As an Indian resident, you pay taxes based on your annual income as well as when you purchase a product or a commodity. Based on the nature of these taxes, it is safe to say that the Indian economy thrives on two kinds of taxes – direct and indirect. But what is direct tax and indirect tax?

It is crucial to stay informed about these taxes to ensure that you are never caught off guard. Hang on as we dive deeper into the difference between direct and indirect tax and elaborate on the concepts.

Introducing the World of Direct Tax

As the name suggests, a direct tax is paid to the entity or authority imposing the tax. For instance, annual income tax is directly paid to the Central Government.

Some of the forms of direct tax you can observe in India are as follows:

• Income tax – Paid directly to the government, based on the income slabs released during every financial year
• Capital gains tax – Apart from your annual income, a percentage of profits from other avenues like shares, mutual funds or selling property are counted as direct taxes. However, the entire amount is not subject to tax; only a minor amount of the profits accrued.
• Securities Transaction tax – It is paid on every trade you conduct on the stock exchange, irrespective of whether you incur a profit or a loss.

With direct taxation, the government has a steady revenue source to address developmental needs in the country. Moreover, it is a way to maintain equilibrium between all classes in society.

The Idea Behind Indirect Tax

Indirect taxes are stark opposites to their counterparts and require you to pay taxes to the government through an intermediary. Some of the common forms of indirect taxation are as follows:

• Goods and Services Tax (GST): GST has emerged as a uniform method of taxation throughout the country, replacing the legacy model where every state government levied their own taxes on the movement of goods. Every product or service consists of a fixed GST to be paid by the customer, which later goes to the government.
• Customs duty: It is applied when you bring goods from a foreign country to India. The aim of customs duty is to ensure that every product entering India is taxed appropriately.

Key Points of Difference Between Direct and Indirect Taxation

The primary difference between direct and indirect tax is the manner of collection. The former is paid directly to the tax-imposing authority, while the latter goes through an intermediary before reaching the government. Apart from these, direct tax and indirect tax have the following differences:

• Direct tax is levied on income and profits, whereas indirect tax focuses on the consumption of goods and use of services
• Both corporations and individuals are subjected to direct tax, while indirect taxes are only borne by the end consumer
• Direct tax is progressive in nature, increasing with a rise in income. However, indirect tax is independent of income

Summing Up

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Frequently Answered Questions

1) Is GST a direct or indirect tax?

GST is a uniform, indirect tax levied on the consumption of goods and services. It was introduced to maintain uniformity and avoid multiple taxes on the movement of goods and services.

2) Is TDS a direct tax?

TDS is an indirect tax since it is acquired from the source of your income.