Everything You Need to Know About Direct and Indirect Tax as a Business Owner

24 January, 2023

As a business owner, you must comply with the various regulations surrounding business operations per the country's laws. Besides following the appropriate safety regulations and industrial management guidelines, you must abide by the taxation laws. It is only when you pay taxes as per legislation that your business is deemed legal. If you fail to pay the due taxes on time, you could attract penalties. Taxation in India can be broadly divided into two categories – direct and indirect taxes. This article briefly explains how direct and indirect taxes work in India.

What Is direct tax?

Direct tax is levied on a taxpayer personally and cannot be passed on to anyone else. The taxpayer directly pays the tax to the Government of India. In the case of businesses, this tax is referred to as Corporate Income Tax. For business owners, their income tax is based on their annual earnings or revenue. They must pay taxes according to the income generated during a financial year, and the quantum of tax depends on the tax bracket they belong to. Most businesses in India typically pay their direct tax returns in advance tax based on their annual projections. If their tax liability is lower than the actual tax paid at the end of the financial year, they can file for refunds. The tax rate for domestic companies and foreign companies also varies with tax rates for foreign companies being slightly higher.

What is indirect tax?

Another type of tax the Government of India imposes is the indirect tax, which is levied on goods and services. Before the introduction of the Goods and Services Tax (GST), the government imposed a list of indirect taxes. But with the GST, the various indirect taxes were amalgamated into one. Note that the GST rate depends on the product purchased or service obtained and can range from 5% to 28%, based on different establishments.

The GST subsumed various indirect tax laws to make the tax system more efficient. Here are a few types of indirect taxes imposed on products and services in India prior to GST:

• Customs duty: Customs duty refers to the import duty applied on goods brought from outside the country, paid by consumers and retailers.

• Central excise duty: Manufacturers had to pay central excise taxes. They typically transferred the burden of this tax to wholesalers and retailers.

• Service taxes: The service provider imposed a service tax on recipients according to the aggregate or gross amount.

• Sales tax: Retailers were required to pay sales tax. However, today, this burden is transferred onto customers, who must pay GST.

• Value Added Tax (VAT): VAT was collected on the value of goods and services. It was added at every stage of the manufacturing and distribution process and passed on to the customer.
  
  

GST rendered all of the indirect tax examples listed above obsolete and has brought about a host of positive reforms. It has prevented the cascading of taxes wherein the consumer had to shoulder the burden of taxation at every stage, and bear inflated prices. It has also made indirect tax payments simple and organised.

Today, business owners can conveniently comply with direct and indirect tax laws. While all indirect taxes are combined under one umbrella, businesses can file their direct taxes online. As a business owner, having your GST documentation in place allows you to approach financial institutions to avail of their products and services for business growth.

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*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.