Explaining direct and indirect taxes faced by MSMEs in India: three-way payment licences in India

In India's traditional Union Budget, the discussion usually centred on indirect taxes and how the cost of goods and services rises each year due to the new tariff rates imposed by the government. However, with the implementation of the Goods and Services Tax (GST), the Union Budget deals only with import duties and no longer includes other indirect taxes. As a result, budget presentations now focus more on direct taxes and the impact they have on companies and individuals.

This paper will look at the direct and indirect tax issues faced by Indian companies.

What are direct and indirect taxes?

Despite being paid by organisations, there is a huge difference between direct and indirect taxes. Taxes are divided into two main categories - direct and indirect.

As the name suggests, a direct tax is a tax that a company pays directly to the government. This tax cannot be passed on to other entities. Income taxes earned by corporations are direct taxes. These taxes are not transferable and must be borne by the taxable entity. In most cases, domestic corporations pay a fixed rate of 30% on their income, plus surcharges, if any. In contrast, foreign corporations are subject to a stricter tax rate of 401 TP3T on their income, plus possible surcharges.

Indirect taxes, on the other hand, are taxes levied on the sale of any product or service. If a company does not sell goods or services that the government deems to be taxable, these taxes will not be involved. Earlier, Value Added Tax (VAT) and Service Tax were applicable on the sale of goods and services respectively. With the inclusion of GST, most goods and services are now subject to a single tax.

Difference between direct and indirect taxes

Although the responsibility for paying direct and indirect taxes rests with businesses, there are significant differences between the two:

While direct and indirect taxes apply to all eligible entities, the ultimate consumer bears the indirect tax, while each entity is responsible for paying its share of the direct tax. Direct taxes are single-stage taxes that apply to certain transactions or income of a company. In contrast, an indirect tax is a multi-stage tax levied at each stage of production and distribution of a product. Direct taxes are not transferable, while indirect taxes are transferable. As a result, an entity that pays indirect taxes on the purchase of a product can usually report it as an input tax. Businesses can generate income tax benefits by investing in tax-saving instruments or by meeting specific criteria set by the government. However, it is not possible to avoid indirect taxes or reduce their liability.

Types of direct and indirect taxes

Companies operating in India are subject to a wide range of direct and indirect taxes.

Types of direct taxes

Direct corporate tax is a tax on income earned by a company in India. It consists of the following:

Profits and gains from business and occupation

capital gain

property gain

Proceeds from other sources

Types of indirect taxes

In addition, the Company is subject to the following indirect taxes, where applicable:

Types of Indirect Taxes You Must Know

Securities Transaction Tax (STT), applicable to securities sold on Indian stock exchanges, including shares, bonds, scripts, derivatives, equity-linked savings schemes, etc.

Dividend Distribution Tax (DDT), levied on the payment of dividends to shareholders.

If a company chooses to pay tax under the MAT structure, a minimum alternative tax (MAT) is levied for zero-tax companies.

For indirect taxes, GST is the main contributor to the entity. It replaces a wide range of indirect taxes that existed earlier. India follows a dual structure whereby the central government and the states or union territories can pre-determine the revenue sharing.

GST is a tax on the sale, transfer, disposal, rental, etc. of goods or services and requires interstate registration based on cash or kind. Though certain basic goods fall under the tax bracket of 0%, there are four main tax rates for GST calculation and return - 5%, 12%, 18% and 28%.This is a far cry from the flat tax rates practiced in most other countries to ensure a seamless tax structure for businesses.

In addition, companies are required to deduct occupational tax from employees' salaries. The exact amount depends on the applicability of the occupational tax and the bonus received by each salaried individual.

If any enterprise is engaged in import or export of goods, it is required to pay customs duty to the Government as an indirect tax. India follows the globally recognised Harmonised System (HSN) classification rules to prescribe the duties payable.

The last indirect tax in force in India is the Value Added Tax (VAT). It currently applies only to the price of alcohol and tobacco or products and is paid by the companies handling such products.

reach a verdict

India has deep-rooted structural problems in ensuring a clear and accessible tax system for corporations. the implementation of GST was supposed to be an excellent opportunity to right the ship. However, its diverse tax rates have introduced the same ambiguity as before.

As a result, we often see organisations, especially Micro, Small and Medium Enterprises (MSMEs), suffering from tax fatigue or failing to properly handle their tax liabilities. As a result, there is a need to implement robust IT solutions, such as an integrated tax payment gateway, to help them handle their taxes more efficiently.

PayU India offers a fully integrated and robust payment solution for your offline and online business. Moreover, it is GST-ready, so our omni-channel solution can seamlessly handle most of your indirect tax needs.

Click here to get rid of tax hassles by adopting PayU India for your daily transactions.