product in India. This tax, which is paid by the manufacturer to the authority, shall be gained from the consumers – to whom the manufacturer sells the product.
- Another type of indirect tax is the customs duty levied on the goods exported and imported outside the Indian Territory.
Capital Gains:
Capital gains are mostly seen in recent mergers and acquisitions that took place in India, where the sale of assets as part of mergers have taken place. Capital gains tax is nothing but the tax that is paid for any sale of assets. In the business environment, when a company sells the assets which it has been in possession of for a certain amount of time, then any gains or profits received out of the sale of such assets are taxable as per Income tax act, 1961.
Goods & Service tax:
One of the major reforms that took place in Indian taxation was the introduction of the Goods and Service tax system in the year 2017. Few of the indirect taxes that we have discussed above have been replaced by GST. Unlike other taxes, it is one tax which shall be applied across the country without any changes. States and the Union shall have SGST and CGST accordingly on the supply of goods and services.