Taxation is a vital aspect of government revenue generation, supporting public expenses and economic development. It encompasses two primary categories, i.e. direct tax and indirect tax. 

 

Direct tax is levied directly on individuals or businesses, and indirect tax is imposed on goods and services during transactions. Understanding their distinctions helps determine the ultimate burden of taxation.

Direct Tax vs Indirect Tax

Here is a table comparing a few factors of indirect and direct tax:

Point of Difference

Direct Tax

Indirect Tax

Authority in Charge

Central Board of Direct Taxes (CBDT), governed by the Department of Revenue

Central Board of Indirect Taxes and Customs (CBIC), governed by the Department of Revenue

Tax Imposition

Levied on the income or profit earned by the taxpayer 

Levied on purchases of goods and services

Final Liability

All individuals and businesses, except those who are exempt

Final liability falls on the end consumers 

Course of Payment

Taxpayers pay this tax to the authorities directly

Taxpayers pay this tax to the authorities via an intermediary (indirectly)

Tax Rate

Depends on the income tax slab the taxpayer belongs to

Same for all taxpayers

Nature of Tax

Progressive tax - The rate increases with the taxpayer’s income

Regressive tax - Everyone pays the same tax, causing a disproportion of tax burden between the rich and poor  

Transferability

The taxpayer cannot transfer the liability to another individual or entity

The taxpayer can transfer the liability to another individual or entity

Understanding Direct Tax

A direct tax is paid directly to the government by individuals or businesses and cannot be transferred. This tax generally applies to the income, assets, or profits earned throughout the financial year. The tax amount depends on the income tax slab you fall under.

Examples of Direct Tax

Here are some examples of direct tax:

  • Income Tax  

This considers the value appreciation and earnings of all the assets and income sources of the individual. A similar system of ‘corporate tax’ is in place for businesses. 

  • Wealth Tax

This tax applies to high-net-worth individuals. For those with a net wealth of more than ₹30 Lakhs, wealth tax is levied at 1%. 

 

However, this was abolished in the 2015 budget. Instead, the additional surcharge was increased by 2% to 12%. This applies to individuals with an income of over ₹1 Crore, and businesses with an income of ₹10 Crores or more per year. 

Understanding Indirect Tax

Indirect taxes are transferable taxes, where the final liability to pay is transferable onto others. This is levied on goods and services rather than the taxpayer's earnings. 

 

Generally, sellers, manufacturers, and service providers collect this tax from customers and pay it to the government. The tax amount depends on several factors, including the price of the product or service.

Examples of Indirect Tax

Check out some examples of indirect taxes that will help you understand the concept better.

  • Service Tax  

Service providers all over India must pay this tax except those covered under the negative list of services. 

  • Entertainment Tax  

This applies to commercial entertainment, such as movie tickets, music festivals, cricket matches, etc. 

Understanding Indirect Tax

Indirect taxes can be transferred to others, and they're imposed on goods and services. Generally, sellers, manufacturers, and service providers collect this tax from customers and pay it to the government. 

 

The tax amount depends on several factors, including the price of the product or service.

Examples of Indirect Tax

Check out some examples of indirect taxes that will help you better understand the concept:

  • Service Tax  

Service providers all over India must pay this tax except those covered under the negative list of services. 

  • Entertainment Tax  

This applies to commercial entertainment, such as movie tickets, music festivals, cricket matches, etc. 

Advantages of Direct Tax and Indirect Tax

Now that you know the difference between direct and indirect tax, here is a look at their benefits:

1. Pros of Direct Tax 

  • Ensures equitable contribution from taxpayers

  • Curbs inflation  

2. Pros of Indirect Tax

  • Ensures guaranteed and equal contribution from all 

  • Easy collection 

Downsides of Direct Tax and Indirect Tax

There are also downsides to consider while discussing the difference between direct and indirect taxation. 

1. Cons of Direct Tax

  • Tax payment procedure is lengthy, complex, and cumbersome

  • May put a restriction on investments

2. Cons of Indirect Tax

  • Uniform charges may appear unfair to lower-income classes 

  • Increases the cost of goods and services

 

Now that you know the difference between direct and indirect tax, remember that certain investments can help you lower your direct tax, i.e., income tax liability. Moreover, such an investment can help you save for the future or meet a specific financial goal. 

 

On Bajaj Markets, explore popular investment tools like NPS, ELSS funds, and FDs, among others. With leading issuers and partners onboard, you can easily begin your investment journey in just a few clicks.

FAQs on the Difference Between Direct and Indirect Tax

Is GST a direct or indirect tax?

GST is a type of indirect tax. It is a single domestic indirect tax levied at every point of sale.

What is the need for direct tax?

Direct tax aims to collect taxes from taxpayers according to their paying capacity. That is why the tax rates are high for high-income slabs.

How to know my income tax liability?

Many financial websites, including the Income Tax Department site, offer income tax calculators. You can use these to estimate your tax liability, provided that you have the accurate data requested.

Is capital gains direct or indirect tax?

Capital gains are not a type of tax but rather a form of income. The capital gains tax is a type of direct tax, as it applies to the profits generated on the sale of an asset.

What are the various types of indirect taxes?

Different types of indirect taxes include Goods and Services Tax (GST), entertainment tax, and customs duty, among others.

What are the types of direct tax?

One popular example of direct taxation is income tax. Others include gift tax, corporate tax, capital gains tax, and more.

Is gift tax a direct tax?

Yes, gift tax comes under the category of direct tax since it is levied under the Income Tax Act, 1961.

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