What is Direct Tax and Indirect Tax

Tax is one of the primary sources of income for the government of any country. That is how the government funds infrastructure, education, and other social services. Paying taxes on time is every citizen’s duty. 

Direct and Indirect Taxes in India

Broadly, taxes can be divided into two types - direct and indirect. So if you want to know ‘what is direct and indirect tax’, read on. You will also find some examples of direct and indirect tax, which will help you understand them in greater detail.  

Direct Tax

As the name suggests, direct taxes are paid directly to the government by the public. 

• It is governed by the Central Board of Direct Taxes (CBDT)

• They cannot be transferred to another entity or person

• It depends on one’s income: if someone earns a low amount (as defined by the government), the tax imposed will be low or even nil

• It helps reduce inequalities, as the taxes paid by the rich are used to create opportunities for people with lower income

Disadvantages of Direct Tax

There are certain disadvantages to direct tax. These are -

• By using various fraudulent means, individuals may evade direct taxes

• Most people consider this to be a burden as it has to be paid in lump sum each year

• The paperwork involved in calculating the tax is difficult to understand for many taxpayers

Indirect Tax

Indirect taxes are levied on goods and services availed by consumers. 

• It is governed by the Central Board of Indirect Taxes and Custom (CBIC)

• Amount collected through indirect tax will also reach the government but through an indirect path via multiple middlemen

• They are collected by an intermediary from the end customer

• It is then the responsibility of the intermediary to pass it on to the government

• It is the same for everyone and does not depend on one’s income

• Everyone pays it, even people who have low income and are exempt from paying direct taxes

• It is easier to pay, as it is often included in the prices of commodities

• No documentation or paperwork is required for its payment, as it doesn’t need to be paid separately

Disadvantages of Indirect Tax

Just like direct tax, indirect taxes too have some disadvantages. They are-

• These are considered to be regressive, as everyone, belonging to each and every income strata, needs to pay them at the equal rate

• Indirect taxes increase the cost of living, as it leads to a rise in the price of goods, commodities, and services

• Taxpayers are unaware that they are paying taxes as it is included in the price of commodities and services they avail

Examples of Direct and Indirect Taxes in India

Now that it is clear what each type of tax means, let’s take a look at some examples of direct and indirect tax. 

The following are the examples of direct taxes - 

• Income Tax - It is paid on income generated by an individual or a business 

• Property Tax - It is paid on property or land owned by an individual or a corporation

• Capital Gains Tax - It is paid on capital gains made on sale of investments or property

On the contrary, the following are some indirect taxes in India-

• Goods and Services Tax (GST) - This has encompassed several other taxes (like VAT, excise duty, etc.), and is the single indirect tax levied on goods and services

• Customs Duty - It is levied on products purchased from foreign land that are being brought into India