Rise in Direct Tax

Rise in Direct Tax

Subject: Economy

Context: Direct tax growth in Covid year.

Details:

• Telangana, Chhattisgarh, Karnataka, Rajasthan and Gujarat recorded the highest growth rate in net direct tax collections in 2021-22 as against the pre-Covid period of 2019-20.
• The northeaster states of Nagaland, Mizoram, and Manipur also witnessed an increase in tax collections.
• Sikkim and Meghalaya recorded a decline.
• Maharashtra, Delhi, Karnataka, Tamil Nadu, and Gujarat accounted for 73 per cent of the country’s total net direct tax collections.
  • Maharashtra-37%
  • Delhi- 12.6%
  • Karnataka -11.9 %

Causes of rise:

• Rise in industrial activity
• Rise in compliance in States -Rajasthan, Chhattisgarh
• Government schemes-towards curbing tax evasion, widening/deepening of the tax base, promoting voluntary compliance, digital transactions along with taxpayer outreach initiatives.
• Establishment IT and startup hubs in Tier 2 cities.

Concept:

Direct Tax regime:

A direct tax is a tax that a person or organization pays directly to the entity that imposed it.

An individual taxpayer, for example, pays direct taxes to the government for various purposes, including income tax, real property tax, personal property tax, or taxes on assets.

Types of Direct tax in India

Income Tax:

• Income tax is perhaps the most well known direct tax imposed by the government on annual income generated by businesses and individuals.
• Income tax is calculated as per the provisions of Income Tax Act, 1961 and is directly paid to the central government on an annual basis.
• Income does not only mean money earned in the form of salary. It also includes income from house property, profits from business, gains from profession (such as bonus), capital gains income, and ‘income from other sources’.
• Income tax is levied on the income of individuals, Hindu undivided families (HUF), unregistered firms and other associations of people.

Corporate Tax

-At present, companies having gross turnover up to Rs.250 crore are liable to pay corporate tax at 25% of the net profit while companies with a gross turnover of more than Rs.250 crore are liable to pay the corporate tax at 30%.

Minimum Alternative Tax (MAT)

MAT is imposed on “zero tax companies”, which typically refer to companies that declare little or no income in order to save tax.

Fringe Benefits Tax (FBT)

The FBT tax is imposed on the fringe benefits like drivers and maids provided/paid for by companies to their employees.

Dividend Distribution Tax (DDT)

An amount that is declared, distributed or paid as dividend to the shareholders by a domestic company is taxed under the Dividend Distribution Tax. It is applicable to domestic companies only. Foreign companies distributing dividends in India do not pay this tax (such dividends are taxable in the hands of the shareholder).

Securities Transaction Tax (STT)

 The SST is imposed on the income which the companies get through taxable securities transactions. This tax is free of any surcharge.

Capital Gains Tax

The capital gains tax is imposed on the income derived from the sale of investments or assets. On the basis of the holding period, capital tax is categorized under short-term gains and long-term gains.

Composition of taxes in Gross tax revenue 

Tax buoyancy explains this relationship between the changes in the government’s tax revenue growth and the changes in GDP.  It refers to the responsiveness of tax revenue growth to changes in GDP. When a tax is buoyant, its revenue increases without increasing the tax rate.

A tax is considered buoyant if it is above 1. The tax buoyancy came in at about 2, which means the rate of growth in tax collection was around twice as fast as nominal GDP growth.

Determining factors:

• size of the tax base
• friendliness of the tax administration
• reasonableness and simplicity of the tax rates
• lesser the tax rebates and reductions