Taxes are one of the government’s most important sources of revenue. In 2020, the Indian government got a total of Rs.9,98,037 crore in tax income. The fact that its non-tax revenue was Rs. 2,52,083 crore adds to the importance of taxes. These taxes are broadly classified into two categories – Direct tax and Indirect tax. There is a difference between direct and indirect tax.

Direct tax

A direct tax is one that is paid to the government directly by an individual. This liability cannot be transferred to another company or person. In India, direct taxes are administered by the Central Board of Direct Taxes (CBDT), which is overseen by the Department of Revenue. The CBDT also participates in the planning stages of direct tax implementation.

Advantages of direct taxes:

  • When the economy is confronted with monetary inflation, the government responds by raising tax rates. As a result of this increase, demand for goods and services falls, resulting in inflation being condensed.
  • There are well-defined tax slabs and exemptions in existence, which helps to balance out income inequities. As a result, lower-income persons pay lower taxes, and vice versa.

Drawbacks of direct taxes

  • Individuals utilise fraudulent tactics to escape taxes totally or pay lower sums than they should, despite the fact that strict rules are in existence.
  • Direct taxes are paid in one big sum each year, which is inconvenient. As a result, they are frequently regarded as a liability. Furthermore, the documentation is lengthy and time-consuming, adding to the inconvenient situation.

Direct taxes come in various forms.

The following are some of the most popular types of direct taxes in India:

  • Income tax

Individuals pay an annual income tax based on their earnings during a given fiscal year. Individuals include Co-operative Societies, Trusts, HUFs (Hindu Undivided Families), and any artificial juridical person under the ITA.

  • Wealth tax

Individuals, HUFs, and enterprises pay a wealth tax based on the value of their assets in a given fiscal year. It covers a wide range of assets, including cash, stocks, real estate, fixed assets, bank deposits, and pension plans, among others.

  • Corporation tax

Businesses or enterprises that operate in India must pay it according on their earned income over the course of a financial year. The tax rate varies depending on whether a company is incorporated in the country or elsewhere.

Capital Gains Tax is applied to the earnings generated from the sale of a property. Residential property, stocks, bonds, precious metals, and other types of property are all included in the phrase ‘property.’

Indirect tax

Through an intermediary, an individual pays indirect tax to the government. The information is subsequently passed on to the government through this intermediary. In India, indirect taxes are administered by the Central Board of Indirect Taxes and Customs (CBIC). The CBIC is also governed by the Department of Revenue.

Indirect taxes provide the following advantages:

  • Equal contribution: Indirect taxes ensure that everyone pays something to the government, no matter how small. It also reaches low-income people who are excluded from paying direct taxes.
  • Non-evadable: These taxes are included in the cost of a product. As a result, an individual can only escape an indirect tax by not consuming the taxable item.

The following are some of the disadvantages of indirect taxes:

  • Indirect taxes are regressive since they are the same for all economic classes, making them unfair to those with lesser incomes.
  • Increased product price: In the country, an indirect tax is added to the cost of goods and services, making these items more expensive.

Indirect Taxes and Its Types

There were several forms of indirect taxes in India before to the introduction of GST:

  • Sales tax

On the sale of movable items, the government imposed a sales tax.

  • Tax on services

Except for those on the negative list of services, all service providers must pay this tax to the government.

  • VAT stands for Value Added Tax.

It was a type of consumption tax that was imposed on a product at each stage of its production or distribution. The GST regime was implemented by the government with the goal of simplifying the taxing process in India.

Difference between Direct Tax and Indirect Tax

ParametersDirect taxIndirect tax
Imposition of tax

It is a tax imposed on a taxpayer’s earnings or profitsInstead of income or profits, an indirect tax is imposed on products and services.
Payment schedule

It is paid to the government directly by the taxpayers.Through a middleman, taxpayers pay money to the government.
Entity responsible for payment

Individuals and companiesEnd-consumers
Rate of tax payment

based on profits and incomeThe same goes for all taxpayers.
Payment transferability This element cannot be transferred.Transferable
Taxation’s nature

The rate of a progressive tax rises as the income of the taxpayer rises.A regressive tax is one whose rate falls as income rises.

Conclusion

Taxes are one of the determining factors in a country’s economic progress. Although both direct and indirect taxes have advantages and disadvantages, they both contribute considerably to government income creation. The government makes efforts toward development and progress through their collecting.

Related Posts

Difference Between GST and VAT
GST Requirement for MF Agent
How to Calculate Your Tax Liability in Debt Mutual Funds with Indexation?
Professional tax

LIKE & FOLLOW US ON: