Direct Tax

What is Direct tax?

A direct tax is imposed on an individual or organisation by the government. The tax is based on the ability of the individuals to pay, and it is typically imposed on income, property, sales, or other financial transactions of the taxpayer. Direct taxes (imposed on income and wealth) are very different from indirect taxes (imposed on transactions).

Direct taxes are generally progressive, meaning the individuals with higher incomes pay higher rates of taxes than those with lower incomes. The direct tax system allows the government to collect more revenue from the taxpayers who can afford to pay more. Direct taxes are typically designed to serve specific purposes, such as education or infrastructure development.

Advantages of Direct Taxes

The advantages of the direct taxes are mentioned below:

• Equity: Direct taxes encourage fairness by taxing people with higher incomes more than others. People with higher wealth make a greater contribution to the country's development compared to those with lower incomes. It helps in reducing social inequality and ensures that there is a balanced distribution of the tax burden on everyone.
• Stable Revenue Source: For the government, the direct taxes provide a predictable and stable revenue source. They can directly ask for the direct taxes earmarked for specific purposes like education funds, developing infrastructure, etc. This way, the government can use the funds where they are most needed, and also they can ensure that the taxpayers' contributions are serving the societal purposes.
• Difficult to Avoid: the tax liability can be determined directly from the Individual taxpayer's wealth or income. So, that's why it is harder to manipulate or hide from the government. This is the reason that the direct taxes are more difficult to evade or avoid as compared to the indirect taxes.

Types of Direct Taxes

There are some types of taxes that are imposed by the central government directly. Here are the common types of direct taxes:

• Corporate Tax
• Income Tax
• Capital Gain Tax
• Gift Tax
• Estate Tax
• Securities Transaction Tax (STT)
• Dividend Distribution Tax (DDT)