Difference Between Direct and Indirect Tax

Taxes are a way for the local, state and national governments to raise revenue for governance and public projects. Regardless of where they reside, anyone earning in India must compulsorily file an income tax return and pay tax according to their slab rate. 

 

Similarly, citizens must also pay taxes during purchases and use of services. These transactions attract service tax, GST, and other charges. To further understand which tax is applicable, you must know how to distinguish between direct tax and indirect tax.

 

One way to understand what is direct tax and indirect tax and the difference between them, is by assessing who bears the final brunt of the tax. Read on to learn the difference between direct and indirect tax, how they work, their examples, and more. 

Here is a table comparing a few factors to further understand the difference between direct tax and indirect tax.

To learn the difference between direct and indirect tax in detail, here’s what you need to know. 

When an individual or business pays the tax directly to the government, making it non-transferable, it is a direct tax. This tax generally applies to the income, assets, or profits earned throughout the financial year. The tax amount depends on the slab you fall under. 

• 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 and a surcharge from 2% - 12% was introduced. This applies to individuals with an income of ₹1 Crore, and businesses with an income of ₹10 Crores per year. 

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.

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. 

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

1. Pros of Direct Tax 

• Regulates the demand for goods and services

• Stabilises the economy

• Curbs inflation  

2. Pros of Indirect Tax

• Ensures guaranteed and equal contribution from all classes of society

• Widens taxpayer base with equitable contributions

• Easy collection 

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

1. Cons of Direct Tax

• Tax payment is lengthy, complex, and cumbersome

• May cause a strain on finances 

2. Cons of Indirect Tax

• Uniform charges may appear unfair to lower-income classes 

 

This is especially true in a country like India, where 5% owns more than 60% of the country's wealth, as of 2023. 

 

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, PPF, ELSS funds, and FDs, among others. With leading issuers and partners onboard, you can easily begin your investment journey on the platform in just a few clicks.