Taxes constitute a significant source of earnings for the government of India. Whether you are earning a salary or watching a movie in a theatre, you may have to pay taxes to access various products and services. These taxes are either paid to the state or central government depending on the nature of the tax. Broadly, the Indian taxation system is divided into two subcategories: direct tax and indirect tax.
As responsible citizens of India, it is essential for individuals to have a clear understanding of the types of taxes the government levies. Both types of taxes are subdivided into several types, which will be discussed in this article. Continue reading to understand the complete difference between direct and indirect tax.
Direct Tax vs Indirect Tax
| Basis | Direct Taxes | Indirect Taxes |
|---|---|---|
| Meaning | A direct tax is a tax levied directly on a taxpayer and is paid directly to the imposing authority. | An indirect tax is levied on goods and services and is paid by the individual to intermediaries, who then submit the tax to the government. |
| Governing authority | Central Board of Direct Taxes (CBDT) | Central Board of Indirect Taxes and Customs (CBIC) |
| Shift of burden | The burden of direct taxes cannot be shifted to another person. | The burden of indirect taxes can be shifted to others. |
| Taxpayer | Individuals, companies and HUFs (Hindu Undivided Family) | Final consumer |
| Taxable condition | Direct taxes are levied when an individual’s income exceeds or meets a specified taxable limit. | Indirect taxes are levied on the sale and purchase of goods and services. |
| Tax evasion | Tax evasion is possible. | Tax evasion is generally more difficult as the tax amount is included in the value of goods and services. |
| Tax collection | Tax collection is complex and difficult. | Tax collection is easy and convenient. |
| Impact of tax | The impact of tax falls on the same person. | The impact of tax falls on different people. |
| Final liability | Any person on whom the tax is levied is liable to pay the tax. | The final consumer who receives the goods or services is liable to bear the tax. |
| Nature of tax | Direct taxes are progressive in nature. | Indirect taxes are regressive in nature. |
What is Direct Tax?
A direct tax is a type of tax liability where the taxpayer pays taxes directly to the imposing authorities. Individuals paying direct taxes cannot transfer their tax liability to another entity or individual. These direct taxes are collected and administered by CBDT (Central Board of Direct Taxes). The Department of Revenue manages CBDT and oversees the implementation of various direct taxes.
Types of Direct Taxes
In India, direct taxes are classified into three types: income tax, capital gains tax, and securities transaction tax (STT). A detailed explanation of these major types of taxes is provided below:
- Income tax
It is the most common direct tax levied by the government of India on an individual’s income. It is directly paid to the government based on the income slabs prescribed by the Income Tax Department of India.
- Capital gains tax
This tax is levied on individuals who realize capital gains in the country. Such gains may arise from investments in land, equities, and more. These taxes are generally calculated based on the holding period of such investments.
- Securities transaction tax
Individuals involved in securities trading in India are liable to pay the Securities Transaction Tax. This tax is payable regardless of the gains realized from such transactions.
What is Indirect Tax?
Indirect taxes are levied by the government of India on goods and services. These taxes are initially collected by intermediaries before being remitted to the government. Thus, they are referred to as indirect taxes. CBIC (Central Board of Indirect Taxes and Customs) administers and collects indirect taxes in India. Similar to CBDT, CBIC also falls under the purview of the Department of Revenue.
Types of Indirect Taxes
Indirect taxes are a significant source of revenue for the government in India. Primarily, there are two main types of indirect taxes, as detailed below:
- GST (Goods and Services Tax)
GST is a comprehensive indirect tax that replaced several previous levies such as Value Added Tax (VAT), service tax, purchase tax, and excise duty. It is levied on goods and services based on various tax slabs recommended by the GST Council of India.
- Customs duty
This duty is levied on goods imported into India from foreign countries. It is payable regardless of the mode of import (land, air, or sea). Therefore, this tax applies to all goods entering India from foreign countries.
Also Read: Advance Tax: Definition, How to Calculate & More
The Benefits of Direct Tax and Indirect Tax
Benefits of Direct Taxes
- Establishes economic and social balance by implementing progressive tax slabs.
- Helps in reducing the rate of inflation by increasing tax rates during inflationary periods.
Benefits of Indirect Taxes
- Ensures broader participation as every individual pays some amount of indirect tax on goods and services.
- Indirect taxes are unavoidable as they are charged on consumed goods and services.
Drawbacks of Direct Tax and Indirect Tax
Drawbacks of Direct Taxes
- Tax evasion and fraudulent practices undermine the effectiveness of direct tax collection.
- Direct taxes are often considered burdensome as they are paid in a lump sum annually, and the documentation process can be extensive and time-consuming.
Drawbacks of Indirect Taxes
- Indirect taxes are the same for all economic classes, which can be perceived as unfair for individuals with lower incomes.
- Indirect taxes increase the cost of goods and services, making them more expensive for consumers.
We have discussed the two primary types of taxes that significantly contribute to the Indian government’s revenue: direct tax and indirect tax. Understanding these taxes helps clarify why the government levies them and how individuals contribute to the country’s development. A direct tax is a tax levied by the central government on the income and capital gains of a taxpayer. Conversely, indirect taxes are levied on goods and services and are paid through intermediaries. As responsible citizens of India, it is essential for everyone to have a clear understanding of the taxes they pay and the distinctions between them.
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