Direct taxes v/s Indirect taxes in India

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Difference between Direct Tax and Indirect Tax in India

Introduction

In India, the government’s right to impose taxes is derived from the Constitution Of India, which divides the power to levy taxes between the state and central governments. All taxes charged in India must be accompanied by a law issued by either the Parliament or the State Legislature. Indirect and direct taxes are the two most common types of taxes in India. In India, all taxes must be preceded by legislation passed by both the Parliament and State Legislatures.

What is a Direct tax?

Direct taxes are those that are paid directly to the government by an individual or a legal entity. Direct taxes are overseen by the CBDT (Central Board of Direct Taxes). Direct taxes are not transferable to another individual or company.

 

Types of Direct tax in India

  • Wealth Tax Act
  • Expenditure Tax Act
  • Income Tax Act
  • Interest Tax Act
  • Gift Tax Act

Advantages of Direct tax

  • Equitable – Indirect tax the individual who earns less income will pay less, while the one who is earning higher income will pay higher tax which will bring equality and relief to the less earner.
  • Reduces inequalities – The tax amount which is been collected by the government from the higher earners will be used in helping the one who is in need, which will help in reducing the inequalities.
  • Curbs inflation – With the increase and decrease in the direct tax rate government controls the inflation in the nation. If there is inflation then the increase in the direct tax rate will affect the buyer’s purchasing power which will help in controlling inflation.

Disadvantages of Direct tax

  • Restrain investment – Many people avoid investing because of direct taxes such as capital gain tax and security transaction tax. Direct taxes, in a sense, stifle investment.
  • Considered a burden – Taxpayers are considered a burden since they are compelled to pay direct taxes such as income tax in a single lump payment every year. Furthermore, the documentation procedure is inherently difficult and time-consuming.

What is an Indirect Tax?

Indirect taxes are the tax which is paid to the government at the time of purchasing any product or any services. unlike direct taxes, indirect taxes are not imposed on the income and profit of an individual or a company. In basic terms, when a buyer purchases a product or service, the excess amount levied by the supplier to the buyer is referred to as indirect tax. Initially, there are 7 types of indirect taxes in India that are excise duty, VAT (Value Added Tax), Service Tax, Entertainment Tax, Custom duty, and others, which are now collectively termed as Goods and Service Tax (GST) which is imposed by the government.

Advantages of Indirect tax

  • The collection is easy – In contrast to direct taxes, indirect taxes do not require any paperwork or complicated procedures to be paid. When you buy goods or services, you must pay the tax immediately.
  • Convenience – In contrast to direct taxes, which are usually paid in one single payment, indirect taxes, such as GST, are paid in little amounts. A small amount of GST was included in the price when you buy goods or services, making GST payment more convenient for taxpayers.

Disadvantages of Indirect tax

  • More expensive – Individual needs to pay an excessive amount at the time of buying products and services, which makes the product and services more expensive.
  • Regressive – Indirect taxes are well-known for being regressive. They are not equitable, even though they ensure that everyone pays taxes regardless of their income. Indirect taxes are levied at the same rate on people of all income levels.

Differences between Indirect and Direct taxes

  • As, stated earlier direct taxes are the ones which is been imposed on the profit and income, while indirect tax is imposed on the products and services.
  • There is a mediator between the end consumer and the government in the indirect taxes, while the direct taxes are directly paid to the government.
  • The direct tax rate is different for an individual, company, and for other legal authorities, while indirect tax is the same for every individual and company.
  • The direct tax depends on the income, while indirect tax does not depend on the income of an individual.
  • Direct taxes cannot be shifted or passed to another individual, while indirect taxes can be passed or shifted to another person or any entity.

Suggested Read: How to save tax in a Private Limited Company

Conclusion

Both direct and indirect taxes serve different purposes. Differences in direct and indirect taxes are equitable since they are imposed on individuals based on their ability to pay. They are also cost-effective because of lower collection costs.

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Ishita Ramani is a young women entrepreneur and currently the operations directors at ebizfiling india private limited. In her entire career so far, she had led a team of 50+ professionals like CA, CS, MBAs, and retired bankers. Parts from her individual experience on almost every facet of Indian statutory compliance, she has been instrumental in setting up operational at ebizfiling.com!

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