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Budget 2024: Direct And Indirect Tax; How It Affects Individuals & Businesses?
On July 23, Union Finance Minister Nirmala Sitharaman is going to present the budget in the Lok Sabha for the fiscal year 2024-25. This is the first budget after the outcome of the Lok Sabha election. The government has to generate money in order to fund social programmes, build infrastructure, fund public transportation, and bolster the armed forces of the nation, among other things. Taxes are the primary source of income for all governments worldwide. India has three tiers to its tax system: state, central, and local municipal bodies. In India, there are two main categories of taxes: direct tax and indirect tax. Let's examine these two tax forms and distinguish between direct and indirect taxes.
What Is Direct Tax?
According to Gaurav Goel (Entrepreneur, SEBI registered Investment Advisor), "Direct taxes are levied on the income and profits of individuals or corporates. Such taxes are non-transferrable. This means that the person or entity on whom such taxes are levied has to pay the taxes themselves and no one else. Such taxes are usually progressive in nature. This means that individuals with lower income pay lower taxes. One big disadvantage of this source of tax collection is the concealment of income by individuals. Hence full tax collection based on real income is nearly impossible. The nodal body that governs and administers such taxes in India is the Central Board of Direct Taxes (CBDT). Main examples of direct taxes are Income Tax, Capital Gains Tax, Corporate Tax, Gift tax, Securities Transaction Tax etc."
What Is Indirect Tax?
Indirect taxes are levied on goods and services that are consumed by individuals or corporations. A tax paying entity can transfer the impact of this tax to others hence it is transferable. Usually, the end customer bears the brunt of these taxes. One big advantage of indirect taxes is that almost every citizen contributes to these taxes based on the quantity of consumption of the goods and services. Such taxes are regressive in nature. Normally, there is a fair distribution of tax here with essential goods attracting lower tax vis-à-vis luxury goods. The nodal body that governs and administers such taxes in India is the Central Board of Indirect Taxes and Customs (CBIC). Main examples of indirect taxes are Goods and Services Tax, Sales Tax, Customs Duty, Octroi Tax, Value Added Tax etc, as per Gaurav Goel.
Direct & Indirect Tax Examples
As per Chakrivardhan Kuppala, Cofounder and Executive Director, Prime Wealth Finserv, Direct taxes are imposed on individuals' income and capital gains, collected directly by the Central Board of Direct Taxes (CBDT). They are progressive, aiming to balance economic disparity but can be burdensome due to extensive documentation and the potential for evasion. The impact of direct taxes is felt directly by the taxpayer, influencing disposable income and savings. For example, an individual earning INR 10 lakhs annually may pay around INR 1 lakh in income tax.
"Indirect taxes are levied on goods and services, collected by intermediaries before reaching the government through the Central Board of Indirect Taxes and Customs (CBIC). They are regressive, affecting all economic classes equally and are included in the price of goods and services, making evasion difficult but increasing costs for consumers. For instance, a GST of 18% on a product priced at INR 1,000 increases its cost to INR 1,180. Indirect taxes impact everyone by raising the overall cost of living," said Chakrivardhan Kuppala.
Difference Between Direct And Indirect Tax
"The key differences between direct and indirect taxes lie in their administration and burden. Direct taxes, governed by the CBDT, are paid by individuals and entities based on their income and capital gains, directly impacting their financial standing. In contrast, indirect taxes, managed by the CBIC, are embedded in the price of goods and services, affecting consumers equally regardless of income. While the burden of direct taxes cannot be shifted and remains with the taxpayer, the burden of indirect taxes can be transferred to consumers, making everyday purchases more expensive. Additionally, direct taxes are progressive, aiming to reduce economic disparity, whereas indirect taxes are regressive, potentially increasing the financial burden on lower-income individuals," said Chakrivardhan Kuppala.
According to Suman Bannerjee, CIO, Hedonova. The 2024 budget introduces significant changes to direct and indirect taxes, each impacting individuals and businesses differently. Direct taxes, like income tax, are charged on the earnings of individuals and corporations, directly affecting disposable income and savings. These taxes can be adjusted to provide relief or require higher contributions, significantly impacting the salaried class. Indirect taxes, such as GST and excise duty, are applied to goods and services, influencing consumer prices and spending habits. The main differences between these taxes include their tax bases, who bears the burden, and how visible they are to taxpayers. Direct taxes are typically more progressive, while indirect taxes can be more regressive, affecting lower-income groups disproportionately."
How Direct And Indirect Taxes Affect Both Individuals And Businesses?
As per CA (Dr.) Suresh Surana, In Budget 2024, the distinction between direct and indirect taxes is crucial as it directly affects both individuals and businesses in various ways.
Direct Taxes: Direct taxes are levied directly on individuals and entities by the government based on their income or profits. Key direct taxes include income tax, corporate tax, and capital gains tax and may impact in the following manner:
- Personal Income Tax: This tax is levied on the income earned by individuals. Budget changes in income tax rates or slabs directly affect how much tax an individual pays on their earnings.
- Corporate Tax: Businesses are subject to corporate tax on their profits. Changes in corporate tax rates or deductions impact business profitability and investment decisions.
- Capital Gains Tax: This tax is applicable on the profit earned from the sale of assets such as stocks, real estate, or valuable items. Budget changes can alter the tax rates or exemptions on such gains.
Indirect Taxes: Indirect taxes are imposed on goods and services rather than on income or profits directly. These taxes are usually passed on to consumers through higher prices. Key indirect taxes include GST (Goods and Services Tax), customs duty, and may impact in the following manner:
- GST: GST is a unified tax levied on goods and services in India. Changes in GST rates or classifications can affect the prices of goods and services, impacting consumers' purchasing power.
- Customs Duty: This tax is imposed on goods imported into or exported out of the country. Changes in customs duty rates influence the cost of imported goods and affect international trade dynamics.
Impact on Taxpayers:
Direct Taxes: Changes in direct taxes directly affect the taxpayer's disposable income, savings, and investment decisions. Lower tax rates or increased deductions can leave taxpayers with more money in hand, while higher taxes may reduce their disposable income.
Indirect Taxes: Changes in indirect taxes influence the prices taxpayers pay for goods and services. Lower indirect taxes can lead to reduced prices, benefiting consumers, while higher taxes may increase the cost of living.
Key Differences:
Nature of Taxation: Direct taxes are levied on income or profits earned directly by individuals or businesses, while indirect taxes are imposed on consumption of goods and services.
Impact on Prices: Indirect taxes affect the prices of goods and services, whereas direct taxes impact the income and profits of individuals and businesses.
Economic Implications: Direct taxes influence savings, investment, and economic growth directly, while indirect taxes affect consumer behaviour and overall consumption patterns.
It is pertinent to note that understanding these distinctions and the implications of Budget 2024's changes in direct and indirect taxes is crucial for individuals and businesses alike in planning their finances and operations effectively.
Advantages And Disadvantages Of Direct Tax
Manikandan S, Tax Expert, Cleartax said, "Direct tax is levied on people's income or profits. For example, a taxpayer pays the government for different purposes, including income tax, personal property tax, FBT, etc. The burden has to be borne by the person on whom the tax is levied and cannot be passed on to someone else. Central Board of Direct Taxes (CBDT) governs and administers the Direct Tax."
| Advantages | Disadvantages |
|---|---|
| Individuals with lower incomes pay lower taxes than people with higher incomes, i.e, progressive in nature. | Fraudulent practices through which taxpayers often pay lower taxes or avoid taxes. |
| Curbs inflation and reduces inequalities. | The documentation process can be complex and time-consuming |
| Sense of certainty as both the government and taxpayer are aware of what and when to be paid. | The burden cannot be transferred to any other in the chain. |
Advantages And Disadvantages of Indirect Tax
Manikandan S has pointed out the key advantages and disadvantages of indirect tax below.
| Advantages | Disadvantages |
|---|---|
| Every Individual contributes to nation-building | Increase in overall price of goods and services |
| Easily collectable from the end consumer | Consumers often lack knowledge of the taxes paid |
| Fair Distribution of tax, i.e, essential goods are charged lesser compared to goods that are luxurious. | It is regressive in nature. |
| The burden of paying can be transferred to the end consumer. | The amount received in tax is often unpredictable as the tax paid depends on the goods and services purchased |
What Does A Common Man Need To Know?
| Direct Tax | Indirect tax |
|---|---|
| Tax on income or wealth | Tax on goods or services |
| Progressive in nature | Regressive in nature |
| The tax burden cannot be shifted, i.e., the person who pays the tax to the Government cannot recover it from somebody else. | The tax burden can be shifted, i.e. the person paying the tax passes on the incidence to another person. |
Disclaimer: The views and recommendations expressed are solely those of the individual analysts or entities and do not reflect the views of GoodReturns.in or Greynium Information Technologies Private Limited (together referred as “we”). We do not guarantee, endorse or take responsibility for the accuracy, completeness or reliability of any content, nor do we provide any investment advice or solicit the purchase or sale of securities. All information is provided for informational and educational purposes only and should be independently verified from licensed financial advisors before making any investment decisions.
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