GST Software
January 21st, 2019 in Income Tax

Difference Between Direct and Indirect Taxes in India

Difference Between Direct and Indirect Taxes

Tax is a charge imposed and collected by the central or/and state government to pay for the goods and services it provides including schools, hospitals, infrastructure, military production and law enforcement. The tax comes into the picture when there is an ownership of an asset, sale of product or service or where income arises. The amount of tax paid by a taxable person fairly depends upon its spending and earnings.

 

Types of Taxes in India

Taxes are broadly catalogued into two categories: Direct and Indirect Taxes

1. What is Direct Tax?

Direct taxes are those taxes that are directly imposed on the person from whom it is collected. These taxes completely depend on the income and wealth of a taxpayer.

A.  Types of Direct Taxes in India

Direct taxes include the following:

Income Tax: Central government imposes and collects the income tax on the income of a taxable person. Income tax slabs have been structured depending on the various income groups & types.

Corporation Tax: Domestic corporate is liable to pay corporation tax on the profits earned during a particular period. Corporation tax has a flat rate structure.

B.  Advantages of Direct Taxes
  • Lower tax burden on the lower income group.
  • Wealth distribution is equal and just under direct taxation
  • Direct tax rates act as an anti-inflationary tool
C.  Disadvantages of Direct Taxes
  • Direct taxes might restrain savings and investments
  • Filing & Payment procedure of direct taxes is bit complicated

2. What is Indirect Tax?

The indirect taxes are imposed on the supplier but the ultimate burden is transferred to the ultimate consumer of the goods and services as the case may be. This tax is imposed and collected by the Central government or State/UT government or both.

A.  Types of Indirect Taxes in India

The major indirect tax in India includes

Goods and Services Tax: 17 indirect taxes have been subsumed under the GST law which was implemented on 1st July 2017.

Central level

  • Central Excise Duty (CENVAT)
  • Service Tax
  • The Excise Duty levied under the Medicinal and Toiletries Preparations (Excise Duties) Act 1955
  • Additional Excise Duties
  • Additional Customs Duty, commonly known as Countervailing Duty (CVD)

State level

  • VAT / Sales tax
  • Luxury tax
  • Entertainment tax (unless it is levied by the local bodies)
  • Taxes on lottery, betting and gambling
  • State Cesses and Surcharges on the supply of goods and services
  • Entry Tax
  • Purchase Tax
B.  Advantages of Indirect Taxes
  • Higher revenue to the government
  • Transparent tax administration
C.  Disadvantages of Indirect Taxes
  • Increased prices of goods and services
  • Equal tax burden irrespective of Income

Direct and Indirect Tax Collection in India

The taxes collection completely depends on the nature of taxes. Direct taxes (income tax and corporation tax) are imposed and collected by the central government. Payment of income tax is monitored by the Income Tax Department. Whereas, Indirect Tax (Goods and Services Tax) is imposed and collected by the Central Government or State/UT Government or both. GST council is chaired by the finance minister along with state finance ministers for governing the GST rates, rules and regulations.

Difference between Direct and Indirect Taxes

Direct and Indirect taxes differ on various parameters

Nature

Direct Tax

Indirect Tax

Tax payment and burden

The taxpayer is liable to pay the direct tax.

The seller or the service provider is liable to pay tax and the burden is transferred to the end consumer

Tax liability

The tax liability amount depends on the income group of the taxpayer

The tax liability amount depends on the type of goods & services supplied

Nature of taxes

Income or profit based tax

Consumption or destination based tax

Tax evasion

Tax evasion is possible due to the lack of administration, however measures are taken to reduce it to minimum

Tax evasion is possible due to common practices followed by tax payers, however measures are taken to reduce it to minimum

Society coverage

It is applicable on the taxpayers who falls under respective tax group or bracket

It is applicable on all the taxpayers irrespective of tax bracket