Difference Between Direct and Indirect Tax

Taxation is a vital aspect of government revenue generation, supporting public expenses and economic development. It encompasses two primary categories, i.e. direct tax and indirect tax. 

 

Direct tax is levied directly on individuals or businesses, and indirect tax is imposed on goods and services during transactions. Understanding their distinctions helps determine the ultimate burden of taxation.

Here is a table comparing a few factors of indirect and direct tax:

A direct tax is paid directly to the government by individuals or businesses and cannot be transferred. This tax generally applies to the income, assets, or profits earned throughout the financial year. The tax amount depends on the income tax slab you fall under.

Here are some examples of direct tax:

• Income Tax  

This considers the value appreciation and earnings of all the assets and income sources of the individual. A similar system of ‘corporate tax’ is in place for businesses. 

• Wealth Tax

This tax applies to high-net-worth individuals. For those with a net wealth of more than ₹30 Lakhs, wealth tax is levied at 1%. 

 

However, this was abolished in the 2015 budget. Instead, the additional surcharge was increased by 2% to 12%. This applies to individuals with an income of over ₹1 Crore, and businesses with an income of ₹10 Crores or more per year. 

Indirect taxes are transferable taxes, where the final liability to pay is transferable onto others. This is levied on goods and services rather than the taxpayer's earnings. 

 

Generally, sellers, manufacturers, and service providers collect this tax from customers and pay it to the government. The tax amount depends on several factors, including the price of the product or service.

Check out some examples of indirect taxes that will help you understand the concept better.

• Service Tax  

Service providers all over India must pay this tax except those covered under the negative list of services. 

• Entertainment Tax  

This applies to commercial entertainment, such as movie tickets, music festivals, cricket matches, etc. 

Indirect taxes can be transferred to others, and they're imposed on goods and services. Generally, sellers, manufacturers, and service providers collect this tax from customers and pay it to the government. 

 

The tax amount depends on several factors, including the price of the product or service.

Check out some examples of indirect taxes that will help you better understand the concept:

• Service Tax  

Service providers all over India must pay this tax except those covered under the negative list of services. 

• Entertainment Tax  

This applies to commercial entertainment, such as movie tickets, music festivals, cricket matches, etc. 

Now that you know the difference between direct and indirect tax, here is a look at their benefits:

1. Pros of Direct Tax 

• Ensures equitable contribution from taxpayers

• Curbs inflation  

2. Pros of Indirect Tax

• Ensures guaranteed and equal contribution from all 

• Easy collection 

There are also downsides to consider while discussing the difference between direct and indirect taxation. 

1. Cons of Direct Tax

• Tax payment procedure is lengthy, complex, and cumbersome

• May put a restriction on investments

2. Cons of Indirect Tax

• Uniform charges may appear unfair to lower-income classes 

• Increases the cost of goods and services

 

Now that you know the difference between direct and indirect tax, remember that certain investments can help you lower your direct tax, i.e., income tax liability. Moreover, such an investment can help you save for the future or meet a specific financial goal. 

 

On Bajaj Markets, explore popular investment tools like NPS, ELSS funds, and FDs, among others. With leading issuers and partners onboard, you can easily begin your investment journey in just a few clicks.