Difference Between Direct and Indirect Taxes

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  • 16 May 2024
Difference Between Direct and Indirect Taxes

Key Highlights:

Direct taxes are taxes levied on income and profits Income tax, capital gains tax, etc., are examples of direct taxes Indirect taxes are imposed on goods and services GST and customs duty are examples of indirect taxes

Taxes are a crucial revenue source for the government. The government levies several types of taxes, which fall into two broad categories: direct and indirect.

What are direct taxes?

Direct taxes are taxes levied by the government directly on individuals and businesses based on their income and profits. These are collected by the Central Board of Direct Taxes (CBDT). The different types of direct taxes are:

  • Income tax

It is the most common type of direct tax that you pay directly to the government. You need to pay this tax according to the rate for each tax slab specified by the government every year. For salaried employees, the employer deducts this amount from the salary directly. This is called tax deducted at source (TDS), and it is subject to your investment declaration at the start of the financial year.

  • Corporate tax

Corporate tax is levied on domestic and foreign companies operating in India. The rates vary depending on the company type and size.

  • Capital gains tax

This tax is levied on the profits you earn from selling capital assets such as stocks, mutual funds, real estate, etc. The rate depends on the asset type and its ownership duration (long term or short term).

Advantages and disadvantages of direct taxes

The table below captures the advantages and disadvantages of direct taxes:

Advantages Disadvantages
Helps in revenue generation
Susceptible to tax evasion
Helps reduce income inequalities by redistributing wealth from higher-income groups to lower-income sections
Cumbersome documentation
Ensures a steady flow of funds for public expenditure
Can put a greater tax burden on individuals in the higher income bracket

What are indirect taxes?

Indirect taxes are taxes you pay on goods and services. You pay these taxes through an intermediary, and they are collected by the Central Board of Indirect Taxes and Customs (CBIC). The different types of indirect taxes are as follows:

  • Goods and Services Tax (GST)

GST is the most common indirect tax and has replaced several others, including excise duty, service tax, VAT, etc. GST rates vary according to different categories of goods and services.

  • Customs duty

Customs duty is imposed on the import and export of goods. The rates depend on the type of goods and the country of origin.

Advantages and disadvantages of indirect taxes

The table below captures the merits and drawbacks of indirect taxes:

Advantages Disadvantages
Same for everyone
Regressive in nature
Convenient payment options
Makes goods and services expensive
Collection is quite easy
Less transparent

Difference between direct and indirect taxes

The following table captures the major differences between direct and indirect taxes across various aspects:

Aspects Direct Tax Indirect Tax
Payment type
Directly to government
Levied on
Income and profits
Goods and services
Tax rate
Depends on income and profits
Same for everybody
Tax type
Progressive in nature. Higher the income, higher the tax
Regressive as tax rates are flat
Tax liability
Not transferable
Can be transferred

Summing it up

Irrespective of the type of tax liability, you should pay your dues on time. Failure to do so can attract stiff penalties and land you in trouble. Paying taxes on time not only helps you keep your record clear but also helps you participate in the country’s economic growth.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

Investments in securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI prescribed Combined Risk Disclosure Document prior to investing. Brokerage will not exceed SEBI prescribed limit.

FAQs on direct and indirect taxes

GST is a type of indirect tax on goods and services, to be paid as and when they are availed. On the other hand, income tax is a direct tax on an individual’s income as per the income tax slab levied every financial year.

Direct taxes are applied on income and profit acquired during the financial year, and indirect taxes are levied on goods and services that you avail from time to time.

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