- Team Orbis Economics
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Image Source: www.freedigitalphotos.net |
Tax announcements are perhaps the
most keenly awaited aspect of the annual budget every year by individuals and
businesses alike. This is because they directly impact either the income in
hands of people and enterprises or increase the prices they pay for products
and services. In this edition of budget related concepts we look at direct
taxes. These taxes – like income tax and corporate tax – affect the incomes
directly. As a result direct taxes can impact the profitability for businesses
and potential demand from consumers as well as disposable incomes for the
income tax payers.
What are direct taxes?
Tax heads can be divided into two
parts – direct and indirect. Direct taxes are called so because their impact on
an individual or esnterprise’s income is exactly that- direct. An increase in
direct tax rate results in less income in the hands of the payee and a decrease
in the direct tax rate results in higher income in the hands of the payee.
Direct taxes are divided under
various heads like income tax, corporation tax, property tax and capital gains
tax among others. However, the two most important direct taxes are income tax
and corporation tax.
What is income tax and why is it important?
Income tax is the tax on the
total income earned by an individual. All salaried people with an income above
a threshold limit pay an income tax, it is also the only direct tax liability
for businesses that function as sole proprietorships. As per the last Union
Budget (2012-13), income tax was payable for a level of income above Rs. 2 lakh.
It is divided into various slabs, with 30% as the rate for all with an income
over Rs. 10 lakh.
Changes in income tax rates thus
determine the money in hand for salaried individuals and sole proprietors. As a
second round effect, they impact the spending decisions of consumers that buy
goods and services produced. Discretionary consumer spending on goods and
services i.e. that, which is not compulsory - like entertainment, beauty and
health care and luxury goods, for instance, are most likely to get impacted by
tax rate changes. So as an individual, income tax changes will determine how
much you can spend and save, and as a business, it will help you plan for
demand for your products and services in the next year.
What is corporation tax, who pays it and why is it important?
Corporation tax or corporate tax,
as it is often called, is the tax levied on all registered companies in India.
These can be both Indian and foreign companies present in India. While Indian
companies have to pay corporate tax on their overall income, even if it is
earned outside the country, foreign companies only need to pay tax on their
income earned in India. Corporate tax rates are important because they can
impact the net incomes of companies and also impact the B2B demand for various
products and services. At present the effective corporate tax rate for Indian
companies is at 30%.
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