Direct vs indirect tax: what’s the difference?

An assessment of direct and indirect taxes can help you determine the amount you pay in taxes annually.
 

The Government of India collects taxes in the form of direct and indirect taxes. Here’s a look at what these two terms mean, their different types and how they benefit society at large.

What is a direct tax?
 

Direct taxes are imposed directly on the incomes of individuals or organisations. These taxes are paid directly to the government, and any liability cannot be transferred to another taxpayer. There are three common types of direct taxes levied on individuals’ and organisations’ incomes in India.

1. Income tax
 

Every citizen of India who earns an income exceeding ₹2,50,000 annually is liable to pay income tax, a form of direct tax. Post this limit, the Indian Government levies taxes based on income slabs. Individual taxpayers can benefit from a range of tax deductions offered by the government under different sections of the Income Tax Act, 1961.

This type of direct tax also includes corporate tax, which is levied on domestic companies and foreign organisations whose make an income from India.

2. Capital gains tax
 

The capital gains tax is levied on any returns earned from investments in assets like equities, bonds, businesses, and farms. The direct capital gains tax is classified into long-term and short-term capital gains tax. Any asset sold within 12 months of acquisition is subject to short-term capital gains tax. On the other hand, assets sold after 12 months are subject to the long-term capital gains tax.

3. Wealth tax
 

A direct tax called wealth tax is levied on properties owned by individuals, and it changes based on the property’s market value. Wealth tax is payable by individuals, Hindu Undivided Family (HUF), and corporate taxpayers based on the residential status of the taxpayer.

What is indirect tax?
 

Indirect taxes are not levied directly on the taxpayer. These are imposed on goods and services. Following are the main types of indirect tax in India.

1. Goods and Services Tax (GST)
 

GST is a form of indirect tax that covers 17 different indirect taxes such as Service Tax, Central Excise, State Value Added Tax (VAT), Stamp Duty, etc. It is a comprehensive indirect tax that follows tax slabs defined by the GST Council to levy indirect tax on goods and services.

2. Customs duty
 

All goods imported to India are taxed with customs duty. This indirect tax applies to every item imported from a foreign country to India.

3. Value Added Tax (VAT)
 

VAT is an indirect tax levied on any movable product sold directly to the customer. VAT comprises central sales tax, which is payable to the Government of India.

The benefits of direct and indirect taxation
 

Here are some critical benefits of direct and indirect taxes.

• Direct taxes help the government in controlling inflation.
• Direct and indirect taxes help the government tax everyone equally. While individuals having high incomes pay higher direct tax, indirect tax is levied on everyone, including the lower-income groups.
• Indirect taxes are easy to collect since they are collected when making purchases.
• Direct taxes are progressive since they help a government reduce income inequality.
  

Tax payments can also be made online. You can pay your income tax online via IDFC FIRST Bank’s swift, easy, and seamless tax payment portal. To know the steps to be followed to pay direct taxes online in India, head to our online tax payment portal.

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