Budget 2024: Know significance of direct and indirect taxes

As Finance Minister Nirmala Sitharaman all set to unveil the Interim Budget 2024-25 on February 1, the spotlight is on the crucial role taxes play in shaping India's economic landscape. Taxes, the lifeblood of government revenue, are a two-fold entity - Direct and Indirect. Taxes form a major source of government revenue and any changes to the taxation policy widely affects individuals and businesses.

The Finance Minister is not expected to make any big announcement on taxation as she presents the Interim Budget in an election year. However, analysts and experts will keep a watch on the Budget speech for announcement on any alteration to the existing tax structure. Let’s take a look at the direct and indirect taxes in India. Ahead of the Budget presentation, it will be helpful to understand the intricacies of announcements on taxation.

Overview of Direct and Indirect Taxes

Direct taxes, such as income tax, property tax, and corporate tax, are paid directly by individuals to the government. The tax burden here is progressive, aligning with one's income level.

Here are some major categories of direct taxes:

1. Income Tax: Income tax, the one we all dread most, is levied on the income earned by individuals and entities in a financial year. The rate increases with higher income levels. Individuals, businesses, and corporations are obligated to pay income tax based on their income during a financial year. There are two tax regimes- old tax regime and new tax regime. In the last year’s Budget, the new tax regime was made the default regime for FY 2023-24 (AY 2024-25). The taxpayers can also opt for the old tax regime.
2. Corporate Tax: Corporate tax is imposed on the profits earned by companies operating in India. Presently, domestic companies with an annual turnover below ₹250 Crore are subject to a 25% tax, while those exceeding this turnover are levied 30% tax. The Income Tax Act introduces a surcharge of 7% for net incomes ranging from ₹1 crore to ₹10 crore, escalating to 12% for higher income increments. It remains to be seen whether the government will make any updates to these rates this year.
3. Capital gains tax: This is applied on the profits earned from the sale of assets such as real estate or stocks. There are short-term and long-term capital gains, with different rates for each, depending on the duration for which the asset is held. Long-term capital gains tax is levied on the gains from any investment or assets held for more than three years.
4. Securities transaction tax (STT): This is levied on transactions involving securities, such as shares and mutual funds.
5. Perquisite tax: This applies to certain privileges provided by your employer, including rent-free accommodation, complimentary electricity and provision of a company car. Perquisites that are exempt from taxation typically include travel allowances, laptops or desktops provided by the organization for official use, medical assistance, free memberships to clubs and contributions to the Provident Fund (PF).

Indirect taxes

On the other hand, indirect taxes, like Goods and Services Tax (GST) and customs duty, are levied on the consumption of goods and services. The burden of these taxes may shift between taxpayers, but ultimately consumers bear the load.

Here is a look at the different categories of indirect taxes:

1. Goods and services tax: Good and services tax is imposed by the government on consumption of various goods and services. GST rates range between 5% and 28% depending on the classification of the goods and services.
2. Excise Duty: Excise Duty is applied to certain products or goods manufactured by companies operating in India.
3. Value Added Tax (VAT): Value Added Tax (VAT), is applied to products sold directly to customers that are movable.
4. Customs Duty: Customs Duty is imposed on items imported into India, and in certain cases, it is also applicable to products exported from the country.
5. Stamp Duty: Stamp Duty is levied on the transfer of immovable property in India and is also applicable to various legal documents.
6. Entertainment Tax: Entertainment Tax is imposed by state governments on transactions related to entertainment businesses. This includes video games, movie tickets, sports activities, arcades and amusement parks

The current dynamics

In the Union Budget for 2023-24, the government estimated a gross tax revenue of about ₹33.61 lakh crore. Out of this, receipts from indirect taxes were pegged at ₹15.37 lakh crore and direct taxes, including corporate tax and income tax, was estimated at ₹18.24 lakh crore. The numbers in the first half of FY 2023-24 reflected an upward trajectory, showcasing a 25.2% rise in direct tax collections and a 6.5% increase in indirect tax collections compared to the same period in the previous fiscal year.