Difference between Direct and Indirect Tax

The government earns most of its income from taxes.

Whether you buy a packet of biscuits at a general store, eat at a restaurant, see a movie at the multiplex, drive your car on roads, or rent a flat, you pay taxes in different ways.

The burden of paying taxes falls on you as a responsible citizen. Furthermore, it is also essential to know what types of taxes are implemented in the country. 

Taxes in India can generally be divided into two categories: direct tax and indirect tax.

We will explore the meaning of these two kinds of taxes in more detail and also discuss the difference between direct tax and indirect tax.

Direct Tax vs Indirect Tax - At a Glance

Indirect taxes are imposed on products and services in addition to direct taxes on income and profits.

While both direct and indirect tax is significant and must be paid, understanding their distinctions and implications adds a level of responsibility and accountability to the procedure.

Here is a thorough table outlining the difference between direct and indirect tax in India.

It is crucial to remember that the direct tax and indirect tax indicated here do not include all of the levies in our nation.

But they stand out the most because they make up a sizable portion of the taxes collected by the government.

Let us now understand Direct taxes and Indirect Taxes in detail.

What is Direct tax?

Simply put, direct tax is one that you pay directly to the taxing authority that imposes it. 

Taxes are levied by the government, and they are paid directly to them. It is not possible to transfer these taxes to another entity or individual.

Regulations governing direct taxes are found in several acts.

CBDT (Central Board of Direct Taxes) administers direct taxes in India, under the direction of the Department of Revenue.

In addition to providing input on direct tax implementation to the government, the department also plays a role in planning.

Types of Direct Tax

Income Tax

There are several types of direct taxes in India, but income tax is the most common.

The income tax slabs of the IT department determine how much you must pay based on your earnings in a particular financial year.

Securities Transaction Tax

Trading in stocks also involves a small component called the securities transaction tax.

No matter how much money you made on a particular or cumulative trade, this tax will still have to be paid.

This tax is collected from you by the broker and paid to the government by the securities exchange.

Capital Gains Tax

The tax on capital gains is payable each time you make a capital gain.

Investing in a property or selling a home can result in a capital gain. Investing in mutual funds over a span of time can also result in capital gains. 

A capital gains tax, either LTCG tax (Long-Term Capital Gains) or STCG tax (Short-Term Capital Gains), will be assessed based on the amount of capital gains and the length of time you held the investment.

Advantages of Direct Tax

• In the case of monetary inflation, direct tax rates can be increased by the government to reduce the demand for goods and services. The fall in demand helps to reduce inflation as it helps to condense the supply.

• The progression principle is also one of the pillars of the direct tax system, which makes it equitable. The tax rate for people with lower incomes is lower, while the tax rate for people with higher incomes is higher.

• Government launches new initiatives to benefit the poor with the higher taxes collected from the rich. Low-income individuals are able to improve their quality of life with the help of the initiatives by generating income sources.

Disadvantages of Direct Tax

• Despite the government's constant efforts to prevent tax evasion, unscrupulous businesses, and individuals are still able to avoid paying taxes or paying them at a lower rate.

• Direct taxes, such as capital gains tax and securities transaction tax, discourage many people from investing. Therefore, direct taxes restrict investment in some ways.

• Income tax is a direct tax that is required to be paid once a year, so taxpayers consider it to be burdensome. Apart from this fact, it is also generally lengthy and complex to complete the documentation process, especially for a first-time taxpayer.

What is an Indirect Tax?

Taxes that are paid through a third party and thus transferable are known as indirect taxes.

This implies that the burden of paying the tax to the government is transferred to another party. GST, or the goods and services tax, is an illustration of an indirect tax.

In this method, the tax must be transferred to the government by the organizations from which we buy the goods, like a supermarket. 

The burden of the tax ultimately falls on a third party, or the consumer, who must pay an extra surcharge on the goods and services they are purchasing.

Indirect taxes are based on our spending habits and are not dependent on our income.

The Central Board of Indirect Taxes and Customers, or CBIC, is in charge of overseeing indirect taxes.

Types of Indirect Tax

In 2022, India will primarily impose the following indirect taxes:

• The Goods and Services Tax, or GST, is levied on all purchases of goods and services made within the nation.

• Many of the pre-existing indirect taxes, such as the VAT and excise charge, were replaced when it was implemented in 2017.

• The country's domestically produced goods are subject to central excise duty.

Advantages of Indirect Tax

• Indirect taxes are growth-oriented, they motivate people to put money aside and make investments.

• It's challenging to avoid indirect taxes.

• Since this sort of tax is only paid when an item is purchased, the taxpayer is not burdened.

• The tax is also fairly straightforward for state governments to impose because it is acquired directly from the vendor or manufacturer, saving time and effort.

•  The government's revenue grows together with the rise in indirect taxes.

Disadvantages of Indirect Tax

• Indirect taxes are uniform and impossible to evade, but they frequently overlook the income inequality that exists in our nation.

• Additionally, the indirect tax raises the cost of commodities and may raise inflation.

• The regressive character of indirect taxes is well known. Indirect taxes must be paid at the same rate by all income levels of individuals.

• Products and services become more expensive as a result of the indirect tax because it is added to the cost of those items. For example, the GST's 28% tax rate is applied to items like cigarettes, luxury bikes, premium vehicles, and so on.

Conclusion

Taxes are essential to the expansion and stability of an economy.

Despite the difference between direct and indirect tax, each tax is significant since it adds to the government's revenue.

It is subsequently used to advance the nation. It is the government's duty to enact just taxes, and it is your duty to make timely tax payments.