Types of Taxes in India: Direct Tax and Indirect Tax 

Taxes are essential for the functioning of any government, providing necessary funds for public services, infrastructure, and administration. Under the tax system, two types of taxes are there in India; i.e.; Direct Tax and Indirect Tax. Both types of taxes play a significant role in the economy, contributing to the government’s revenue and ensuring the smooth functioning of the country. In this article, we will explain the types of taxes in India. 

What are the types of Taxes in India? 

In India, based on the broder categorization, taxes are of two types: 

• Direct Tax and 
• Indirect Tax.  

Direct Tax is a tax paid directly to the government by the person or entity on whom it is imposed. The tax burden cannot be shifted to another individual.
Whereas Indirect Tax is collected by an intermediary (such as a retailer) from the consumer. The burden over tax can be shifted from a person to another one. 

• Direct Taxes include Income Tax, Corporate Tax, Capital Gains Tax, and (historically) Wealth Tax. These are paid directly by the taxpayer to the government.  
• Indirect Taxes include GST, Customs Duty, Excise Duty, and Service Tax. These are collected by intermediaries and paid to the government.  
• Other Taxes encompass Professional Tax, Property Tax, Road Tax, Entertainment Tax, and Stamp Duty, which are specific to certain activities and levied by state or local authorities. 

Category	Tax Type	Description	Applicability	Compliance
Direct Taxes	Income Tax	Tax on income earned by individuals and businesses	Based on income slabs set by the government, applicable to individuals, HUFs, and businesses	Annual filing of Income Tax returns
	Corporate Tax	Tax on profits of companies	Different rates for domestic and foreign companies	Payment on net income after expenses
	Capital Gains Tax	Tax on profit from the sale of assets like property, stocks, bonds	Categorized into short-term (less than 36 months for property, 12 months for equities) and long-term (more than these periods)	Filing during the year of sale
	Wealth Tax	Tax on net wealth of individuals, HUFs, and companies (abolished in 2015)	Applicable until 2015, historically significant	N/A
Indirect Taxes	Goods and Services Tax (GST)	Comprehensive type of tax over the manufacture, sale, and consumption of goods and services	Divided into CGST, SGST, and IGST based on intra-state and inter-state transactions	Collected at each point of sale/service
	Customs Duty	Tax on goods imported into or exported out of India	Rates vary based on the type of goods and their origin/destination country	Paid during import/export processes
	Excise Duty	Tax applied on manufacture of goods within Indian boundary	Mostly subsumed by GST; still applicable to certain products like alcohol and petroleum	Paid by manufacturers
	Service Tax	Tax on services provided in India	Subsumed by GST; historically significant	Collected from service providers
Other Taxes	Professional Tax	Tax on professions, trades, and employment	Levied by state governments; varies by state	Paid by employers and employees
	Property Tax	Tax on property ownership	Levied by municipal authorities; varies based on property location and value	Annual payment by property owners
	Road Tax	Tax on vehicles for road usage	Levied by state governments; varies by vehicle type and usage	Paid during vehicle registration
	Entertainment Tax	Tax on entertainment activities like movies, shows, and exhibitions	Levied by state governments; varies based on the type of entertainment	Included in the ticket price
	Stamp Duty	Tax on legal documents related to property transactions, marriage certificates, etc.	Levied by state governments; varies by document type and property value	Paid during document registration

Types of Direct Tax and Indirect Tax

Here are the main types of Direct Taxes in India are: 

• Income Tax 
  • Income Tax is levied on the income earned by individuals, Hindu Undivided Families (HUFs), and businesses.
  • Its applicability is based on income slabs set by the government, with varying rates. Requires annual filing of Income Tax returns detailing earnings and tax paid. 

• Corporate Tax 
  • Corporate tax is imposed on the profits of domestic and foreign companies operating in India.
  • Companies must pay tax on net income after deducting expenses and allowances. Different rates are applied for domestic companies and foreign companies. 

• Capital Gains Tax 
  • This kind of tax is charged on the profit from the sale of assets such as property, stocks, and bonds. Rates vary based on the type and duration of asset holding.
  • The tax can be categorized into short-term and long-term capital gains, depending on the holding period of the asset. 
    • Short-term Capital Gains: For assets held for a short period (less than 36 months for immovable property, 12 months for equities). 
    • Long-term Capital Gains: For assets held longer than the short-term period. 

• Wealth Tax (Abolished in 2015) 
  • Wealth Tax was levied on the net wealth of individuals, HUFs, and companies. Although no longer in force, it was an important Direct Tax historically. 

The main types of Indirect Taxes in India are: 

• Goods and Services Tax (GST) 
  • Goods and Services Tax is a comprehensive tax type levied on the manufacture, sale, and consumption of goods and services.
  • In 2017, GST replaced multiple indirect taxes like VAT, Service Tax, and Excise Duty.   
  • Based on the type of tax collections, GST is divided into three. 
    • Central GST (CGST): Collected by the central government on sales within state. 
    • State GST (SGST): Collected by state governments on intra-state sales. 
    • Integrated GST (IGST): Collected by the central government on inter-state sales. 

• Customs Duty 
  • Customs Duty is charged on goods imported into or exported out of India. The customs duty rates vary based on the type of goods and their origin / destination country.
  • Its main purpose is to protect domestic industries and regulate the movement of goods across borders. 

• Excise Duty 
  • Excise Duty is tax type levied on the manufacture of goods within India. Mostly subsumed by GST, but still applicable to certain products like alcohol and petroleum.
  • During the initial stage, it was considered important for generating revenue from domestic manufacturing. 

• Service Tax 
  • Service Tax is tax collected on services provided within India. In simple words, simplified tax collection from the service sector. 

What are the differences between Direct Tax and Indirect Tax? 

Let’s see the detailed overview of the difference between Direct Tax and Indirect Tax. 

Criteria	Direct Tax	Indirect Tax
Definition	Tax paid directly by individuals or entities to the government.	Tax collected by intermediaries from consumers and paid to the government.
Examples	Income Tax, Corporate Tax, Capital Gains Tax	GST, Customs Duty, Excise Duty
Burden of Payment	Cannot be shifted to another person	Can be transferred from one person to another
Equity	More equitable, based on the taxpayer’s ability to pay	Less equitable, same rate for all consumers
Tax Evasion	Easier to evade through underreporting	Harder to evade, collected at the point of sale/service
Impact on Prices	Will not affect goods and services pricing	Increases the price of goods and services
Administrative Costs	Higher administrative and compliance costs	Lower administrative costs, but higher compliance costs for businesses
Economic Impact	Can discourage savings and investments	Promotes savings but can lead to inflation
Transparency	More transparent, taxpayers know the exact amount paid	Less transparent, consumers may not be aware of the tax amount included in prices
Revenue Stability	Provides stable and predictable revenue	Can fluctuate with changes in consumption patterns

What are the advantages of Direct Tax?

• Equity:
  • Based on the taxpayer’s ability to pay, ensuring that those with higher incomes pay more. 
• Progressive Nature:
  • Helps in redistributing wealth by imposing higher rates on higher income brackets. 
• Revenue Stability:
  • Provides a consistent and predictable revenue stream for the government. 
• Transparency:
  • Taxpayers are aware of how much tax they are paying, leading to clear accountability. 
• Economic Policy Tool:
  • Can be used to influence economic behavior, such as encouraging investments in certain sectors through deductions and exemptions. 

What are the disadvantages of Direct Tax?

• Tax Evasion:
  • Easier to evade through underreporting or hiding income. 
• Compliance Burden:
  • Filing tax returns can be complex and time-consuming for taxpayers. 
• Economic Disincentives:
  • High tax rates can discourage earnings, investment, and savings. 
• Administrative Costs:
  • Requires substantial resources for tax assessment, collection, and enforcement. 
• Inflexibility:
  • Changes in tax rates or structures can be slow and politically challenging to implement. 

What are the advantages of Indirect Tax?

• Broad-based:
  • Collected from a wide base of consumers, leading to significant revenue generation. 
• Ease of Collection:
  • Collected at the point of sale or service, reducing the chance of evasion. 
• Encourages Savings:
  • Does not directly tax income or savings, promoting investment and spending. 
• Flexibility:
  • Can be adjusted easily to regulate consumption patterns or address economic changes. 
• Less Visible:
  • Consumers may not notice small incremental taxes on individual purchases. 

What are the disadvantages of Indirect Tax?

• Regressive Nature:
  • Affects all consumers equally, which can disproportionately impact lower-income individuals. 
• Inflationary Impact:
  • Increases the cost of goods and services, potentially contributing to inflation. 
• Hidden Nature:
  • Consumers may be unaware of the amount of tax they are paying, leading to less transparency. 
• Compliance Costs for Businesses:
  • Businesses must manage and remit taxes, which can increase their operational costs. 
• Unpredictable Revenue:
  • Revenue from indirect taxes can fluctuate with changes in consumer spending and economic conditions. 

Conclusion

In conclusion, Direct Tax and Indirect Tax are the two different types of taxes in India. Both types of taxes contribute significantly to the nation’s revenue, aiding in the development and maintenance of public services and infrastructure. 

Consult 24eFiling for services like Income Tax filing, GST registration under Direct Tax and Indirect Tax in Bangalore and Hyderabad location. Our team will simplify the process for you. Why wait? Rush to 24efiling Now.!! 

FAQs