Distinguish Between Direct Tax and Indirect Tax
Close

Buy a Life Insurance Plan in a few clicks

Close

Now you can buy life insurance plan online.

Kotak e-Term Plan

Kotak e-Term Plan provides a high level of protection to your loved ones in your absence. Know more

Kotak Guaranteed Savings Plan

Kotak Guaranteed Savings Plan is a savings and protection plan that helps you achieve long-term financial goals and provides an insurance cover against any eventuality. Know more

Kotak E-Invest

Kotak e-Invest plan is a complete Unit-Linked Insurance Plan that can be customized as per your goals and needs. Know more

Kotak Health Shield

Kotak Health Shield Plan helps secure your finances in sudden medical expenses such as Cardiac, Liver, Neuro, and Cancer (all early and significant illness stages/conditions of cancer), along with offering protection for personal accidents - in case of accidental death or disability. Know more

Kotak Lifetime Income Plan

Kotak Lifetime Income Plan gives you the security of your income continuing throughout your life and in your absence throughout your spouse's lifetime! Know more

What is the Difference Direct Tax and Indirect Tax

What is the Difference Direct Tax and Indirect Tax
  • 17th Jan 2020 |
  • 11,138

Most people know about taxes as it gets deducted regularly from their salary and is charged while buying or consuming something. But have you tried to differentiate GST from corporate tax? Though not many are gleeful about the income tax deductions, they keep going on without knowing about taxes. Today let’s distinguish between direct tax and indirect tax and better understand the difference between them./p>

Direct Tax

What is Direct Tax?

Direct tax is a type of tax that is paid by an individual to the government. This individual can be a person or an organization. As this type of tax is directly imposed by the government, it cannot be transferred to another entity. Some advantages of direct tax are that it aids in curbing inflation and also distributing wealth equally in the society.

Types of Direct Tax

Income Tax

Income tax is a common tax paid by most salaried and self-employed persons. This tax varies from person to person as one pays income tax according to the tax bracket their income falls in which is directly levied on the salary. Besides, the Government of India allows taxpayers income tax exemption for various investments and expenditure schemes.

Wealth Tax

Wealth tax is levied on the value of certain assets in the market for that particular financial year. This asset can be held by an individual, HUFs (Hindu Undivided Family) or companies. Though wealth tax was widely used before, now it has been abolished.

Corporate Tax

Corporate tax is levied on the profits of companies and businesses in India. This tax is also applicable to foreign companies where the income is arising from India.

Capital Gains Tax

Capital Gains tax is taxed on the income arising out of the sale of investments. The tax is levied based on how long you hold the asset. Capital gains are of two types, Long Term Capital Gains (LTCG) and Short Term Capital Gains (STCG) - according to which the tax rates differ.

Benefits of Direct Tax

Here are some benefits of direct taxes:

  • They help control inflation

Direct taxes can influence the demand for goods and services and help keep inflation in check. In case of a rise in the rate of inflation, the government increases direct taxes. With a rise in taxes, the demand for goods and services falls and inflation is controlled.

  • They promote equality

Direct taxes are directly proportional to the income of the payer. So, people with a high income pay higher direct taxes and people with a lower income pay lower direct taxes. These taxes help maintain equality.

  • They benefit the poor

The tax collected by people with higher incomes is used to provide better facilities and initiatives to the poor. This stabilizes the inequality in incomes and helps lower-income groups in their day to day lives.

Disadvantages of Direct Tax

Here are some disadvantages of direct taxes:

  • They can lead to fraud and tax evasion

Direct taxes are paid by the citizens of the country just like income tax. Since this is an obligatory tax, some people may try fraudulent ways to avoid paying them.

  • They may lead to disputes between different income groups

Since direct taxes are paid as per the income, high-income groups can feel overburdened. Similarly, lower-income groups may sense the economic divide that leads to social inequality.

  • They can be inconvenient

Unlike indirect taxes, direct taxes are not included in the price of goods or services. They can come with their fair share of paperwork that can seem troublesome.

  • They may discourage people from investing

Capital gains taxes may lead people to avoid investments in order to reduce their tax liability. This further disrupts the growth of the economy and hampers the individual’s financial health too.

Indirect Tax

What is Indirect Tax?

Indirect tax is a type of tax imposed by the government on the supply of goods and services and can be transferred from one entity to another. Recently, the Goods and Services Tax (GST) was introduced by the government on 1 July 2017 which subsumed all the other kinds of indirect taxes. Some of the benefits of GST as indirect tax are the elimination of multiplicity of taxes and an eventual decrease in the cost of goods due to the reduction in the cascading effect of taxes.

Types of Indirect Tax

Goods and Services Tax (GST)

GST is charged twice where the Central Government levies Central GST (CGST) and the State Government levies State GST (SGST) on intra-state supply of goods or services. The Centre also levies Integrated GST (IGST) on the inter-state supply of goods or services.

Tax on Liquor and Petrol Products

Taxes on liquor and petrol products do not come under GST and are taxed separately.

Benefits of Indirect Tax

Here are some benefits of indirect taxes:

  • They promote equal participation

Since indirect taxes are the same for all citizens, everyone gets to contribute to indirect taxes irrespective of their incomes.

  • They are easy to pay

There is no heavy paperwork involved in paying indirect taxes. The collection happens at the time of the sale and is paid to the government by the supplier.

  • They help create awareness

Indirect taxes charged on harmful substances such as alcohol, cigarettes, etc., are considerably higher than other routine products. This creates awareness and discourages people from using such products.

  • They may not seem so high or obvious

Indirect taxes are usually included in the price of the product or service which is why they do not appear as high. People simply pay them when they make a purchase. There is no separate payment.

Disadvantages of Indirect Tax

Here are some disadvantages of indirect taxes:

  • There is no awareness of the tax amount

Indirect taxes are included and hidden in the price of the goods or services purchased. Hence, people do not always know how much tax they end up paying to the government.

  • They are the same for every income group

Indirect taxes remain the same for all irrespective of the income. This implies that people from a lower income group will pay the same indirect tax on a product or service as people from a higher income group. This may be equal, but it is not equitable.

  • They add to the price of goods

Indirect taxes increase the price of goods and services for the local people. They end up paying a higher price than the original price of the product, and these taxes ultimately interfere with their monthly budgetary constraints.

What is the difference between Direct Tax and Indirect Tax?

When looking at what is direct tax and indirect tax, there are various differences that you need to know. Here are some of the key differences:

1.Taxpayers of the particular type of tax

Direct taxes are levied on every individual, HUFs, and company. For indirect taxes, the end-consumer becomes the taxpayer

2.Applicability of the tax

Direct taxes are applicable only to the taxpayer whereas indirect taxes are levied on every single stage of the production-distribution stage of the goods.

3.Transferability of the taxes

Direct taxes cannot be transferred as compared to indirect taxes which can be transferred.

4.Evasion from paying tax

Direct tax can be evaded by investing in tax-savings instruments whereas indirect tax cannot be evaded.

Direct Tax vs. Indirect Tax

Here is a table for direct vs indirect tax to help you understand the distinction between the two better:

Direct Tax

Indirect Tax

For activities conducted and income earned

For products and services

Tax burden cannot be shifted

Tax burden can be shifted

The concerned person pays it directly

It is paid by one person and recovered by another

Collection is difficult

Collection is significantly easier

Example: Income Tax, Corporate Tax

Example: GST, Tax on Liquor

Kotak Guaranteed Savings Plan

Features

  • Enhanced Protection Through Riders
  • Life Cover
  • Tax Savings
  • Multiple Premium Payment Terms
  • @ Guaranteed Loyalty Additions
  • Accrued Guaranteed@ Additions

Ref. No. KLI/22-23/E-BB/490

T&C

Browse our library of resources

- A Consumer Education Initiative series by Kotak Life

Similar Articles

9 Tax Changes in Budget 2019 that may Impact Your Personal Financial Planning

How to Save Tax on Salary Arrears?

Are Financial Planning and Tax Planning the Same Thing?

ITR-6: Guide to filing ITR-6 Form online

Income Tax Filing For NRI in India

Difference between Section 80C and 80CCC of the Income Tax Act, 1961

Budget 2019: Impact on the Common Man in India

Penalty For Late Filing TDS Return

LTC Cash Voucher Scheme October 2020 – Everything You Need to Know

What is Form 16B?

Tax-Savings Investments and Options in India

What is Challan 280? How to Pay your Income Tax Online with Challan 280?

Guaranteed Return Plans-Why is it a must for you?

Tips to plan your savings in 2019

Types of Income Tax Return (ITR) Forms

E-Filing of Income Tax Returns in India

Tax Exemption and Scope of Coverage

When Should TDS be Deducted and Who is Liable to Deduct it?

Tax Structure in India

A Guide to Life Insurance Policy’s Tax Benefits and Taxability

Income Tax Deductions for Disabled Person Under Section 80U

Investment Proofs You Need Submit To Lower TDS Cut From Your Salary

What is Section 80C Deduction?

Section 10 (10d) of Income Tax Act, 1961 on Payouts of Life Insurance Policy

Tax Season Is Coming- Know How to Save Tax

Insurance and Endowment: Everything You Need to Know!

A Complete Guide for Filing ITR 3 Form

What is the TDS Rate on Salary?

What is Form 16A?

What is Section 80C - Explained in Detail

Understanding Tax Exemptions in ULIP (Old and New)

Types of Riders in Insurance Policy

Tax Saving Options for Salaried Employees

Can You Get Term Insurance Without Income Proof?

Union Budget Highlights – 1st February 2022

Section 80G of Income Tax Act

How to File Income Tax Return - Everything You Need To Know

Everything You Need to Know About Tax Benefits of National Pension Scheme (NPS)

Income Tax Deductions Under Section 80C

How To Save Tax Better with 80C

Section 16 of the Income Tax Act (ITA), 1961

ITR 2 Form – Complete Guide

Pradhan Mantri Suraksha Bima Yojana

What is TDS Exemption Limit?

What is ITR 5 Form and How to File ITR 5?

Financial Benefits and Government Schemes Every Woman in India Should Know

How to Save Income Tax with Insurance

How to Check Income Tax Refund Status Online in India

How to Check Income Tax Returns Status Onine?

Section 44AD of Income Tax Act for AY 2020-21

What is Tax Evasion and What Are The Penalties For Tax Evasion In India?

Tax Benefit of Investing in Term Plan

Received an Income Tax Notice? Your Guide to Understanding Intimations under Section 143 (1)

What is the Last ITR Filing Date and Penalty for Late Filing of ITR?

All about TDS on Salary under Section 192 – Kotak Life

Financial Planning and Best investment options for Housewives

What are Direct Taxes? How to Avoid being Overtaxed?

How To Save Tax Using Life Insurance?

How to Get Form 16?

How to View 26AS and Download Form 26AS Online?

Tax Saving for Self Employed in India

All You Need to Know About Section 80C

Income Tax Benefits for Doctors

Save Income Tax by 31st March: Here Is a Checklist

What To Do If Your TDS Is Not Deposited With The Government?

How can I get Form 16B from traces?

52 Weeks Savings Plan: Daily Savings Plans for a Better Tomorrow

All about Online Income Tax Calculator

Income Tax Deductions & Exemptions under Sections 80C, 80D & 80DDB for FY 2020-21 & 2021-22

How to Claim TDS Refund for Excess TDS Deduction

Presumptive Taxation for Business and Profession

Tax Benefits of ULIP Plans Available for NRIs

How to Pay Advance Tax Online in India

How to View 26AS and Download Form 26AS Online

आयकर स्लैब 2021-2022

Tax Planning and Tax Benefits of Life Insurance

What is Section 80C Deduction Limit?

What are the Tax Benefits of Sukanya Samriddhi Yojana (SSY)?

Tax-Free Income in India

Why Tax Planning Should Be an All-year Round Activity

Tax Saving Tips: Best Ways to Save Income Tax for 2021

Tax Saving Guide for 2019-20

5 Popular Tax-Saving Schemes in India

How Much Money This Budget 2019 Can Help You Save

Problems People Face with Tax Returns after a Job Change

Income Tax Exemption for Disabled

How do I Calculate My Term Insurance Premium

Investing Lump Sum Amount

How to save tax for salaried person?

Why is Form 16 Important?

Sub-sections Under Section 80C of the Income Tax Act, 1961

What Is Salary Protection Insurance and Why You Need It

List of Important Income Tax FAQs

What is Form 26AS - All You Need To Know

The Difference Between Gross Income & Total Income in Calculating Income Tax

Section 80E: Tax Exemption on Interest on Education Loan

How to File Form 16 for Salaried Employees?

Have You Considered Term Insurance a Part of Your Tax Planning?

How to File ITR Online

What Is Advance Tax and How Is It Calculated?

Why January Is an Important Month for Saving Tax?

How to File Form 10E for Tax Relief on Salary Arrears?

How to File TDS Return?

7 Important Things to Remember While Investing in a Savings Investment Plan

How to file Form 16 online?

Saving Income tax in 2017 - 18

How to Check Income Tax Refund Status Online in India

What is TDS Refund Process?

Income Tax Deduction Under Section 80CCC In India

What is the Difference between Form 16 and Form 16A?

How to Download Form 16?

9 Income Tax Myths That Could Cost You Money while Filing returns

What is Section 195 of the Income Tax Act? TDS on Non-Residents of India

Income Tax Exemption for Physically Handicapped Dependent

How to e file ITR on Income Tax Government Portal

Income Tax Filing Using Multiple Form 16

Do Beneficiaries Pay Taxes on Life Insurance?

What is Section 10D of the Income Tax Act?

5 Unusual Investments You Didn't Know for Saving Taxes in India

Home Investment Plan to Buy Dream Home

9 Point Guide on how to File Income Tax Return Online

Section 80C Deductions as per Income Tax Act, 1961

Form 16, Form 16A, and Form 16B?

Top 8 Tax-Saving Methods in India- Budget Planning

TDS Due Dates of FY 2020-21 For Return Filing

What are the Different Types of Taxes in India?

What is the Percentage of Tax Deducted at Source (TDS)?

A Comprehensive Guide to Understand the ITR 7 Form

How to e-Verify your Income Tax Return

What is Tax Deduction at Source (TDS)?

All about TDS Payment Online & Due Dates

How to File Income Tax Return without Form 16

Section 80D - Medical and Health Insurance Tax Benefits Under Section 80D

What is TDS Slab?

What is ITR & How to File Income Tax Return

Difference between Section 80C, 80CCC, 80CCD & 80D

How to File Income Tax Return for First Time Tax Payers

Interest Imposed Under Section 234A, 234B and 234C

What is Section 80CCC of the Income Tax Act 1961

Guide for Tax Calculation on your Salary

Tax Deductions You MUST Know

Things to Do After Filing Income Tax Returns

What is House Rent Allowance and How is HRA Exemption Calculated?

Tax Benefits for Startups in India

Impact of GST on Life Insurance in India

What Investment Options Come with Tax Incentives?

ITR 1: Sahaj Form

Tax Saving Options other than Section 80C

Role of Life Insurance in Your Financial Portfolio

Income Tax Slabs and Rates in India for FY 2021-22/AY 2022-23