Every earning individual in India is liable to pay taxes on their income if it exceeds the minimum threshold. Similarly, taxes are also applicable on the purchase of goods and services. However, the two scenarios involve two different taxation systems. The first is a direct tax, while the second is an indirect one. Understanding the differences between direct and indirect taxes is crucial for responsible taxpayers.

• Taxpayers pay direct taxes directly to the government, while indirect taxes are collected and remitted by intermediaries.
• Unlike direct taxes that are levied on income and profits, indirect taxes are imposed on the sale of goods and services.
• Indirect taxes are collected at a flat rate, while direct taxes are collected at a progressive rate.

Direct taxes are imposed on the income or profits earned by an individual or company. These taxes are paid by an individual directly to the government. In other words, the taxpayer cannot transfer the payment liability to another person. Direct taxes are collected and regulated by the Central Board of Direct Taxes (CBDT), which operates under the Department of Revenue.

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Common examples of direct taxes in India include:

• Income tax: Income tax is a direct tax imposed on the taxpayer’s annual income. Taxpayers are liable to pay income tax if their income falls above the minimum income threshold. Income is taxed as per the slab rates set by the Indian government.
• Corporate tax: Corporate taxes are imposed on company profits. Companies are liable to pay corporate tax at a flat rate on their net profits in a particular financial year.
• Capital gains tax: Capital gains taxes are imposed on the gains earned from the sale of capital assets like property, stocks, and mutual funds.

Indirect taxes are levied on goods and services rather than the income of individuals and business profits. Indirect taxes are paid to the government through an intermediary. These taxes are paid by customers while purchasing various goods and services, while the business collects and remits them to the government. Indirect taxes in India come under the purview of the Central Board of Indirect Taxes and Customs (CBIC), which also operates under the Indian Revenue Department’s supervision.

In India, indirect taxes like sales tax, VAT, customs duty, service tax, and excise duty were subsumed and replaced with the GST or the Goods and Services Tax in 2017. The primary objective of introducing GST was to eliminate the cascading effect of different indirect taxes on the end customer.

Now that you know the meaning of these tax categories, it won’t be difficult to understand the differences between direct and indirect taxes. Here’s a comprehensive table that sums up the direct vs. indirect tax debate succinctly.

*(GST is an exception since it a proportional tax)

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In a nutshell, there are several differences between direct and indirect taxes in terms of who pays the tax, how it is collected, and how the taxation rates are determined. Both taxation systems have pros and cons. Therefore, both are crucial for the economy’s progress and development. That’s why most countries around the world implement a balanced approach by amalgamating the two taxation categories.

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