Topic: GS3 – Indian Economy – Issues relating to mobilisation of resources

Critical for UPSC to analyse India’s fiscal health, tax revenue trends, and economic performance for policy evaluation and governance.

What are direct taxes?

●   Direct taxes are levied directly on individuals and entities by the government.

●  These taxes cannot be shifted to another person or entity and are borne by the taxpayer themselves.

●   Examples of direct taxes include income tax, corporate tax, capital gains tax, and property tax.

●   Direct taxes are imposed based on an individual’s or entity’s income, profits, or assets.

●   They are an important source of revenue for the government and play a significant role in funding public services and welfare programs.

What are different types of direct taxes?

●   Income Tax: Levied on the income earned by individuals, including salaries, wages, interest, dividends, and rental income.

●    Corporate Tax: Imposed on the profits earned by companies or corporations from their business activities.

●  Capital Gains Tax: Applied on the gains realized from the sale of capital assets such as stocks, bonds, real estate, or precious metals.

●   Property Tax: Levied on the value of property owned by individuals or entities, including land, buildings, and other real estate.

●  Wealth Tax: Tax on the net wealth or assets owned by individuals or entities, including cash, bank deposits, investments, jewelry, and other valuables.

●   Inheritance Tax: Tax imposed on the value of inherited assets or property received by heirs or beneficiaries of an estate.

●   Gift Tax: Levied on the value of gifts received by individuals or entities, typically above a certain threshold, to prevent tax evasion through gifting assets.

 Significance of increase in direct taxes revenue:

●  Government Revenue: Increase in direct taxes revenue signifies a growth in the government’s primary source of income, providing funds for public expenditure, social welfare programs, and infrastructure development.

● Fiscal Stability: Higher direct taxes revenue contributes to fiscal stability by reducing budget deficits, financing government expenditures, and lowering reliance on borrowings, enhancing macroeconomic stability and investor confidence.

● Progressive Taxation: Direct taxes, such as income tax and corporate tax, are typically progressive, with higher-income individuals and companies paying a larger share of their income as tax, promoting equity and redistributive justice in society.

●  Investment in Public Goods: The rise in direct taxes revenue enables governments to invest in public goods and services, including education, healthcare, infrastructure, and social security, enhancing overall welfare and quality of life for citizens.

●  Reduction of Indirect Taxes: Increased direct taxes revenue may allow for a reduction in indirect taxes, such as goods and services tax (GST), benefiting consumers by lowering the cost of goods and services and improving affordability.

● Economic Development: Higher direct taxes revenue reflects a growing economy, increased economic activity, higher employment levels, and rising incomes, indicating a positive trajectory of economic development and prosperity.