Question

Refer the given text carefully: According to the Economic Survey 2024-25, the government budget’s projections for the fiscal year 2025-26 indicate that gross direct tax revenue will rise by 12.7%, while gross indirect tax collections are expected to grow by 8.3% relative to FY 2024-25. Direct taxes include income tax and corporate tax, reflecting earnings and profits of households and firms. It plays a key role in revenue growth of the government. Indirect taxes encompass Goods and Services Tax (GST), custom duties and other transaction-based levies. Higher growth rate projected for direct taxes suggests a push to enhance tax buoyancy through improved compliance and reforms. On the other hand, indirect taxes are expected to benefit from consumption trends and Goods and Services Tax (GST) administration improvements. The balance tax strategy aims to mobilize resources while supporting fiscal consolidation and sustainable economic growth. On the basis of the above passage and common understanding, answer the following questions: (i) Differentiate between the two types of taxes indicated in the above text, with suitable examples. (ii) Elaborate the likely consequences of the tax projections made by the government.

Hint:

Remember: Direct taxes are paid directly by individuals and businesses based on their income or wealth, while indirect taxes are passed on to the consumer as part of the price of goods and services.

Answer 1

Step 1: (i) Distinguishing Direct and Indirect Taxes.

Direct Taxes: These are levied on the income or property of individuals and companies. The liability to pay and the actual burden of the tax fall on the same person (e.g., Income Tax, Corporate Tax). They are generally progressive in nature.

Indirect Taxes: These are levied on the consumption of goods and services. The liability to pay is on the seller, but the burden is shifted to the final consumer (e.g., GST, Customs Duty). These are generally regressive in nature.

Step 2: (ii) Consequences of the Projections.
1. Fiscal Consolidation: Stronger tax growth helps the government reduce the fiscal deficit, leading to a more stable macro-economy.
2. Social Equity: Since direct taxes are growing faster (12.7%), the government is generating more revenue from those with higher ability to pay, which can reduce income inequality.
3. Improved Compliance: The projected rise in direct taxes suggests that technological reforms and better administration are successfully bringing more taxpayers into the formal net.
4. Reflecting Consumption Health: The 8.3% growth in indirect taxes signals robust domestic demand and higher spending levels by the public.