2/4/24, 10:28 AM Difference Between Direct & Indirect taxes

Difference Between Direct and Indirect Tax with

Examples
In India, every individual earning an income, has to pay tax according to his/her income slab. There are two types
of taxes which are charged in India: Direct tax and Indirect tax.

What is Direct Tax?

Direct taxes are non-transferable taxes paid by the taxpayer to the government. These taxes are administered and
governed by the Central Board of Direct Taxes (CBDT). Corporate tax and capital gain tax are examples of direct
tax.

What is Indirect Tax?

Indirect taxes are transferable taxes where the liability to pay can be shifted to others. These taxes are
administered and governed by the Central Board of Indirect Taxes and Customs (CBIC). Service tax and sales tax
are examples of indirect tax.

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Comparison of Direct and Indirect Taxes

Both the direct and indirect taxes are significant to the government. They provide a sizable portion of
government revenue. Indirect and direct taxes, however, have different effects on society. To learn more, keep
reading:

Parameter Direct tax Indirect tax

This tax on taxpayers for the goods and

Tax Imposition This tax is directly the taxpayer’s income.
services availed or purchased.

Payment course This tax is directly paid to the government. This tax is indirectly paid to the government.

These taxes are paid by individuals and

Paying Entity These taxes are paid by end-consumers.
businesses.

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The rate of tax is decided by the government

Rate of Payment Tax rates are the same for everyone.
based on profit and income.

Transferability of
This type of tax is non-transferrable. This type of tax is transferable.
tax

Nature of Tax This is a progressive type of tax. This is a regressive type of tax.

Types of tax Income tax, wealth tax, corporate tax, etc. Sales tax, service tax, value added tax, etc.

Tax Collection Collecting this type of tax is difficult. Tax collection is relatively easier.

Types of Direct and Indirect Taxes in India

Major Types of Direct taxes are as follows:

1. Wealth tax: The tax levied on an individual’s assets based on their value in a financial year is known as
wealth tax. This tax is levied on HUFs, individuals, or companies.
2. Corporation tax: This type of tax is levied on companies and businesses based on their income in a
financial year. The taxation rate depends on whether the enterprise is in India or abroad.
3. Income tax: This tax is levied on individuals on their annual income in a financial year.
4. Capital Gains tax: The tax levied on profit earned from property sale are considered under this category of
taxes.

Major Types of Indirect taxes are as follows:

1. Service tax: This type of tax is paid to the government by all the service providers.
2. Sales tax: This type of tax is levied by the government on movable goods.
3. Value added tax: This is levied on products which are added at each stage from manufacturing till
distribution.
4. Excise Duty: The tax collected from manufacturers by the government is called as excise duty tax.

Benefits of Direct and Indirect Taxes

The key benefits of direct taxes are as follows:

1. Helps in establishing economic and social balance: The direct taxes are charged according to tax slabs.
Individuals earning lower income have to pay less tax and the individuals earning higher income have to
pay more tax. Thus, this category of tax helps in establishing social and economic balance.
2. Helps in reducing the rate of inflation: The tax rates are increased by the government when the economy
faces inflation. This eventually results in pulling down demand for goods and services, thus, reducing the
rate of inflation.

The key benefits of indirect taxes are as follows:

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1. Contribution is equal: Every individual pays some amount of indirect tax to the state government. Even
the lower income groups who are exempted from direct tax payment, are charged indirect tax on the goods
and services they avail themselves.
2. Unavoidable tax: These taxes are charged on the goods and services consumed. That is why these taxes
are unavoidable.

Disadvantages of Direct and Indirect Taxes

The disadvantages of direct taxes are as follows:

1. Can be avoided: The Government of India has framed stricter rules and policies in order to curb tax
evasion. However, fraudulent practices are still prevailing and many individuals are paying lower taxes
than they should.
2. Investment restraints: A lot of individuals avoid making investment to escape from the imposition of
direct taxes like capital gains tax and securities transaction tax.
3. Viewed as burden: Direct taxes are often viewed as a burden as they require to be paid in single lump-
sum amount annually.

The disadvantages of indirect taxes are as follows:

1. Unawareness: This type of tax is added to the product price and individuals are mostly unaware of the
amount they are paying.
2. Regressive:This type of tax is considered regressive in nature. Though they ensure that everyone pays
taxes irrespective of their income, they are not equal. Individuals from all income groups have to pay
indirect taxes at the same rate.
3. Increases the price of goods and services: Indirect tax is charged on all the goods and services availed or
consumed in society. Thus, this type of tax increases the end price of goods and services.

Both direct and indirect taxes are important for the country as they are intricately linked with the overall
economy. As such, collection of these taxes is important for the government as well as the well-being of the
country. Both direct taxes and indirect taxes are collected by the central and respective state governments
according to the type of tax levied.

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FAQs on Different between Direct and Indirect Taxes

1. How should I know which tax is direct or indirect?

Indirect taxes are placed on products and services as opposed to direct taxes, which are imposed on income
and profits. One of the main distinctions between indirect and direct taxes is that indirect taxes are
typically collected from end users through an intermediary, whereas direct taxes are paid directly to the
government.

2. Is the rate of payment different for direct and indirect taxes?

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