What Is the Difference Between Direct and Indirect Tax?

Direct and indirect taxes are two primary categories of taxes that contribute to the government’s revenue. While both serve the same purpose of generating income for the government, they differ in how they are collected and who bears the tax burden.

Difference Between Direct and Indirect Tax:

Definition:

Direct Tax: A direct tax is a tax that is paid directly to the government by the taxpayer. The person or entity on whom the tax is levied is responsible for paying it. Examples include income tax, wealth tax, and corporate tax.

Indirect Tax: An indirect tax is a tax that is collected by an intermediary (e.g., a retailer or service provider) from the person who ultimately bears the cost of the tax (the consumer). Examples include goods and services tax (GST), sales tax, excise duty, and customs duty.

Tax Burden:

Direct Tax: The burden of the tax falls directly on the individual or entity who is liable to pay it. The taxpayer cannot transfer the burden of the tax to someone else.

Indirect Tax: The burden of the tax can be passed on to others. For example, the seller collects the tax from the buyer, and the buyer ultimately bears the cost of the tax.

Collection Method:

Direct Tax: Direct taxes are collected directly from the taxpayer, usually through filing a tax return or through payroll deductions (e.g., TDS - Tax Deducted at Source).

Indirect Tax: Indirect taxes are collected by intermediaries, such as businesses or service providers, who include the tax in the price of goods or services.

Impact on Taxpayers:

Direct Tax: The individual or business pays the tax based on their income or wealth. This tax is progressive, meaning that the more an individual earns, the higher the tax they pay.

Indirect Tax: Indirect taxes are regressive to some extent, as they affect all consumers, regardless of their income. The tax is added to the price of goods and services, meaning that even lower-income individuals pay the same tax rate on purchases.

Examples:

Direct Tax:

• Income Tax
• Corporate Tax
• Capital Gains Tax
• Wealth Tax

Indirect Tax:

• Goods and Services Tax (GST)
• Sales Tax
• Customs Duty
• Excise Duty

Progressiveness:

Direct Tax: Direct taxes are typically progressive in nature, meaning they are designed to tax individuals based on their ability to pay.

Indirect Tax: Indirect taxes tend to be regressive since everyone, regardless of income, pays the same rate on goods and services.

Administration:

Direct Tax: These taxes require more complex administration, as they involve income assessments and returns filed by taxpayers.

Indirect Tax: Indirect taxes are easier to collect at the point of sale and are generally simpler to administer for the government.

Example:

Direct Tax Example:

Mr. Raghav earns ₹10,00,000 per year. Based on his income, he pays income tax directly to the government.

Indirect Tax Example:

Mr. Raghav buys a smartphone worth ₹20,000. The seller charges GST on the phone, which Mr. Raghav pays as part of the purchase price. The seller then remits the GST collected to the government.