Difference Between Direct & Indirect taxes in India (2024)

FAQs

Difference Between Direct & Indirect taxes in India? ›

Direct taxes are paid directly to the Indian government by the taxpayer (you); the tax rate depends on your annual income and earnings, and only you can pay them. Indirect taxes are paid whenever you purchase a product or service and are paid to the Indian Government by the intermediary party (the retailer).

In every aspect, direct and indirect taxes are completely different. Direct taxes are imposed on one's income and earnings and are paid directly to the government. On the other hand, indirect taxes are quite the opposite and are given to the government whenever any goods or services are purchased.

Indirect taxes are important for India's economy. They help the government earn money and encourage businesses to make things in India. This can also help the country become better for everyone.

Direct taxes are levied on individuals and companies by the country's supreme tax body. Direct taxes are directly paid by those on whom it is imposed. For instance, taxpayers directly pay income tax, property tax, tax on assets and gifts to the government.

Disadvantages of Indirect Taxes

This tax remains regressive to some extent even after the introduction of the Goods and Services Tax. The tax on a commodity or service is the same for all, disregarding the poor or rich. This makes commodities expensive for a poor person and affects his net operating income.

Central Board of Indirect Taxes and Customs (CBIC) is a part of the Department of Revenue under the Ministry of Finance, Government of India.

India follows a progressive tax system. Under a progressive system, high-income earners pay more than low-income earners. Under a regressive tax system, low-income earners pay a higher amount of taxes than high-income earners.

An indirect tax is a tax passed off by the government on goods and services. It is collected by the manufacturers or sellers of goods and services from the consumer when they purchase an item or service and then paid to the government. They are often already embedded in the prices of goods and services.

GST and Centre-State Financial Relations

GST is a unified tax system that replaced multiple indirect taxes levied by both the Central and State Governments. Under GST, both the Central and State Governments share the authority to levy and collect taxes on goods and services.

How much people in India pay direct tax? ›

In India, just 3.5 crore people, or 2.89 percent of the over 121 crore people living there, file income tax returns. Almost half of them work in agriculture. It is essentially free from income tax.

Problems with current tax system

India simultaneously has a tax base for direct taxes that is too small; and a tax base for indirect taxes that is too large. Consequently, too little tax revenue is raised; and too much of the tax burden is paid by the poor.

Income tax contributes significantly to government revenue, funding essential services such as education, healthcare, infrastructure, and defense. Abolishing it without a viable alternative could lead to budget deficits and a deterioration of public services.

Key Takeaways on Direct and Indirect Taxes in India

Direct taxes can be in the form of income tax, capital gains tax or securities transaction tax, while indirect taxes such as GST, Customs Duty or VAT are levied on all end-consumers to buy any goods services.

Among all the given taxes Gift Tax is not an Indirect tax.

Detailed Solution. The correct answer is Sales Tax. Sales tax is an indirect tax.

Final answer: The situation which best exemplifies indirect taxation is when stores charge sales tax on each purchase, which is then given to the government.

The major sources of revenue for the Indian government are the GST and income tax. Both sources of taxation account for roughly 90 per cent of the government's overall revenue. GST contributed about 57 per cent of overall tax revenue in 2021-22.

Progressive taxes are a system where individuals with higher incomes pay a higher percentage of their income in taxes. Flat taxes entail a uniform tax rate applied to all income levels, with everyone paying the same percentage of their income in taxes.

A Value-Added Tax (VAT) is a consumption tax assessed on the value added in each production stage of a good or service.