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What are direct taxes?
February, 25th 2013

Taxes are levied by the government on various individuals, firms, companies and other entities to fund the expenses for running the country. There are different ways in which taxes can be classified and one of the prominent categories of tax consists of direct taxes. These are taxes that each one of us will face and here are some important points related to these taxes.

Nature
Direct taxes are all those taxes whose final burden remains on the taxpayer. This will give rise to a situation where the person or the entity on whom the tax is levied and the person or entity who ends up paying the final tax is one and the same. The tax cannot be shifted to someone else as this has to be paid by those on whom the tax is levied.

Example
The most common example of a direct tax is the Income tax that individuals pay on the taxable income that they earn during the financial year. The other example of this is also the corporation tax that companies pay on the profits that they make during the year. Both these taxes arise on the income earned and they cannot be shifted to anyone else making them direct taxes.

How is it levied?

There is a very clear way and manner in which the direct tax is levied so for example in case of Income Tax this is based on the income earned. The exact receipts that would be included and other deductions that would be allowed are also mentioned so that the taxpayer can calculate the amount of the burden and then pay this amount to the government.

Rate

On the question of the extent of the impact of direct taxes the rate at which the tax is levied is important because this ensures the final collection of the tax amount. A lower rate will get more people to comply with the process and this can lead to a larger base of people paying the tax and consequently a larger tax collection. A very high rate will lead to people looking for ways to save tax and this can lead to a smaller tax base.

Changing nature

India has witnessed a change in the nature of tax collections over the last decade. In the budget for the financial year 2000-01 direct taxes constituted 36 per cent of the total tax revenue. In the last budget of 2012-13 the share of direct taxes in the total projected tax revenue has crossed the 50 per cent mark to touch 52 per cent. Increasingly a larger part of the total tax collected now consists of direct taxes and this shows how compliance has increased and also that the tax base has grown.

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