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Direct Tax & Indirect Tax: The Difference

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Created on
May 3, 2023


What’s Inside

If you’re a working individual and have filed an ITR, you know all about income slabs and their corresponding taxes. Similarly, if you’ve carefully examined restaurant bills, you must have encountered GST rates. While paying these taxes might seem the same to you, both fall under separate categories of taxes. For starters, one is a direct tax paid directly to the government, while the other is an indirect tax paid to the merchant.

Since direct and indirect taxes are intertwined in our daily lives, as responsible taxpayers, understanding the differences between the two becomes important. The following sections cover the differences between direct and indirect tax to help you understand taxation better.

Understanding Direct Tax

The taxpayer pays direct taxes to the tax authority in India, and the CBDT oversees them.

Income Tax, Capital Gains Tax (CGT), and Corporate Tax are common direct taxes in India. Income tax is levied on annual earnings based on tax slabs, CGT is paid on capital asset sales profits, and Corporate Tax is imposed on business profits.

Understanding Indirect Tax

Indirect taxes are collected by an intermediary and paid to the tax authority in India. The Central Board of Indirect Taxes and Customs (CBIC) oversees these taxes levied on purchasing, selling, or importing goods and services. In 2017, GST replaced various indirect taxes, eliminating the burden of managing multiple taxes. Custom Duty is an additional indirect tax applied to imported goods.

Mapping Out The Differences Between Direct and Indirect Taxes

Now that you know what is a direct tax and indirect tax, understanding the differences between the two should be relatively simple. Here’s a comprehensive table to summarise the differences between direct and indirect taxes:

Bottom Line

Regardless of their benefits and pitfalls, both direct taxes and indirect taxes are needed for the economy's progress. You can bank on the Fi Money app to make accurate and timely tax payments and fulfil your civic duty.

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Frequently Asked Questions

1. What are direct tax and indirect tax with examples?

Direct taxes are paid directly to the tax-imposing authority, while indirect taxes are paid to intermediaries and carried forward to the actual tax-imposing authority. Income Tax and Capital Gains tax are examples of direct taxes. GST and Excise Duty are examples of indirect taxes.

2. What is the difference between direct tax and income tax?

There are no differences between the two because income tax is a type of direct tax. Your annual income is taxed under the Income Tax Department's predetermined tax slabs.

3. What is an example of an indirect tax?

GST is an example of an indirect tax. It is charged on the supply and manufacture of goods and services, but the tax burden is passed to the end-use customer.

4. Which is better, direct or indirect tax?

Both have their positives and negatives. But direct taxes are generally preferred to indirect taxes due to their progressive nature, where the rich are taxed more than the others. In contrast, indirect taxes have a flat taxation system that lacks equitability.


Fi Money is not a bank; it offers banking services through licensed partners and investment services through epiFi Wealth Pvt. Ltd. and its partners. This post is for information only and is not professional financial advice.
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