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Direct vs Indirect Taxes

Understanding the Types of Taxes

The citizens of India cannot shy away from paying taxes. The Government of India imposes two types of taxes on its citizens – direct and indirect taxes. Before we delve into the details of differences between the two taxes, let’s quickly recap the two types of taxes:

Direct taxes: These taxes have to be paid directly to the government and cannot be transferred to anyone else. Different acts govern these taxes.

Indirect taxes: These taxes are imposed on all the goods and services, and not on income and profits. It is collected by a retail store or an intermediary from the consumer or one bearing the ultimate burden of the tax.

Differences Between Direct and Indirect Taxes

ContextDirect TaxIndirect Tax
ImpositionImposed on income or profits Imposed on goods and services
Taxpayer Individuals, HUFs, firms and companies End-consumer of the goods and services
ApplicabilityApplicable to the taxpayer aloneApplicable to every stage of the production-distribution chain
Tax burdenThe burden falls directly on the individual The burden is shifted to the consumer by the manufacturer or service provider
TransferabilityCannot be transferred to anyone elseCan be transferred from one taxpayer to the other
CoverageConfined to an entity or individual taxpayer Wide coverage because all the members of the society are taxed
Administrative cost Higher administrative costs and many exemptions Lesser administrative costs because of stable, convenient collections
Tax evasion PossibleNot possible
Allocative effectsHave good allocative effects since they put less burden on the collection Allocative effects not as good as those of direct taxes
InflationHelps in reducing inflationMight help in increasing inflation
Orientation Discourage investments, lessen savingsGrowth-oriented, encourage savings
Mode of progress Progressive, reduce inequalities Regressive, enhance inequalities
Most common types (in India)Income, Wealth, Corporate TaxGST or Goods and Services Tax
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