Direct & Indirect Taxes in India – Feature Explained

Taxes are an integral part of any functioning economy, serving as the primary source of revenue for governments to fund public services and infrastructure. Broadly, taxes are categorized into two types: direct and indirect. Direct taxes are levied directly on an individual’s or entity’s income and wealth, such as income tax and corporate tax. Indirect taxes, on the other hand, are imposed on goods and services, and are passed on to consumers, like sales tax and GST.

Tax is an important fee that a country imposes on its people to contribute to the growth and to build the future of the nation like a give and take relationship. Taxes come in a small distributed format, and we end up paying it knowingly or unknowingly. Understanding the distinction between these two types of taxes is crucial, as they impact both individuals and businesses differently, influencing spending habits, savings, and overall economic growth. There are two categories in which tax is collected from the taxpayers depending on the mode of implementation:

Direct Tax

Some taxes are levied by the government directly on the income and the assets possessed by an individual and the corporate entities, or the organization is known as direct taxes. The only thing to keep in mind in this mode of tax payment is that it needs to be done directly to the government and cannot be transferred via any third party. These include the wealth tax, income tax, corporate tax, and gift tax. The taxpayer, in this case, does not have the feasibility of shifting the burden of paying the tax on others.

Advantages of Direct Tax

Below are the main advantages of direct tax:

• It is quite equitable as it raises the commodity price, which makes it similar for the rich and poor as the burden of taxes is not transferable; hence, the low income can be kept at par.
• It is very economical as the collection of tax is low compared to indirect tax as it is directly collected from the source saving the expense resulting in a high economy.
• The return that we get from direct taxes increases at a fast pace hence offering a large revenue. So, it is quite productive even though there is a large increase in numbers.
• In sudden cases of emergency, the direct taxes which smoothly serves the purpose of extending its hand to the State. Hence it serves people from paying the taxes as it might act as a burden in case they are not able to pay.

Disadvantages of Direct Tax

Below are the disadvantages of direct tax:

• It is evaded also as direct tax expects people to be honest while paying the tax. Hence, many people hide their actual income and go by paying a small income.
• The biggest disadvantage is that it is quite difficult as the taxpayer must directly give from his pocket, which makes it little inconvenient as the person can feel the pain.
• In case the tax payment is disincentive as it might make the country suffer at times as high taxation can lead to people getting discouraged from making any investment.
• If the tax payment is not progressive and in the case becomes proportional, the poor people can feel the pinch. Hence needs to be fixed arbitrarily by the government to help the poor people to hold the head high in the society.

Indirect Tax

In Indirect Tax, the taxes are applied to the service and goods manufactured. Here there is involvement of an intermediate party who takes up the task of initially paying the government and then it is the work of the latter to add up the amount that individuals pay for a product or service. In the end, the total calculated amount is shared with the end consumer. It is transferable and can be put on others in case the taxpayer wants. These include the value-added tax (VAT), service tax, and excise duty.

Advantages of Indirect Tax

The main advantages of indirect tax are:

• Compared to direct tax, indirect tax is far easier to collect as it is the same for all and an intermediate party is involved.
• In case of indirect tax, it is easy to determine any issues coming up as in case of cigarettes; a high tax rate can be applied so that it can discourage the people from keeping away from such habits to some extent.
• A smart way of increasing revenue.
• It is advantageous in case of tourists as they do not pay the income tax as they are exempted from it but the goods they buy and the service they take which can easily add to the government’s revenue.
• It depends on the consumer if they want to buy the goods that are coming under the tax; hence, taxpayer-friendly.

Disadvantages of Indirect Tax

Below are the disadvantages of indirect tax:

• It is difficult as well as costly and easily hampers the lifestyle of poor people.
• The amount of revenue collected cannot be predicted as it includes the sales tax, goods tax, which is always variable; hence, difficult to analyze.
• Sometimes it is responsible for the inflation happening in the country. As a result, there is an increase in price. As a result, it becomes difficult on the part of common people to handle this situation.

At every level of the system, there are specific guidelines that apply to the central and the state government during tax collection. It is monitored in various levels to ensure no protocols are broken and can be applied in the agricultural income, land revenue at the same time empowering the local bodies to collect the tax on water, power supply, property tax and various others.

Types of Direct and Indirect Taxes

Direct taxes include the following:

• Income Tax: It is looked after and collected by the income tax department, and this is only for the individual as it is imposed as well as paid by the specific person.
• Gift Tax: In case anyone gets any gift that is taxable, they need to pay that much amount to the government.
• Corporate Tax: Various companies profit a lot from their projects when they deal with outside clients, and the government collects a small part of that profit for the betterment of the country.
• Wealth Tax: When a person buys an asset for personal use, they need to pay the tax that is levied on them.
• Estate Duty: It is paid in inheritance cases when taken up by an individual.

Indirect taxes include the following:

• Service Tax: When we go out to restaurants or places where we get services to customers, it is necessary to pay the tax.
• Entertainment Tax: It is paid by the people who go for the movie, but in reality, it is imposed on the owners of the movie theatre that is drifted towards the customers.
• Sales Tax: It is paid by the shop retailers which they indirectly collect from the consumers in the form of goods tax.
• Custom Duty: It falls on the goods which when brought from outside the country but ultimately is paid by the customers.

Why is Tax Payment Essential?

When an individual pays the taxes, it might be little difficult on his or her behalf to give up some amount from the hard-earned money, but in the later run it is made clear that the amount is towards the administration and setting up the resources for contributing in the country’s economic progress:

• It simultaneously serves the purpose of savings as well as investments. As whenever a person buys an asset or makes any investment, a small portion of that amount is charged as tax, which can enable the taxpayers to fill the reduced amount as tax.
• It showcases the sincerity and honesty with which one fills the tax returns. Hence it acts as a badge for a person.
• During the application of the loan, it becomes important as the bank requires all the proof and documents along with the statement that the applicant has filed the taxes regularly. So, in such cases, it is quite helpful and helps the bank to build trust on the loan applicant.

Conclusion

One of the largest sources of cash inflow for the government which is taken up to invest in various projects for the nation’s prosperity and development. And India is a secular, democratic country, and has one of the well-balanced as well as well-structured tax systems for its citizens. So it is our duty to accept the tax system and be honest, which can take the future of our country to a position which everyone dreams of.

Read Also: Income Tax Rules: What are the restrictions on cash transactions?