Direct and Indirect Tax
An summary of direct and indirect tax
In this post, we’ll discuss about the Types Of Taxes In India: Direct Tax And Indirect Tax
We will cover the following topics:
- Types Of Taxes In India
- What is Direct Tax?
- Types of Direct taxes
- Advantages and Disadvantages of Direct Taxes
- What is Indirect Tax?
- Types of Indirect taxes
- Advantages and Disadvantages of Indirect Taxes
- What are the Key Differences Between Direct And Indirect Taxes?
- Role of Direct and Indirect Taxes in Economic Policy
- FAQs
Types of Taxes In India
India’s tax structure is divided into three tiers: local municipal bodies, state governments, and the central government. In India, taxes are classed into two categories: direct or indirect. Let us look at these two sorts of taxes to understand the distinction between direct and indirect taxes.
What is Direct Tax?
The term “direct tax” refers to when a taxpayer pays directly to the revenue body. In this case, the taxpayer is responsible for paying the tax and cannot transfer this duty to another firm. India’s Central Board of Direct Taxes (CBDT) collects and administers direct taxes. The Department of Revenue controls CBDT and advises the government on direct tax implementation.
Types of Direct taxes
The following are some common types of direct taxes imposed in India:
Income Tax
An individual pays an annual income tax based on their earnings in a given financial year. The term ‘individual’ in the ITA also includes co-operative societies, trusts, Hindu Undivided Families (HUFs), and any artificial juridical being.
Wealth Tax
Individuals, HUFs, and companies paid wealth tax based on the value of their assets in a particular financial year. It applies to a wide range of asset categories, including cash, stocks, real estate, fixed assets, bank deposits, and pension plans.
Corporation Tax
It is paid by businesses or companies that operate in India based on their earnings for the current financial year. The tax rate varies according to whether a firm is incorporated in the country or outside.
Capital Gains tax
Capital Gains Tax applies to the earnings made from the sale of a property. Residential property, stocks, bonds, precious metals, and other assets are all considered ‘property’.
Securities Transaction Tax (STT)
This is a small tax charged when you buy or sell shares or other securities on recognised stock exchanges. It is collected automatically at the time of the trade.
Dividend Distribution Tax (DDT)
Earlier, companies had to pay this tax when giving out dividends to shareholders. Now, it has been removed and the tax on dividends is paid directly by the shareholders instead.
Estate Tax
Also called inheritance tax, this is charged on the total value of a person’s property and assets after their death, before it is passed on to their heirs. It is meant to tax the transfer of wealth from one generation to the next.
Gift Tax
This tax applies when someone gives money or property to another person without getting anything of equal value in return. It helps prevent people from avoiding taxes by transferring assets as gifts.
Advantages and Disadvantages of Direct Taxes
| Advantages | Disadvantages |
| Fair to all: The tax burden depends on a person’s income, so those who earn more pay more. | Chances of tax evasion: When tax rates are high, some people may try to hide or underreport their income. |
| Clear and certain: Taxpayers know exactly how much they need to pay every year. | Heavy paperwork: Filing returns and maintaining records can be time-consuming and complicated. |
| Encourages responsibility: Paying and filing taxes regularly builds financial discipline and honesty. | Can affect savings: High taxes reduce take-home income, which may discourage saving or investing |
| Stable income for the government: Direct taxes provide a steady and predictable source of revenue. | Not inflation-friendly: Tax slabs do not always change quickly when prices rise. |
| Helps reduce inequality: Progressive tax rates ensure that the rich contribute more, helping bridge the income gap. | Takes time and effort: Individuals and businesses often need professional help to manage tax filing |
What is Indirect Tax?
Direct taxes are collected on taxpayers’ income and profits, whereas indirect taxes are imposed on goods and services. The taxpayers pay the indirect tax to the government through an intermediary, so indirectly funding the government.
The Central Board of Indirect Taxes and Customs (CBIC) is in charge of collecting and administering indirect taxes, which are supervised by the Department of Revenue, exactly like the CBDT.
Types of Indirect taxes
Indirect taxes are those that are charged on the use or purchase of goods and services. These taxes are collected by sellers or service providers but are finally paid by consumers. The main types of indirect taxes in India are:
Goods and Services Tax (GST)
GST is a single, comprehensive tax that replaced older taxes like VAT, service tax and excise duty. It is divided into CGST, SGST and IGST based on whether the transaction happens within a state or between states.
Customs Duty
This tax is charged on goods that are brought into or sent out of India. It includes basic customs duty, anti-dumping duty and safeguard duty which help protect Indian industries.
Excise Duty
Earlier, this was charged on goods manufactured within India. After GST came into effect, excise duty now applies only to specific items like alcohol, tobacco and petroleum.
Stamp Duty
This is charged on legal documents involved in the sale or transfer of property. It is collected by state governments and the amount differs based on the location and type of transaction.
Note: Most excise duties are now included under GST, except for a few selected products.
Advantages and Disadvantages of Indirect Taxes
| Advantages | Disadvantages |
| Easy to collect: These taxes are collected at the time of purchase, so people don’t have to file or pay them separately. | Affects low-income people more: Everyone pays the same rate, which can be harder on people with lower income. |
| Covers a wide range: Since it applies to all goods and services, the government earns more revenue. | Leads to higher prices: Adds to the cost of goods and services, which can increase inflation. |
| Hard to avoid: As the tax is already included in the price, it’s difficult to escape paying it. | Not always visible: Many people don’t realise they are paying tax because it’s included in the final price. |
| Encourages saving: Since tax is charged on spending, people may prefer to save more instead of spending. | Extra work for businesses: Businesses must maintain records, issue proper invoices, and file returns on time. |
| Helps control the economy: The government can increase or reduce tax rates to manage demand or support local industries. | Cascading problem earlier: Before GST, there was a tax-on-tax issue, which has now been reduced under GST. |
What Are the Key Differences Between Direct And Indirect Taxes?
The table below covers all the differentiating points between direct and indirect taxes:
|
Context |
Direct Tax |
Indirect Tax |
|
Meaning |
Direct payments to the government |
Paid to the government through a middleman. |
|
Levied on |
Profits and income |
Goods and services |
|
Taxpayer |
Individuals, HUFs, and businesses |
End-consumers of products, goods, and services. |
|
Tax Rate |
Directly dependent on income and profits. |
Same goes for everyone. |
|
Tax Burden |
Progressive |
The flat tax rate results in a regressive tax burden. |
|
Transfer of liability |
Not transferable |
can be transferred. |
|
Tax Collection |
Complex |
Very convenient. |
|
Types |
Income taxes and STT |
Goods and Services Tax (GST) |
|
Evasion |
Possible |
Not possible |
Role of Direct and Indirect Taxes in Economic Policy
Both direct and indirect taxes play an important role in shaping a country’s economy. Direct taxes help the government reduce income gaps and support welfare schemes, which promotes balanced growth. They also guide people’s savings and investment habits. On the other hand, indirect taxes are simpler to collect and ensure a regular flow of income for the government.
These can be changed from time to time to control inflation, support local industries, or manage consumption.
Together, both types of taxes help the government maintain financial stability, promote fair development, and handle changing economic needs effectively.
That brings us to the end of this post on Direct and Indirect Tax. If you have any questions or queries, please leave a comment in the section below.
FAQs
1.Is gift tax a direct or indirect tax?
Ans: The Income Tax Act provides for a gift tax. As such, it is a direct tax. If the value of the gift exceeds Rs.50,000, it is taxed at the usual slab rate.
2.What's the difference between direct and indirect taxes?
Ans: A direct tax imposed on an individual’s income or wealth. An indirect tax is imposed on individuals who use goods or services.
3.What are some examples of direct taxes?
Ans: Direct taxes include income tax, property tax, company tax, gift tax, inheritance tax, and so on.
4.Who is required to pay direct tax?
Ans: Individuals and companies are subject to direct taxes under the Income Tax Act. Those who are subject to direct taxes have to pay them. For example, income tax, asset tax, property tax, etc.
