DIRECT V.

INDIRECT TAXES

Introduction
What is Tax?
A tax is a mandatory/obligatory fee/expense charged by the government (state and central) on an
individual or an organisation to collect revenue for the benefit of the population. This collected
revenue is used to finance projects for the public welfare and public interest such as schools,
bridges, infrastructure, hospitals, and even many initiatives that the government takes which do
not have any significant benefit economically, etc.
Every person as well as legal entities such as corporations, development organizations,
associations of people and non-profit organizations, are subject to paying taxes.
Taxes are one of the most important sources of incomes for the government.
We would know taxes as something we pay after meals at a restaurant, to watch a movie at the
multiplex, to drive our vehicles on roads or to simply purchase a packet of biscuit from a general
store. And as a responsible citizen of the country, it is our duty to do the same, i.e., to pay it, but
do we know how these taxes that we pay are classified or what the different types of taxes
implemented in the country are?

How does Taxation work?

Your tax bracket for the fiscal year affects how much tax you must pay. Individuals pay a
different tax rate than corporations. Nonetheless, various kinds of income are taxed at varying
rates or subject to a variety of constraints.
The Indian Tax System recognizes the following types of income, referred to as "Heads of
Income" by Indian Tax Rules:
1. Income from House Property – any rental revenue collected from residential home is
referred to as House Property.
2. Income from Capital Gains,
3. Income from Salary – any regular source of income is considered under this head.
4. Income from Other Sources – which includes gifts, lottery winnings, dividend income,
and interest income.
Exemptions and deductions have historically been the favored method for taxpayers to lower
their taxable income. Some types of income and benefits are tax-free, the earning of which
makes one eligible for a tax break. When you invest in tax-saving devices or pay for specified
costs, you are entitled to these deductions. School tuition expenditures is one such example,
which is eligible as a deduction from gross income to some degree under the Income Tax Act of
1962.

Types of Taxes
The Indian Tax structure is that of a three-tier one. Namely,
1. Local municipal bodies,
2. State, and,
3. Central Government.
We can broadly classify the types of taxes collected on the basis of how they are paid to the
above-mentioned authorities into:
1. Direct Tax, and,
2. Indirect Tax.

Direct Tax
Direct taxes are paid directly to the taxing authorities or the authorities that are imposing/levying
the taxes.
For example, income tax, personal property tax, wealth tax, etc. These are imposed by the
government and are also paid to the government, directly.
It is not possible to transfer these taxes to another person or organization.
Direct taxation is governed by multiple acts. The Central Board of Direct Taxes (CBDT) is in
charge of handling direct tax administration in India. The Department of Revenue
oversees/governs the CBDT. The department also helps the government plan how to impose
direct taxes by offering suggestions and planning assistance.

Common types of Direct Taxes in India:

1. Income Tax
• One of the most prevalent types of direct taxes is income tax.
• As the name implies, income tax is a tax that is levied on the earnings and income
of people and companies, on the basis of the income tax slabs of the IT
department, by the federal government, on the money made by them during a
specific fiscal year.
• As mentioned earlier, for individual taxpayers, there are several tax deductions
available under various sections of the IT Act.
• However, the amount of money you earn under various income categories
determines how much income tax you must pay. Additionally, income tax is
levied on individuals whose yearly income surpasses Rs 2.5 lakh per annum for
the fiscal year 2022–2023.

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 2. Capital Gains Tax
• You will have to pay capital gains tax on each and every capital gain you make.
The selling of a property or investments may result in this capital gain.
• You will be liable to pay either Long-Term Capital Gains (LTCG) tax or Short-
Term Capital Gains (STCG) tax, depending on the capital gains and the length of
time you held the investment.

Other different types of Direct Taxes in India are:

1. Wealth Tax – a tax levied on the worth of a person’s property.

2. Corporate Tax – a tax levied on the earnings of businesses and corporations.

3. Estate Duty – a tax paid by a citizen in the event of an inheritance.

4. Gift Tax – the recipient of a taxable gift must pay taxation.

Benefits of Direct Tax:

1. Curbs Inflation – by increasing the direct tax rates, the goods and services demand can be
reduced. And as demand falls, it helps condense inflation. So, during cases of monetary
inflation, the Government increases the direct tax rates in order to curb the inflation.

2. Equitable and Reduced Inequalities – the foundation of direct taxes lays in the
progression principle. People with lower income pay lower taxes, and people with higher
income pay higher taxes.
The government uses the increased taxes it receives from the wealthy to fund new
programs for the underprivileged. People with lesser incomes can raise their standard of
living by using the income streams that the projects give.

3. Elasticity & productivity – direct taxes have elasticity because when the government is
faced with a natural calamity emergency like earthquakes, famine or floods, it can collect
money in the form of taxes to overcome all the loss and damage suffered.

4. Certainty – both the government and the taxpayers have certainty about the total amount
being received and the quantity, rate, time of payment, mode of payment, and even the
punishment prescribed upon failure to pay respectively. So, everyone knows that tax has
to be paid, in a certain way and that it WILL be paid.

5. Simplicity – the rules, acts, procedures, and regulations relating to income tax are
extremely clear and simple.

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Disadvantages of Direct Tax:
1. Considered a Burden – it is a burden for taxpayers to pay a single lump sum every year
like in cases of income tax. It is not only a burden for them, but it is also a time-
consuming and complex process of documentation of the same, creating a lot of
inconvenience.

2. Evasion is Possible – there are a lot of fraudulent practices through which one can escape
or can avoid paying or can pay lower amounts of taxes. However, the latest tax reforms
have made it difficult to do the same but of course, it hasn’t completed stopped.

3. Restrains from Investments – a lot of the taxpayers avoid investing due to taxes like the
capital gains tax or the securities transaction tax.

4. Uneconomical – the expenses that arise from the process of collection of these direct
taxes are higher due to the widespread requirement of staff for the process.

5. Less incentive to work and save – rates of direct taxes are progressive in nature, as
mentioned earlier in the benefits of direct taxes. The taxpayer, if having higher income,
after paying the particular higher amount of tax, is left with every less money for himself
which leads him to feel discouragement to work hard and save money upon reaching a
certain level of income because almost nothing remains for himself after paying the taxes.

6. Arbitrary in nature.

Indirect Tax
While direct taxes are imposed on income and profits, indirect taxes are levied on goods and
services.
A major difference between direct and indirect tax is the fact that while direct tax is directly paid
to the government, there is generally an intermediary for collecting indirect taxes from the end-
consumer. It is then the responsibility of the intermediary to pass on the received tax to the
government.

Unlike a direct tax, indirect taxes do not depend on the income of an individual. The tax rate is
the same for everyone.
The CBIC (Central Board of Indirect Taxes and Customs) is mostly responsible for handling
indirect taxes in India. Just like CBDT, CBIC also works under the Department of Revenue.
For example, end-users of products and services are subject to indirect taxation. The government
levies it on suppliers and manufacturers to purchase, sell, and acquire products.

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Common types of Indirect Taxes in India:

1. Sales Tax – It is a type of indirect tax in which the seller charges a buyer at the time of
selling or exchanging a taxable good. Then the seller repays the tax to the government on
behalf of that buyer. However, the sales tax generally relies upon the authority in power
and the policies implemented by the authority. Some major sales tax types are
manufacturer’s sales tax, wholesale sales tax, use tax, value-added tax, and retail sales
tax.

2. Excise Duty – paid by the manufacturer, who passes on the tax burden to wholesalers
and retailers. It is imposed on licensing, sale or production of certain goods produced
within the country.

3. Customs Duty – import tariffs put on goods imported from other countries, which are
effectively paid for by customers and merchants. When you purchase something that
needs to be imported from a foreign country, you are required to pay customs duty on it.
Irrespective of whether the product has come to India by air, land, or sea, you will have to
pay the customs duty on it. The goal of imposing this indirect tax is to make sure that
every product entering India is taxed.

4. Service Tax – a tax levied on products and services provided to consumers, including a
restaurant bill.

5. Goods & Services Tax (GST) – it is one of the existing indirect taxes imposed on various
goods and services. One significant benefit of GST is that it eliminates the tax-on-tax or
cascading effect of the previous tax regime. GST subsumed as many as 17 different
indirect taxes in India like Service Tax, Central Excise, State VAT, and more. It is a
single, comprehensive, indirect tax which is imposed on all the goods and services as per
the tax slabs laid by the GST council. One of the biggest benefits of GST is that it mostly
eliminated the cascading or tax-on-tax effect of the previous tax regime.

Benefits of Indirect Taxes:

1. High Revenue Production – indirect taxes cover a large number of essential goods and
luxurious goods which are consumed by the both the rich and poor classes o f people
which helps in covering a very large revenue.

2. No evasion – indirect taxes are included in the prices of the goods and services or a
commodity which makes it difficultly to evade or avoid the tax. It ensures that every
individual, including the poor, contributes toward nation-building.

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 3. Convenient – since the indirect taxes are small amounts and are included in the price of
the commodity or goods & service, it usually goes unnoticed by the taxpayers while
being paid which is not the case in direct taxes. This payment is more convenient as such
taxes are already included in the price when purchasing any product or service.

4. Economy – the procedure of collecting indirect taxes are easy and simple and are
economical in collection and administration of the same.

5. Wide coverage – almost all everyday essential commodities are covered under indirect
taxes .

6. Elasticity – since there is wide coverage, there is wide scope for modifications regarding
the taxes, goods and tax rate, etc.

Disadvantages of Indirect Tax:

1. Regressive in Effect – by taxing all commodities and goods and services, there is no
proper distinction between the rich and the poor and everyone has to pay the same taxes
irrespective of how high it is or not.

2. Uncertainty in collection – the accurate total yield or taxes collected cannot be estimated
by the tax authorities due to the uncertainty of whether those commodities and goods and
services will be purchased or not.

3. Increases Inflation – indirect taxes increase the cost of input and output, the production
cost, and the price of the goods. It can result in an increase in the overall price of goods
and services.

4. Consumers often lack civic consciousness of the tax they are paying.

DIRECT TAXES INDIRECT TAXES OTHER TAXES

Income Tax Sales Tax Property Tax
Corporate Tax Service Tax Registration Fees
Securities Transaction Tax Coctroi Duty Toll Tax
Capital Gains Tax Custom Duty Education Cess
Gift Tax Value Added Tax (VAT) Entertainment Tax
Wealth Tax Goods & Services Tax (GST) Professional Tax

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Direct v. Indirect Taxes

DIRECT TAXES INDIRECT TAXES

Tax on income or wealth Tax on goods or services
Progressive in nature Regressive in nature
The tax burden cannot be shifted, i.e., The tax burden can be shifted, i.e., the
the person who has to pay the tax to the person who has pay the tax can pass on
Government cannot recover it from the incidence to another person.
somebody else or cannot shift the burden
of paying that tax to the Government
upon somebody else.
Collection is challenging Comparatively simple
Paid by individuals and businesses Paid by end consumers
Depends on income and profits Same for everyone
Tax evasion is possible Tax evasion is not possible

Conclusion
As a responsible citizen, it is our duty to pay the taxes and to be regular with the same.
The largest source of tax in India is GST which is an indirect tax. Collections from GST in the
Financial Year20 22 crossed Rs. 6.75 lakh crores accounting for 26.8% of the central
government’s gross tax revenue in the year.

The next largest tax in India is the corporate tax which is the direct tax levied on companies. It
accounted for 25.2% of the total tax revenue in the Financial Year 2022.

Bibliography
1. https://mutualfund.adityabirlacapital.com/blog/what-is-tax
2. https://www.adityabirlacapital.com/abc-of-money/direct-vs-indirect-tax-what-is-the-
difference
3. https://cleartax.in/s/types-of-taxes-in-india-direct-and-indirect-tax
4. https://unacademy.com/content/bank-exam/study-material/general-awareness/taxation-in-
india-direct-and-indirect-taxes/