We all have seen our family discuss the monthly budget which includes the expenses towards food, clothes, rent, school fees, etc, and also some big purchases like a car, house, and more. This is done to plan how much money is needed by the family and how to afford other large expenses.
In a similar manner, the government of every country plans for the country and its people. This is done so that all expenses, which the government has to incur for the development of the country, can be met through taxes.
What are direct taxes?
- In simple terms, we are required to pay direct tax to the government on the income we earn, through salary, renting and selling of properties, shares, business and professional consulting, lotteries, farming.
- Most of the time, the direct tax is deducted in the form of TDS (tax deducted at source). The TDS is deducted by companies when they pay salaries. The companies then deposit the amount to the Government.
What are indirect taxes?
- In simple words, Goods and Services Tax (GST) in India is an indirect tax. We pay this tax on the goods and services we buy.
- The person or company charging the tax from us pays it back to the government.
The cycle of revenue and spendings
- The government is the treasurer (one who is responsible for collection and spending) of the money received from both direct and indirect taxes.
- Government announces spends under various schemes and heads. These expenditures are made out of the taxes received by the Government.
- An increase in taxes leads to lower disposable income (income that is left to spend after paying taxes) for citizens.
The Government prepares estimates of future spends and accordingly decides tax regulation. This is the budget process.