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 | Intermediary |
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.
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FAQs on direct and indirect taxes
What is the difference between GST and income tax?
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.
What are direct and indirect taxes?
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.
