A Direct tax is imposed directly on the taxpayer and paid directly to the government by the ones on whom it is imposed. It cannot be shifted by the taxpayer to someone else. Some important direct taxes imposed in India are as under:
- Income Tax: It is levied on and paid by the same person according to the different tax brackets as defined by the income tax department. It is imposed by the government on all the income that is generated by various entities within their jurisdiction. All individuals and businesses have to file an income tax return every year to determine whether they owe any taxes or are eligible for any tax refund.
- Corporate Tax: It is also known as the corporation tax. It is the tax on all the income or gains generated by corporations. It is generally levied on the profits earned. The companies and business organizations are taxed on the income under the provisions of Income Tax rules.
- Estate Tax: An estate tax which is also known as an inheritance tax or death duty is a tax which arises on the death of an individual. It is a tax on the estate or total value of the money and property, of a person who has died.
- Gift Tax: It is the tax that an individual receiving the taxable gift pays to the government.
An indirect tax is a tax collected by an intermediary from the person who bears the ultimate economic burden of the tax. It can be shifted by the taxpayer to someone else. An indirect tax may increase the price of a good so that consumers are actually paying the tax by paying more for the products. Some important indirect taxes imposed in India are as under:
- Customs Duty: It is a tariff or tax imposed on goods when transported across international borders. The purpose of it is to protect the country’s economy, jobs by controlling the flow of goods, especially the restrictive and prohibited goods, in and out of the country. Hence, simply put, it is the tax imposed on imports and exports of goods. Under the customs laws, the various types of duties are levied:
- Basic Duty: It is levied on all imported goods.
- Additional Duty or Countervailing Duty (CVD): Countervailing Duty (CVD) is charged on the import of specific goods listed by the government of importing country as per their Foreign Trade Policy. It is imposed to balance the price of the same product of domestic producers and the price of foreign producers based on the export subsidy they avail from their exporting country.
- Anti-dumping Duty: Dumping is basically when foreign sellers may export into India, goods at prices below the amounts charged by them in their domestic markets with the intention to capture the Indian markets. That is why, in order to prevent dumping, the Central Government may levy additional duty equal to the margin of dumping on such articles.
- Protective Duty: The Central Government may levy protective anti-dumping duties at the rates recommended on specified goods.
- Export Duty: Such duty is levied on export of goods. The main purpose of this duty is to restrict exports of certain goods.
- Central Excise Duty: It is the tax which is charged on excisable goods that are manufactured in India and are for domestic consumption. It is mandatory to pay Central Excise duty on the goods manufactured, unless if they are exempted.
- Service Tax: The Service Tax is levied on the gross or aggregate amount charged by the service provider on the receiver.
- Sales Tax: Sales Tax in India is a form of tax that is imposed by the Government on the sale or purchase of a particular commodity within the country. Sales Tax is imposed under both, Central and State Government Legislation. Generally, each state follows its own Sales Tax Act and levies tax at various rates.
- Value Added Tax (VAT): It is a tax on the estimated market value added to a product or material at each stage of its manufacture or distribution, ultimately which is passed on to the consumer. It is a multi-point levy on each of the entities in the supply chain.
- Entertainment Tax: It is the tax levied on the cinema owners, who transfer the burden to cinemagoers, which is paid to the state government.
Currently, all the above indirect taxes are subsumed under one tax i.e. Goods and Services Tax (GST). It will be levied on the supply of goods and services. It has three components:
- CGST: Collected by the Central Government on an intra-state sale (For instance, Within Rajasthan)
- SGST: Collected by the State Government on an intra-state sale (For instance, Within Rajasthan)
- IGST: Collected by the Central Government for inter-state sale (For instance, From Rajasthan to Gujarat)
Following are the key differences between direct and indirect tax:
|Basis of Comparison||Direct Tax||Indirect Tax|
|Meaning||Direct tax is referred to as the tax, levied on person’s income and is paid directly to the government.||Indirect Tax is referred to as the tax, levied on a person who consumes the goods and services and is paid indirectly to the government.|
| Individual, Hindu Undivided Family (HUF), Company, Firm etc.
|the end consumers of goods and services.|
|Burden||Cannot be shifted.||Can be shifted|
|Evasion||Tax evasion is possible due to lack of administration in collection of taxes.
|Tax evasion is hardly possible because it is included in the price of the goods and services.
|Direct tax helps in reducing the inflation.||Indirect taxes may increase inflation by increasing the price of goods and services.
|Administrative Costs||It involves higher administrative costs and have many exemptions||It involves lesser administrative costs due to convenient and stable collections|
|Coverage||It is collected only from people in respective tax brackets. Hence, coverage is narrow.||It has a wider coverage as all members of the society are taxed through the sale of goods and services.|
|Event||Taxable income of the assessee.||Purchase, sale or manufacture of goods and provision of services.
|Incidence and Impact||Falls on the same person.
|Falls on different person.|