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ARN. No. KLI/23-24/E-BB/1201
Features
Ref. No. KLI/22-23/E-BB/999
Direct taxes are levied directly on an individual's or company's income, while indirect taxes are collected on the consumption or purchase of goods and services, ultimately borne by the end consumer.
Most people know about taxes, as they are deducted regularly from their salary and charged when buying or consuming something. But have you tried to differentiate GST from corporate tax? Though few are gleeful about income tax deductions, they continue without knowing about taxes.
Taxes are essential for a government’s functioning and a nation’s development. They can be broadly classified into direct and indirect taxes, each with distinct characteristics and implications. Understanding the difference between direct and indirect tax is crucial for taxpayers and businesses, as it helps in better compliance and informed financial planning.
For a better understanding of direct and indirect taxes, let us take a look at this table that explains the difference between direct and indirect tax:
Aspect
|
Direct Tax
|
Indirect Tax
|
Definition
|
Tax is paid directly to the government by the individual or entity on whom it is imposed.
|
Tax is collected by intermediaries (such as retailers) from the consumer and then remitted to the government.
|
Examples
|
Income Tax, Corporate Tax, Wealth Tax
|
GST, VAT, Excise Duty, Customs Duty
|
Payer
|
Individuals and entities earning income or profits
|
End consumers of goods and services
|
Collection Point
|
At the source of income
|
At the point of sale or service delivery
|
Tax Burden
|
Borne by the individual or entity directly
|
Passed on to the end consumer
|
Administration
|
Central Board of Direct Taxes (CBDT)
|
Central and State Governments (via GST Council)
|
Rate Structure
|
Progressive rates based on income slabs
|
Multiple rates based on goods/services
|
Compliance
|
Requires annual filing of tax returns
|
Requires periodic filing by businesses (monthly/quarterly)
|
Impact on Prices
|
Does not directly affect the prices of goods and services
|
Increases the price of goods and services
|
Nature
|
It cannot be shifted to others
|
It can be shifted to the end consumer
|
Direct tax is a tax 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 distributing wealth equally in society.
Different types of direct taxes are paid by individuals and entities. Let us take a quick look at them:
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 in which their income falls, which is directly levied on the salary.
Wealth tax is levied on the value of certain assets in the market for that particular financial year. These assets can be held by individuals, HUFs (Hindu Undivided Family), or companies. Though wealth tax was widely used before, it has been abolished.
Corporate tax is levied on the profits of companies and businesses in India. This tax also applies to foreign companies whose income is arising from India.
Capital Gains tax is taxed on the income from 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.
Here are some benefits of direct taxes:
Direct taxes can influence the demand for goods and services and help keep inflation in check. When the rate of inflation rises, the government increases direct taxes. With rising taxes, the demand for goods and services falls, and inflation is controlled.
Direct taxes are directly proportional to the payer’s income. 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.
The tax collected by higher-income people provides better facilities and initiatives to the poor. This stabilizes income inequality and helps lower-income groups in their daily lives.
Here are some disadvantages of direct taxes:
Direct taxes are paid by the country’s citizens, just like income taxes. Since they are obligatory, some people may try fraudulent ways to avoid taxes.
High-income groups can feel overburdened since direct taxes are paid based on income. Similarly, lower-income groups may sense the economic divide that leads to social inequality.
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.
Capital gains taxes may lead people to avoid investments to reduce their tax liability. This further disrupts the growth of the economy and hampers the individual’s financial health.
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 indirect taxes. Some of the benefits of GST as an indirect tax are the elimination of a multiplicity of taxes and an eventual decrease in the cost of goods due to the reduction in the cascading effect of taxes.
Before 2017, indirect taxes in India were classified into various categories based on the goods or services being taxed and the level of government that levied it. With the introduction of the Goods and Services Tax (GST) in 2017, the classification of indirect taxes has been significantly simplified.
GST is charged twice: 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 inter-state supply of goods or services.
Taxes on liquor and petrol products do not come under GST and are taxed separately.
Here are some benefits of indirect taxes:
Since indirect taxes are the same for all citizens, everyone contributes to indirect taxes regardless of income.
Paying indirect taxes involves no heavy paperwork. The collection happens during the sale, and the supplier pays the government.
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.
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.
Here are some disadvantages of indirect taxes:
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 pay to the government.
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.
Indirect taxes increase the price of goods and services for the local people. They end up paying a higher price than the product’s original price, and these taxes ultimately interfere with their monthly budgetary constraints.
In India, direct taxes are collected by the Central Board of Direct Taxes (CBDT), which operates under the Department of Revenue in the Ministry of Finance. Here is a detailed explanation of the process:
The CBDT is the apex body responsible for the administration of direct taxes in India. It provides essential inputs for policy and planning of direct taxes and is responsible for the implementation of direct tax laws through the Income Tax Department.
This department is responsible for enforcing direct tax laws and collecting taxes. It handles various functions such as:
GST (Goods and Services Tax) is an indirect tax. It is levied on the supply of goods and services and is collected by businesses from consumers at the point of sale, which is then remitted to the government. This tax is included in the price of goods and services and is ultimately borne by the end consumer, making it an indirect tax.
To know the difference between GST and income tax, take a look at this table:
Feature
|
GST
|
Income Tax
|
Type of Tax
|
Indirect Tax
|
Direct Tax
|
Tax Base
|
Consumption of Goods & Services
|
Income Earned
|
Who Pays
|
Ultimately borne by the consumer (collected by businesses)
|
Individuals & Businesses based on income slabs
|
Tax Rate
|
Fixed rates for different categories (e.g., 5%, 18%)
|
Progressive rates based on income level (higher income = higher rate)
|
Administration
|
Central & State Governments (GST Council)
|
Central Government (Income Tax Department)
|
Compliance
|
Businesses exceeding a turnover threshold must register
|
Individuals and businesses exceeding the income threshold must file returns
|
Frequency of Returns
|
Monthly, Quarterly, or Annual (depending on turnover)
|
Once a year
|
As a responsible citizen, it is crucial to understand and fulfill your tax obligations as per your tax slab. Here are a few reasons why paying taxes is important:
Paying taxes on time and accurately contributes to the nation’s development and helps maintain a functioning and fair society.
It is important to understand and distinguish between direct tax and indirect taxes. Both types of taxes play a vital role in a nation’s economy, funding essential public services and infrastructure and ensuring economic stability and growth. By understanding these differences, taxpayers can better navigate their obligations and contribute to the nation’s development.
1
GST is an indirect tax levied on the supply of goods and services.
2
Direct taxes, such as income tax, are paid directly to the government by the individual or organization. Indirect taxes, such as GST or sales tax, are collected by intermediaries (like retailers) from the consumer.
3
Yes, direct taxes usually have fixed rates based on income or profits, while indirect taxes can vary depending on the type of goods or services.
4
Individuals, businesses, and entities earning taxable income or profits must pay direct taxes.
5
The largest tax in India by revenue is the Goods and Services Tax (GST).
6
Yes, Tax Deducted at Source (TDS) is a direct tax deducted from an individual’s income and paid to the government.
7
Certain types of income, such as agricultural income, gifts below a specified limit, and income from certain specified bonds, are not taxable under Indian tax laws.
Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.
Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors
Pay 10,000/month for 10 years, Get 1,65,805/Year* for next 15 years.
ARN. No. KLI/23-24/E-BB/1201
Features
Ref. No. KLI/22-23/E-BB/999
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
