Difference Between Direct and Indirect Tax

Difference Between Direct and Indirect Tax

There is a well-known saying “Nothing is definite, but death and taxes” and it sounds valid, as taxes play a major role in our lifestyle. The Government of every country needs funds to upgrade the country’s infrastructure, healthcare facilities, education, tourism, and other activities. In short, the government needs resources for the nation's development. Hence, the government generates revenue by taxing its citizens in exchange for providing these services. There are 2 types of tax in India - direct tax and indirect tax. This article will explain the difference between direct and indirect taxes.

India, having a wide distribution of income earners and sources of revenue, is not different. It offers a well-built legal system for its population. This includes a 3 tier federal structure: state governments, central government, and native municipal bodies. It places the value of taxes across the board and marks an important distinction between its major sorts of taxes.

There are distinct taxes applicable to citizens under the Indian taxation system. The most important difference between these taxes is their implementation. But, the majority of taxes under the Indian taxation system fall under two categories: direct and indirect taxes.

What is direct tax? What is indirect tax? What is the difference between direct and indirect tax? This article will answer all these questions and also introduce you to various types of direct and indirect taxes.

The tax paid directly to the government by the legal entity or an individual is referred to as a direct tax. CBDT - Central Board of Direct Taxes, governed by the Department of Revenue is in charge of the administration of direct taxes in India. Additionally, the department also involves planning and providing inputs to the government on the implementation of direct taxes. These taxes cannot be transferred to the other person or legal entity.

The significance of these taxes are they make up a huge part of India’s tax generated revenue as they are paid directly to the government. As they are termed as direct taxes, the authority of paying these tax amounts depends on the taxpayers themselves.

Direct taxes works at the ability-to-pay precept. This monetary precept claims that individuals who've greater sources or earn higher earnings ought to pay greater taxes. The power to price taxes can be a manner to redistribute the wealth of a nation.

Direct taxes include earnings from salary, house property, expert or commercial enterprise earnings, capital gains. The extra earnings from different sources, like the fixed deposit interests, mutual fund and stock market interests are also considered. The tax legal responsibility relies upon the residential status and gender of a person subject to tax.

The Best example of direct tax is a person’s income tax. If a person makes Rs 100,000 in a year and owes Rs 50,000 in taxes, that Rs 50,000 would be a direct tax.

  • Income tax: Levied on and paid by the identical person in line with tax brackets as described through the tax department.
  • Corporate tax: Paid by corporations and firms on their profits.
  • Wealth tax: Levied on the worth of property that someone holds.
  • Estate duty: Paid by a private just in case of inheritance.
  • Gift tax: An individual acquiring the taxable present will pay tax to the government.
  • Fringe benefits tax: Paid through an organization that offers fringe benefits to employees. It is further taken by the authorities.

Taxes that are imposed on services and items when they are purchased and sold are referred to as indirect taxes in India. Generally, the indirect taxes in India are operated by CBIC which stands for Central Board of Indirect Taxes and Customs. Similar to CBDT, CBIC also operates under the Revenue Department.

It is worth noting that these taxes are not directly paid by the assessee to the government authorities. Instead, these are charged on services and goods, which is further collected by intermediaries

The dealers of the service or products collect these taxes under the Indian tax system. The tax is levied as an addition to the initial value of the item or service, which will increase their cost. A similar price is then paid by these parties to the government, thus it is referred to as indirect.

Excise duties on liquor, fuel, and cigarette taxes are the best examples of indirect taxes.

  • Excise duty: This refers to the taxes charged on the manufacture of goods within the country. This type of indirect tax is imposed for the license of certain goods or production and sale by the Central Government of India. Additionally, the state governments collect taxes for narcotics and alcohol.
  • VAT: Paid by a retailer or a merchant, who then transfers the tax burden to consumers by imposing an excise tax on goods and services.
  • Custom duty: These types of taxes are imposed on goods from outside the country, usually paid for by retailers and consumers.
  • Entertainment tax: The charge is on the cinema owners, who shift the burden to the individual you watch the movie.
  • Service tax: Imposed on services offered to consumers, like food bills in a restaurant.
  • Securities Transaction Tax: This tax is applied to securities trading through the Indian Stock Exchange.
Topic Direct Tax Indirect Tax
  • Imposition
  • It is imposed on income and conducted activities.
  • It is forced on items and services.
  • Taxpayer
  • The direct taxpayer is an individual or an organization.
  • Every consumer who buys goods or services pays indirect tax.
  • Transferability
  • In the event of direct taxes, the tax has to be paid by an individual. It cannot be transferred.
  • Indirect taxes can be transferred from one taxpayer to another.
  • Impact on Inflation
  • Direct taxes can be used to reduce inflation. If the inflation rises, direct tax can be increased to curl the demand and control inflation.
  • The increase in indirect tax leads to an increase in inflation.
  • Tax Evasion
  • Owing to the lack of administration, tax evasion is possible in direct taxes.
  • Since the indirect tax is charged on goods and services, tax evasion is not possible.
  • Nature
  • Direct Tax in India is imposed on individual’s income and it is progressive in nature. in India are paid after the citizen gets his/her salary.
  • Indirect tax is regressive in nature as all the end consumers have to pay it regardless of their income.
  • Wider Coverage
  • Direct Tax is only applicable to people within particular tax brackets.
  • Indirect Tax ensures wide coverage as anyone who purchases goods or services is taxed.
  • Administrative Costs
  • Direct Taxes have many exemptions and involve high administrative costs.
  • Since indirect tax is taxed on GST, it involves low administrative costs.


Both direct tax and indirect tax play a vital role in a nation's economy. Collection of both these taxes is important for the development of our nation. Both can be collected by Central as well as the State Governments.

  • Who decides tax rates in India?
  • In order to make sure that taxation rates and rules are fair, the government uses tax slabs to see the rate at which every individual expense assessee is subject to cover annual assessment.

  • How many types of tax in India?
  • There are two sorts of Taxes, direct tax and indirect tax which are managed by two disti boards, Central Board of Direct Taxes - CBDT and Central Board of Excise and Customs - CBEC.

  • What type of tax is GST?
  • GST is an indirect tax imposed on manufacture, consumption of goods, sale and as well as services at the national level.

  • How is tax calculated?
  • Tax is charged as a percentage of your pay. The rate that you pay relies upon the measure of your pay. The initial segment of your pay, up to a specific sum, is charged at 20%..

  • What happens if you do not pay stamp duty?
  • If you fail to pay your transfer duty on time, you need to pay interest on the amount you owe. In addition you may also be charged with other penalties.

  • What are the types of direct tax ?
  • Direct taxes include corporate tax, gift tax, sin tax, estate tax, income tax, value-added tax (VAT), property tax,and taxes on assets.

  • How much indirect tax do we pay?
  • Service tax is charged at the pace of 15% as of now.The taxability arises once the worth of services exceeds Rs. 10 lakhs during the year.