BAJAJ BROKING
July 10, 2025
4 mins read
Taxation is one of the main sources of income for the Indian government. There are two main types of taxes: direct and indirect taxes. Tax money is primarily used for developmental and welfare purposes. In India, the tax system is well-elaborated and demarcated. Both the state and the central government collect taxes depending on the type of transactions.
The government focuses on increasing transparency in the taxation system. Additionally, the Goods and Services Tax (GST) was introduced in 2017. It brought more uniformity and clarity to the tax system, simplifying the complex system. In this guide, we will discuss direct tax vs indirect tax. Read on to learn more.
Direct tax is a tax paid by individuals or organisations directly to the government. The tax cannot be transferred to another person. It is levied on wealth or income, and the payer is held directly responsible for payment and filing. Some of the direct taxes in India are Income Tax, Corporate Tax, Capital Gains Tax, and Securities Transaction Tax (STT).
Income Tax is contributed by individuals, HUFs, and companies based on their annual incomes. Company Tax is contributed by companies on their earnings. Direct taxes in India are administered and controlled by the Central Board of Direct Taxes (CBDT).
Direct taxes are significant because they are progressive, meaning individuals with higher incomes pay a higher tax rate. This serves to decrease income inequality and enhance social equity. Additionally, as the identity of the taxpayer is known, direct taxes ensure accountability and discourage the circulation of black money. Direct tax filing is annual through income tax returns (ITRs).
Taxes encourage investment and savings through several exemptions and deductions under the Income Tax Act, including under Section 80C, which provides tax-saving investments.
An indirect tax is a tax that is received by an intermediary (such as a seller) from the final consumer. It passes the tax burden to the final consumer and is hence distinct from a direct tax. In India, the Goods and Services Tax (GST) is the major indirect tax, which was introduced in 2017 to replace various other taxes, including VAT, excise duty, and service tax. Indirect taxes are levied on the consumption of goods and services, rather than on income or profit.
Each time a consumer makes a purchase, they pay GST, which is received by the seller and subsequently paid to the government. Indirect taxation is regarded as regressive in nature since it's imposed at an equal rate on everybody, irrespective of income levels, and hits the lower-income groups harder. Customs Duty (on imports/ exports) and Excise Duty (previously on manufacturing, currently absorbed under GST) are other types of indirect taxes.
They are regulated by the Central Board of Indirect Taxes and Customs (CBIC). GST streamlined the structure of indirect taxes in India, achieved a unified market, and enhanced compliance through digital invoicing and returns. Indirect taxes form a significant chunk of government revenues through their extensive use.
Some of the highlighting difference between direct and indirect tax are as follows:
Direct Tax | Indirect Tax |
Levied directly on the income or wealth of individuals and organisations. | Levied on goods and services, and passed on to consumers. |
Paid directly to the government by the taxpayer. | Collected by intermediaries (sellers) and paid to the government. |
It cannot be transferred to another person. | Tax burden can be shifted to the final consumer. |
Examples: Income Tax, Corporate Tax, Capital Gains Tax. | Examples: GST, Customs Duty, Excise Duty. |
Progressive in nature; higher earners pay more. | Regressive in nature; affects all income groups equally. |
Administered by the Central Board of Direct Taxes (CBDT). | Administered by the Central Board of Indirect Taxes and Customs (CBIC). |
Encourages transparency and accountability in income reporting. | Encourages consumption-based revenue collection. |
Filed and paid annually or quarterly based on income. | Paid at the time of purchasing goods or services. |
Direct taxes are those that are actually imposed directly on people's income or wealth. Some of the very prominent forms of direct taxes in India are:
This is charged on the earnings of individuals, such as salaries, business profits, rent, and so on. It is controlled by the Income Tax Act, 1961 and is applicable to individuals, Hindu Undivided Families (HUFs), and companies.
It is charged on the net profits of firms. Domestic firms are taxed on their worldwide income, whereas international firms are taxed only on income received in India.
Brought in to make companies that make zero income disclosures under general provisions but report profit in their accounts, fall under the tax cover. They are made to pay taxes at a minimum level.
It is taxed on the gains arising from the sale of capital assets, such as shares, bonds, and property. It is divided into short-term and long-term based on the holding time.
Securities Transaction Tax (STT): It is charged on the sale and acquisition of securities listed on a stock exchange
Indirect taxes are those taxes that are paid by middlemen (such as retailers) on behalf of the ultimate buyers. Indirect taxes are taxed on products and services and are eventually borne by the ultimate user. The categories of indirect taxes in India are:
Introduced in 2017, GST merged various indirect taxes under one tax system. It is charged at every point of sale and is applicable on both goods and services.
Charges on imported or exported goods from India include. It regulates foreign trade and shields home industries from overseas competition.
Previously levied on goods produced in India, particularly petroleum and tobacco items. After the GST, excise duty is imposed only on a limited number of goods.
Previously levied on services rendered in India. It has now been replaced with GST.
Levied at every sale stage, depending upon the value added, but now incorporated under GST. Still levied in some states for some goods, such as liquor.
Levied on legal documents, particularly property deals. This tax still stands separate from GST.
Previously levied on cinema tickets and amusement parks. It is almost integrated into GST, although some states might still charge it.
Direct taxes have many economic and social advantages. Some of these are:
A major benefit is that they are progressive in nature, i.e., individuals with higher incomes pay more. This reduces economic inequality and makes sure the burden of taxation is evenly distributed.
Another significant advantage is economic stability. As direct taxes are income-based, they provide a stable and predictable source of revenue for the government. This allows the government to plan and reallocate resources more effectively to support public infrastructures and welfare programs.
Direct taxes also ensure transparency and accountability. Taxpayers must maintain proper books of accounts and submit returns, thereby maintaining the integrity of the financial system. It also prevents tax evasion and black money flow.
There are also various deductions and exemptions under the Income Tax Act, such as under Section 80C, 80D, and 24(b), that provide incentives for saving and investment in the form of life insurance, health insurance, and housing loans.
In addition, direct taxes are self-assessed, placing the burden on individuals to file their income truthfully. The Central Board of Direct Taxes (CBDT) oversees compliance and ensures strict enforcement of tax laws.
Indirect taxes have several practical benefits for both the government and taxpayers. These are:
One major advantage is that they have a wide base. As these taxes are incorporated into the price of a good or service, they are paid by all consumers, regardless of their socioeconomic status, whether they are poor or rich, to ensure extensive coverage.
Another advantage is the ease of collection. Sellers or service providers collect indirect taxes and remit them to the government, lessening the compliance burden on individual taxpayers. This also makes administration easier, and fewer opportunities for tax evasion exist.
The Goods and Services Tax (GST) has particularly simplified the system by consolidating various state and central taxes. It has achieved uniformity in tax rates and conditions nationwide, facilitating interstate commerce and stimulating the national economy.
Indirect taxes are non-intrusive because the consumer pays without requiring returns to be filed or income details to be disclosed. They're paid automatically when a product is purchased or a service is used.
These taxes also lead to the formalisation of the economy. For instance, GST encourages firms to maintain electronic records, which makes them part of the formal economy. This not only increases compliance but also contributes to widening the tax base.
Finally, indirect taxes are a useful instrument for controlling consumption. Increased taxation on items such as tobacco, liquor, and luxury goods discourages abuse while generating additional revenue.
The taxation system in India significantly affects both consumers and businesses. For consumers, direct taxes such as income tax impact disposable income. Higher tax rates may reduce purchasing power, which in turn can influence spending patterns, especially on non-essential goods and services. Indirect taxes like GST are levied on goods and services at the point of consumption, making everyday purchases more expensive.
As GST is a consistent tax system in the country, it is borne by all consumers, regardless of their income group, although basic commodities are taxed at lower rates or exempted to ease the burden on the poor.
For corporations, taxes influence the cost of operations, pricing mechanisms, and profitability. Direct taxes, such as corporate tax, are imposed on profits, and hence, companies are motivated to contain costs. Compliances such as tax audits, TDS, and return filings also contribute to administrative loads. In contrast, indirect taxes such as GST have consolidated the previously complicated tax systems (VAT, service tax, excise) into a single system.
Although it has simplified the tax system, it requires companies to transition to digital filings, classification of goods and services, and invoice matching, which can be challenging, particularly for small businesses. But input tax credit under GST prevents tax-on-tax, which saves manufacturers and suppliers in the long run.
In all, taxation affects consumer habits and business choices, and it plays a crucial role in determining demand, supply, and pricing in the economy. A transparent and fair tax regime ensures compliance and fosters confidence among stakeholders, thereby generating stable economic growth.
In conclusion, the tax regime in India plays a crucial role in economic development, as it finances public infrastructure and influences business activities. While consumers bear the burden of direct and indirect taxes that impact their spending, businesses must contend with the compliance and expenditure implications. Transparency and efficiency are encouraged by a well-organised and streamlined tax system such as GST.
A balance between tax collection, economic growth, and equity is still key. An equitable and stable tax regime promotes compliance, fosters investment, and leads to sustainable development for both individuals and businesses in the long term.
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Direct taxes are paid directly to the government by individuals or entities, while indirect taxes are collected by intermediaries on goods and services and then paid to the government.
Direct taxes, such as income tax, reduce an individual’s disposable income, directly affecting their purchasing power and financial planning. They are calculated based on the taxpayer's earnings and personal financial situation.
Indirect taxes are generally unavoidable, as they are built into the prices of goods and services. Consumers unknowingly pay them while making everyday purchases, regardless of income level.
Examples include Income Tax, Corporate Tax, Capital Gains Tax, and Securities Transaction Tax. These are levied directly on the earnings or profits of individuals and businesses.
Goods and Services Tax (GST) is an indirect tax levied on the supply of goods and services, collected by businesses at the point of sale and remitted to the government.
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