Every earning individual in India is required to pay income tax based on the various slab rates. Similarly, when individuals buy products or use services, they must pay tax on those purchases or services. It is at this point that the necessity to grasp various sorts of taxes and their distinctions arises.
These taxes are broadly classified into two categories – Direct tax and Indirect tax.
Direct tax is paid by an individual directly to the government. A taxpayer cannot transfer this liability to another entity or person. The Central Board of Direct Taxes (CBDT), which is governed by the Department of Revenue, administers direct taxes in India. CBDT also contributes to the planning stages concerning the implementation of direct taxes.
An individual pays indirect tax to the government but through an intermediary. This intermediary then passes it on to the government. The Central Board of Indirect Taxes and Customs (CBIC) is responsible for administering indirect taxes in India. The Department of Revenue governs the CBIC as well.
The fundamental categorisation of taxes is premised upon who collects the taxes from taxpayers. An overview of direct tax and indirect tax difference is given below –
|Context of differentiation||Direct tax||Indirect tax|
|Imposition of tax||It is levied on the income or profit of a taxpayer.||An indirect tax is levied on goods and services rather than on income or profits.|
|Course of payment||Taxpayers pay it directly to the government.||Taxpayers pay it to the government through an intermediary.|
|Paying entity||Individuals and businesses||End-consumers|
|Rate of tax payment||Based on income and profits||Same for all taxpayers|
|Transferability of payment||Cannot be transferred.||Transferable|
|Nature of tax||Progressive tax, i.e., its rate increases with taxpayer’s income.||Regressive tax, i.e., its rate decreases with increase in income.|
There are several types of these taxes, which further accentuate the difference between direct tax and indirect tax. These types are as follows –
Types of direct tax
The following are some common types of direct taxes imposed in India –
An individual pays an annual income tax based on their income in a particular fiscal year. Under the ITA, the term ‘individual’ also encompasses Co-operative Societies, Trusts, HUFs or Hindu Undivided Families, and any artificial juridical person.
Wealth tax is levied on individuals, HUFs, or companies on the value of their assets in a financial year. It applies to a variety of asset types such as cash, shares, real estate, fixed assets, bank deposits, pension plans, etc.
It is paid by businesses or companies that operate in India based on their earned income in a financial year. The rate of taxation varies based on whether an enterprise is incorporated in the country or anywhere abroad.
The profits generated on the property sale are taxed under the purview of Capital Gains Tax. The term ‘property’ includes residential property, stocks, bonds, precious metals, etc.
Prior to the introduction of GST in India, there existed the following types of indirect taxes –
The government levied sales tax on the sale of movable goods.
All service providers are required to pay this tax to the government except those covered under the negative list of services.
It was a consumption tax placed on a product, which was added at each stage of its manufacture or distribution.
The government introduced the GST regime intending to streamline the taxation proceedings in India.
These are some key benefits of direct taxes-
The benefits of indirect taxes are-
Direct taxes are accompanied by some drawbacks, which are as follows-
Few downsides of indirect taxes include –
Yes, indirect and direct taxes are required to be collected separately. Direct taxes are levied on profits and income, whereas indirect taxes are levied on products and services.
The Products and Services Tax (GST) is an indirect tax levied on goods and services.
Direct taxes are levied on profits and income, whereas indirect taxes are levied on products and services.
In India, indirect tax is administered by the Central Board of Indirect Taxes and Customs (CBIC) and governed by the Department of Revenue.
The minimal threshold limit is determined by your age. If you are under the age of 60, the threshold limit is INR 2.5 lakhs. The threshold limit for older adults aged 60 to 79 years is INR 3 lakhs. The minimal threshold limit for super senior citizens aged 80 and above is INR 5 lakhs. If your gross income falls below this level, you are not obliged to file an income tax return.