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.


Direct Tax

Indirect Tax

Subject to taxation

Your income or any activity you engage in is subject to direct taxation.

The products and services you obtain from other people are subject to indirect tax.

Who is responsible for paying the tax?

Individuals and businesses both pay a direct tax on their income.

On the other hand, a third-party/middleman pays indirect tax to the government but indirectly charges it from the customer through the product/service.

Can you transfer the tax?

Direct tax cannot be transferred.

Indirect taxes can be transferred easily.

How is the tax structured? 

Direct taxes are progressive, which means that when income levels rise, their rates do as well. 

Regressive taxation means that the rate of an indirect tax reduces as income levels rise.

Economic implications

Inflation may be lowered by a direct tax imposition.

The rate of inflation increases due to an indirect tax.

The price of execution

Direct taxes have higher expenses since they are more variable and have more exclusions. 

Because of its consistent and uniform collection, indirect tax has lower costs.

How is the direct and indirect tax paid?

Following the receipt of your income or profit, you must pay a direct tax. 

When purchasing goods or services, one must pay an indirect tax.

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

Disadvantages of Direct Tax

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:

Advantages of Indirect Tax

Disadvantages of Indirect Tax


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.

Difference Between Direct and Indirect Tax Related FAQs

Yes, separating indirect taxes from direct taxes is important. Profits and income are subject to direct taxes while goods and services are subject to indirect taxes.

Both sorts of taxes are significant and must be paid. Indirect taxes are imposed on products and services in addition to direct taxes on income and profits.

The Central Board of Indirect Taxes and Customers, or CBIC, is in charge of overseeing indirect taxes and it is governed by the Department of Revenue in India.

GST, which is the Goods and Services Tax is a type of Indirect Tax as it is imposed on products and services.

For those who are under the age of 60, the MIL is INR 3 lakhs under the New Tax Regime.

For those who are aged 60-79 years, the MIL is INR 3 lakhs under the Old Tax Regime. And for the super senior citizens - those who are aged 80 or above, the MIL is INR 5 lakhs under the Old Tax Regime.

You do not have to file an income tax return if your gross income falls below this level.

Indirect taxes include sales taxes, value-added taxes, and service taxes. 

The types of direct taxes include corporate, wealth, income, and capital gain taxes.


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