Taxes is crucial for every citizen and business in India. Taxes play a vital role in supporting the country’s growth, funding public services like healthcare, education, and infrastructure. In India, taxes are mainly divided into two categories: direct tax and indirect tax. While both contribute to the economy, they differ in how they are collected and who is responsible for paying them.
What Are Taxes and Types of Taxation in India?
In India, taxes are compulsory payments made to the government by individuals, businesses, and organizations. The primary purpose of taxes is to generate revenue that the government uses to fund essential services and programs that benefit society. These funds help build infrastructure, support public welfare, provide national security, improve healthcare and education, and maintain other vital services.
Taxes in India are broadly classified into two categories:
- Direct Taxes
- Indirect Taxes
Direct Taxes- Direct tax is levied on people’s income or profits. For example, a taxpayer pays the government for different purposes, including income tax, personal property tax, FBT, etc. The burden has to be borne by the person on whom the tax is levied and cannot be passed on to someone else.
Indirect Taxes- Conversely, indirect tax is levied by the government on goods and services. Therefore, it can be shifted from one tax-paying individual to another. E.g; the wholesaler can pass it on to retailers, who then pass it on to customers. Therefore, customers bear the brunt of indirect taxes. The Central Board of Indirect Taxes and Customs (CBIC) governs and administers indirect taxes.
Taxes | ||
Direct Taxes | Indirect Taxes | Other Taxes |
Sales Tax | Property Tax | |
Corporate Tax | Service Tax | Registration Fees |
Securities Transaction Tax | Octroi Duty | Toll Tax |
Capital Gains Tax | Custom Duty | Education Cess |
Gift Tax | Value Added Tax (VAT) | Entertainment Tax |
Wealth Tax | Goods & Services Tax (GST) | Professional Tax |
Central Board of Direct Taxes (CBDT) governs and administers the Direct Tax.
list of types of Direct taxes
- Income tax- It is a type of tax imposed on the profits and income earned during the year. Income tax is the most common example of direct tax. As the term “income tax” suggests, it is a tax levied by the Central government on income generated by individuals and businesses in a particular financial year. However, the amount payable for your income tax depends on how much money you earn under different heads of income. Additionally, for a financial year, income tax applies to those with an annual income exceeding the basic exemption limit applicable to them.
Types Of Indirect Taxes And Direct Taxes In India
- Goods and Service Tax- (GST) is an indirect tax levied on various goods and services. One significant benefit of GST is that it eliminates the tax-on-tax or cascading effect of the previous tax regime.
- Excise duty– Is a tax imposed on licensing, sale or production of certain goods produced within the country.
- Sales Tax—Sales tax is a type of indirect tax that the seller charges a buyer when selling or exchanging a taxable good. The seller then repays the tax to the government on behalf of that buyer.
However, the sales tax generally depends upon the authority in power and the policies implemented by the authority. Some significant sales tax types are manufacturer’s sales tax, wholesale sales tax, use tax, value-added tax, and retail sales tax.
Advantages And Disadvantages Of Direct Tax
Direct Taxes | |
Advantages | Disadvantages |
Individuals with lower incomes pay lower taxes than people with higher incomes, i.e, progressive in nature. | Fraudulent practices through which taxpayers often pay lower taxes or avoid taxes.
|
Curbs inflation and reduces inequalities. | The documentation process can be complex and time-consuming |
Sense of certainty as both the government and taxpayer are aware of what and when to be paid. | The burden cannot be transferred to any other in the chain. |
Advantages And Disadvantages Of Indirect Tax
Indirect Taxes | |
Advantages | Disadvantages |
Every Individual contributes to nation-building | Increase in overall price of goods and services |
Easily collectable from the end consumer | Consumers often lack knowledge of the taxes paid |
Fair Distribution of tax, i.e, essential goods are charged lesser compared to goods that are luxurious. | It is regressive in nature. |
The burden of paying can be transferred to the end consumer. | The amount received in tax is often unpredictable as the tax paid depends on the goods and services purchased |
Difference Between Direct And Indirect Tax
| Aspect | Direct Tax | Indirect Tax |
| Definition | Tax paid directly by individuals or entities to the government. | Tax collected by intermediaries from the taxpayer, then passed to the government. |
| Who Pays the Tax? | Paid by the person or entity on whom it is levied (e.g., income tax). | Paid by consumers as part of the price of goods and services (e.g., GST). |
| Burden of Tax | The taxpayer bears the full burden of the tax. | The burden is passed on to the consumer through higher prices. |
| Progressiveness | Typically progressive, meaning higher-income individuals or entities pay more. | Generally regressive, as it affects all consumers equally regardless of income. |
| Examples | Income tax, corporate tax, property tax, capital gains tax. | GST, VAT, service tax, excise duty, customs duty. |
| Tax Rate | Tax rate increases with the taxable amount. | Tax rate is generally fixed and applied to the sale of goods/services. |
| Collection | Collected directly by government agencies (e.g., CBDT for income tax). | Collected by intermediaries like retailers or service providers and passed on to the government. |
| Impact on Price | Does not directly affect the price of goods or services. | Directly increases the price of goods and services. |
| Transparency | More transparent, as taxpayers are directly aware of the amount they are paying. | Less transparent, as the tax is included in the price of goods/services. |
| Scope | Applicable to individuals, businesses, and organizations based on income or wealth. | Applied to goods and services purchased by individuals, regardless of their income. |
FAQs
What are the different types of taxes under Indian GST?
Is Excise Duty tax an indirect tax?
Yes, excise duty is an indirect tax that customers pay. It is imposed on the manufacture, sale, or consumption of specific goods produced domestically such as alcohol, tobacco, and petroleum products, and is collected by the central government.
