Tuesday, May 24, 2022

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Budget | Explained: Direct and Indirect taxes

The Union Budget is the most important executive document published by the Government of India every year. In its annual Union Budget, the central government provides details of how much money it expects to receive from various sources and how it intends to spend the money.

India earns about 70-80 per cent of its total revenue through taxes. While taxation is the primary source of income for the government, it also generates a recurring income, called non-tax revenue. It comes from dividends and profits of public sector enterprises, interest, regulatory fees, fines and user charges for publicly provided goods and services.

Tax revenue comes from two categories, direct taxes and indirect taxes. 

Direct taxes

As the name suggests, it is levied directly on the taxpayers. Direct taxes include income tax and corporation tax. Income tax is levied on individuals and businesses other than companies. It is paid on income earned during a particular financial year.

Corporation tax is the money paid by companies on the profits, made by them in a given financial year.

Indirect taxes

Indirect tax is levied by the government on goods and services, and not on the income, profit or revenue of an individual.

India introduced the Goods and Services Tax on July 1, 2017. It replaced many indirect taxes like VAT, excise duty, service tax, etc.

Indirect tax is not paid directly to the government by an individual but is collected and given to the government by an intermediary such as a manufacturer, trader or service provider. Indirect taxes include GST, Central Excise and Customs duty.

India’s Direct and Indirect tax collection

In the financial year 2021, India’s direct tax collection was Rs 9.45 lakh crore while indirect tax collection was Rs 10.71 lakh crore. Direct taxes in India are monitored by the Central Board of Direct Taxes (CBDT) and indirect taxes are monitored by the Central Board of Indirect Taxes and Customs.

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