Every earning individual in India is required to pay income tax based on the various slab rates. Similarly, when individuals buy products or use services, they must pay tax on those purchases or services. It is at this point that the necessity to grasp various sorts of taxes and their distinctions arises.
What is Direct Tax?
Direct taxation is a form of tax paid to the government by individuals or organizations on which it is imposed. Generally, direct taxes depend on the taxpayer’s earnings or net worth.
For instance, income tax in which individuals and corporate entities pay levies based on their returns and property rating calculated as per the value of land owned by them. Another example is capital gains tax that is incurred when an individual has made proceeds from sales of assets such as shares in stocks or real estate.
Direct taxes are non-transferable taxes paid by the taxpayer to the government. These taxes are administered and governed by the Central Board of Direct Taxes (CBDT).
Here are some of the details about direct taxes:
- Direct taxes are based on the ability to pay principle, requiring higher taxes from those with more resources and higher incomes. Such fees aid in wealth distribution within the nation.
- It is not possible to transfer direct taxes; so, it is up to companies and individuals to pay them.
- There are penalties for failing to make timely payment of these kinds of tax where one can be fined or even jailed.
- The brackets used in direct taxation may inhibit a drive for increased income when people limit productivity to avoid high tax rates.
- Indirectly, individuals are charged indirect tax when they buy goods and services from businesses.
- Retail traders and wholesalers pay indirect tax on their sales.
Who is eligible to Pay Direct Taxes?
- Salaried individuals earning less than Rs 50 lakh annually from various sources should use the ITR-1 form.
- Individuals and HUFs without income from business or professional gains should use the ITR-2 form.
- Individuals and HUFs with income from business or professional gains should use the ITR-3 form.
- Individuals, HUFs, and firms (excluding LLPs) with total income under Rs 50 lakh from business/profession as per Sections 44AD, 44ADA, and 44AE should use the ITR-4 form.
- Entities and persons other than companies, individuals, and HUFs should use the ITR-5 form.
- Companies not claiming exemptions under Section 11 should use the ITR-6 form.
- Individuals and firms required to file under Section 139(4A), 139(4B), or 139(4D) should use the ITR-7 form.
- Companies and other persons required to file under Sections 139(4A), 139(4B), 139(4C), or 139(4D) should use the ITR-7 form.
What is Indirect Tax?
Indirect taxes are transferable taxes where the liability to pay can be shifted to others. These taxes are administered and governed by the Central Board of Indirect Taxes and Customs (CBIC). Service tax and sales tax are examples of indirect tax.
It is not only a tax that is imposed by the government on an intermediary, say, a retailer or service provider to be passed on to the customer who finally pays it. While this type of fee is included in prices charged for goods and services, direct taxes are not.
Some of them include sales tax, customs duty, excise duty, value-added tax (VAT), and Goods and Services Tax (GST). As they are levied at different stages of production and distribution, their expenses are transferred to buyers. These indirect taxes are less visible to customers but add up to the total price of products and services.
Difference Between Direct and Indirect Tax
The fundamental categorisation of taxes is premised upon who collects the taxes from taxpayers. An overview of direct tax and indirect tax difference is given below –
| Context of Differentiation Between Direct Tax vs Indirect Tax | Direct Tax | Indirect Tax |
| Imposition of tax | It is levied on the income or profit of a taxpayer. | An indirect tax is levied on goods and services rather than on income or profits. |
| Course of payment | Taxpayers pay it directly to the government. | Taxpayers pay it to the government through an intermediary. |
| Paying entity | Individuals and businesses | End-consumers |
| Rate of tax payment | Based on income and profits | Same for all taxpayers |
| Transferability of payment | Cannot be transferred. | Transferable |
| Nature of tax | Progressive tax, i.e., its rate increases with taxpayer’s income. | Regressive tax, i.e., its rate decreases with increase in income. |
Types of Direct and Indirect Taxes in India
Major Types of Direct taxes are as follows:
- Wealth tax: The tax levied on an individual’s assets based on their value in a financial year is known as wealth tax. This tax is levied on HUFs, individuals, or companies.
- Corporation tax: This type of tax is levied on companies and businesses based on their income in a financial year. The taxation rate depends on whether the enterprise is in India or abroad.
- Income tax: This tax is levied on individuals on their annual income in a financial year.
- Capital Gains tax: The tax levied on profit earned from property sale are considered under this category of taxes.
Major Types of Indirect taxes are as follows:
- Service tax: This type of tax is paid to the government by all the service providers.
- Sales tax: This type of tax is levied by the government on movable goods.
- Value added tax: This is levied on products which are added at each stage from manufacturing till distribution.
- Excise Duty: The tax collected from manufacturers by the government is called as excise duty tax.
FAQs
Can you give examples of Direct and Indirect Taxes?
- Direct Tax: Income tax, wealth tax, property tax, corporate tax, capital gains tax.
- Indirect Tax: Goods and Services Tax (GST), excise duty, customs duty, sales tax, service tax.
Who bears the burden of Direct Taxes?
Lorem ipsum dolor sit amet, consectetur adipiscing elit. In the case of direct taxes, the taxpayer (individual or organization) bears the entire burden. For example, if an individual has to pay income tax, they are directly responsible for paying itUt elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.
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