What is Direct Taxes? 

The direct taxes imposes itself on a person (juristic or natural) or property (i.e., real and personal property, livestock, crops, wages, etc.), distinct from a tax imposed on a transaction. In this sense, indirect taxes, such as sales or value-added tax (VAT), impose themselves only when a taxable transaction occurs.

People have the freedom to engage in or refrain from such transactions. In contrast, a direct tax (in the general sense) imposes itself on a person, typically unconditionally, such as a poll tax or head tax, which imposes itself based on the person’s very life or existence, or a property tax, which imposes itself on the owner by ownership rather than commercial use. 

Direct taxes are thought to be borne and paid by the same person. The person who pays the amount of direct tax does not recover all or part of the tax elsewhere.

In this sense. Direct taxation is opposed to indirect taxation. The notion of fiscal incidence allows us to analyse who ultimately weighs the burden of a tax and determines whether the tax is direct or indirect. 

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Major Functions Of Direct Taxes? 

The Direct Tax worldwide primarily aims for tax collection, and every point of value addition attracts tax. Its flow is as follows :

1.Revenue Generation: The primary function of direct taxes, which include income taxes and corporate taxes, is to generate revenue for the government. This revenue is beneficial for funding public services, infrastructure projects, and government programs aimed at national development.

2. Redistribution of Wealth: Direct taxes are structured progressively, meaning higher-earning businesses pay more, which helps narrow the income inequality gap for all. Governments can redistribute wealth more effectively and promote social equity by taxing higher-income individuals or entities at increased rates.

3. Encouraging Savings and Investments: Certain tax policies, such as deductions or exemptions on savings and investments, encourage individuals and corporations to save or invest in it, thus promoting capital formation. This is crucial for economic growth and improving the financial health of citizens and the country.

So, summing up direct tax comes back to the end-consumer. This tax is also indirect, and it is clear that every business has to pay the government at every stage. 

Types of Direct Taxes

1. Income tax: It is based on one’s income. Employers deduct a certain percentage from a worker’s salary based on how much they earn. The good thing is that the government is also keen on listing credits and deductions that help lower tax liabilities.

2. Transfer taxes: The most common form of transfer taxes is the estate tax. This tax is levied on the taxable portion of the property of a deceased individual, including trusts and financial accounts. A gift tax is another form of tax that collects a certain amount from people transferring properties to another individual.

3. Entitlement tax: This type of direct tax is why people enjoy social programs like Medicare, Medicaid, and Social Security. 

4. Property tax: Property tax charges individuals on properties like land, buildings, shops, and small industries. It also funds the maintenance of public services such as police and fire departments, schools, and libraries.

Direct and Indirect taxes Difference

1. Nature of Taxation:

Direct Tax: Paid directly by individuals or organizations to the government. It implements taxes on income, property, or profits.

Indirect Tax: Implemented on goods and services and collected by a retailer. The end consumer holds the tax burden.

2. Point of Incidence:

Direct Tax: The person who ultimately pays the tax and the person on whom the tax is proposed fall on the same individual. Example: Income tax.

Indirect Tax: The incidence and impact are on different entities. The seller collects the tax, but the consumer pays it. Examples: sales tax or VAT.

3. Taxpayer Responsibility: 

Direct Tax: Paid by the person on whom it is proposed, based on income or profit generation

Indirect Tax: Collected by a business and passed on to the government, but ultimately paid by consumers.

4. Progressive vs Regressive:

 Direct Tax: Typically progressive, meaning higher-income individuals pay a higher tax rate.

Indirect Tax is regressive since it affects everyone equally, regardless of income. Lower-income individuals may spend a larger portion of their income on consumption-related taxes.

Disadvantages of Direct Income Taxes

Tax evasion: This is probably the biggest disadvantage of such taxes. When loopholes exist in the legal system, the probability of tax evasion through manipulative techniques is higher. Several taxpayers suppress profits by manipulating their financial statements, which reduces their tax liability.

Social conflict: Social conflict is likely because the entire population is not liable to pay these taxes. This may result in criminal acts, inferiority complexes among the lower strata, and social injustice.

Inconvenience: Filing and submitting direct taxes requires the taxpayers to fulfil several formalities and go through numerous procedures, which makes the entire process cumbersome and inconvenient for the taxpayers.

Although these taxes have some disadvantages, direct taxation in India comprises a significant component of the economy. When implemented appropriately, these taxes are an excellent way to prevent inflation and sustain price levels.

Conclusion

India implements various taxes, which have evolved over time. These taxes depend on a person’s income and wealth, distributing the burden according to individual financial capability. This system helps support people from slums and maintains an overall balance in the country’s economic growth.

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