Home > Topics > Income Tax > Direct Taxes vs Indirect Taxes – Differences & Examples
← PreviousNext →

Direct Taxes vs Indirect Taxes – Differences & Examples

When you buy a ₹1,000 shirt, you pay ₹1,180 (₹180 = GST). When your salary is ₹10 lakh, you pay ₹1.12 lakh as tax. What's the difference? Let's find out!

Definitions

Direct Tax

Tax paid directly by the person on whom it is levied. Cannot be shifted to another person.

Examples: Income Tax, Wealth Tax, Property Tax

Key Point: Burden and payment - both on same person

Indirect Tax

Tax collected by intermediary (seller) from consumer. Burden shifted to end consumer.

Examples: GST, Customs Duty, Excise Duty

Key Point: Seller pays to government, but consumer bears the cost

Simple Illustration

Direct Tax:

Your Salary: ₹10,00,000
You pay tax: ₹1,12,000
Government receives: ₹1,12,000 from YOU

You cannot ask your employer or anyone else to pay this tax for you!

Indirect Tax (GST):

Shopkeeper sells shirt: ₹1,000
+ GST 18%: ₹180
You pay: ₹1,180
Shopkeeper collects ₹180 and pays to government

You don't pay government directly - shopkeeper does. But you bear the cost!

Comprehensive Comparison

Loading comparison…

Detailed Differences

AspectDirect TaxIndirect Tax
CollectionDirectly from taxpayerThrough intermediary (seller)
BurdenOn payer onlyShifted to consumer
NatureProgressive (based on income)Regressive (fixed rate)
EvasionDifficult (TDS, documentation)Easier (fake bills, underreporting)
Impact on InflationNoneIncreases prices
Economic EquityMore equitable (rich pay more)Less equitable (poor pay same % as rich)
AwarenessHigh (you see deduction in salary slip)Low (hidden in price)

Types of Direct Taxes in India

Loading stats…

1. Income Tax

On: Individuals, HUFs, Firms, Companies Rate: 0% to 30% (individuals), 25-30% (companies) Collection (2023-24): ₹19 lakh crore

Who pays:

  • Salaried employees
  • Business owners
  • Professionals (doctors, lawyers, CAs)
  • Freelancers

2. Corporate Tax

On: Company profits Rate: 25% (turnover < ₹400 cr), 30% (larger companies) Alternative: 22% (if no deductions claimed - Section 115BAA)

3. Securities Transaction Tax (STT)

On: Stock market transactions Rate: 0.025% to 0.1% (varies by transaction type) Collected: At source (by stock exchange)

4. Wealth Tax (Abolished 2015)

Was on: Net wealth exceeding ₹30 lakh Reason for abolition: High compliance cost, low revenue

Types of Indirect Taxes in India

Current (Post-GST, 2017)

1. GST (Goods and Services Tax)

Types:

  • CGST: Central GST
  • SGST: State GST
  • IGST: Integrated GST (inter-state)

Rates: 0%, 5%, 12%, 18%, 28%

Examples:

  • Milk, books: 0%
  • Medicines: 5%
  • Clothes: 5-12%
  • Electronics: 18%
  • Luxury cars, cigarettes: 28%

Collection (2023-24): ₹20.2 lakh crore

2. Customs Duty

On: Imports Rate: Varies (0-150%) Purpose: Protect domestic industry, revenue

Example: Import iPhone from USA

  • Base price: $1,000 (₹83,000)
  • Customs duty 20%: ₹16,600
  • Total: ₹99,600

3. Excise Duty (on petroleum, liquor)

GST doesn't cover petroleum products yet

4. Professional Tax

On: Employment/profession Rate: ₹200-₹2,500/year (varies by state) Max: ₹2,500/year (Maharashtra)

Progressive vs Regressive Nature

Progressive (Direct Tax)

Higher income → Higher rate

Example - Income Tax Slabs (FY 2023-24, New Regime):

₹0 - ₹3L: 0%
₹3L - ₹6L: 5%
₹6L - ₹9L: 10%
...
Above ₹15L: 30%

Person A (₹5L income): Pays ₹10,000 (2% effective) Person B (₹20L income): Pays ₹3.45L (17.25% effective)

Equity: Rich pay proportionally more!

Regressive (Indirect Tax)

Everyone pays same rate, regardless of income

Example - GST on Mobile Phone (₹10,000):

GST 18%: ₹1,800

Poor person (₹3L income): ₹1,800 = 0.6% of annual income Rich person (₹50L income): ₹1,800 = 0.036% of annual income

Inequity: Poor pay proportionally more!

Real-World Impact

Scenario: Rahul (₹6 lakh salary)

Direct Taxes:

  • Income Tax: ₹30,000
  • Professional Tax: ₹2,400
  • Total: ₹32,400/year

Indirect Taxes (estimates):

  • Shopping (₹1L spend × 12% avg GST): ₹12,000
  • Fuel (₹50,000 × 50% excise/VAT): ₹25,000
  • Electricity, phone (18% GST on ₹30,000): ₹5,400
  • Total: ₹42,400/year

Total Tax Burden: ₹74,800 (12.5% of income)

7 0% comes from indirect taxes that most people don't even realize they're paying!

Advantages & Disadvantages

Direct Tax

Advantages: ✅ Equitable (rich pay more) ✅ Reduces income inequality ✅ Certainty (known in advance) ✅ Promotes savings (deductions for investments)

Disadvantages: ❌ May discourage hard work (high rates) ❌ Evasion by wealthy (black money) ❌ Complex compliance

Indirect Tax

Advantages: ✅ Convenient (no separate payment) ✅ Wider coverage (everyone pays) ✅ Difficult to evade completely ✅ Revenue certainty for government

Disadvantages: ❌ Regressive (burdens poor) ❌ Inflationary (increases prices) ❌ Cascading effect (tax on tax) - reduced by GST ❌ Hidden cost (consumers unaware)

Summary

  • Direct Tax: Paid directly, cannot shift burden - Income Tax, Corporate Tax (₹16.6L cr)
  • Indirect Tax: Paid through intermediary, burden on consumer - GST (₹20.2L cr)
  • Progressive: Direct tax - rich pay higher % (0-30% income tax)
  • Regressive: Indirect tax - everyone pays same rate (18% GST)
  • Collection: Direct tax 55%, Indirect tax 45% of total revenue
  • Real burden: Average person pays 12-15% of income in taxes (direct + indirect combined)

Quiz Time! 🎯

Loading quiz…

Next Chapter: Canons of Taxation - Adam Smith's Principles! 📚

← PreviousNext →