In India, everybody who receives income of any type is required to pay taxes on it. In a similar vein, tax is due on any type of transferred commodities or services between individuals or businesses. Because of the tax system in place, the government has enough funds to invest in the country’s growth. Since taxes are the government's primary income source, both the state and the central governments levy them.
What is Indirect Tax?
On both products and services, the government levies an indirect tax. A person pays indirect tax to the government through an intermediary. Then, this middleman gives it to the government. For example, the wholesaler would distribute it to stores, which would then distribute it to customers. Overseeing indirect taxes is the responsibility of India's Central Board of Indirect Taxes and Customs (CBIC). The Department of Revenue is also in charge of the CBIC.
What is Direct Tax?
A direct tax is a tax you pay directly to the entity responsible for collecting it. No other organisation or individual can receive these taxes. Many acts govern direct taxes. The Revenue Department of India, which is in charge of the CBDT (Central Board of Direct Taxes), oversees the collection and administration of direct taxes.
Features of Direct Tax
You need to be aware of some key features of direct tax. Check them out below:
Increasing the Income Tax Slabs:
It indicates that when a taxpayer's income rises, so do their tax rates. Under the Indian Income Tax, based on a slab structure, individual taxpayers are subject to taxation. In a slab system, various income brackets are subject to varying tax rates. People with higher incomes in India will have to pay taxes according to their income. The introduction of the slab system aimed to preserve the nation's just taxation structure.
Corporate Tax Simplification:
The updated new tax structure increases the tax refund level, provides a larger tax exemption, and lowers the surcharge for the wealthy. Any corporation's earnings from its operations are subject to corporate tax. The rates for corporations range from 15% to 40%.
Minimum Alternate Tax (MAT):
MAT restricts the tax breaks businesses can claim, requiring them to pay the government a minimum amount of corporate tax. It guarantees minimal levels of taxation for all Indian domestic and foreign businesses. In India, ensuring minimum tax rates for all domestic and foreign businesses is the main driver for the establishment of MAT.
Shifting of Schemes:
Currently, shifting of schemes means a sale or redemption for the source scheme and a purchase for the destination scheme under the income tax legislation, and it is, therefore, subject to capital gains tax. Whether the previous scheme was an equity or non-equity fund will determine the tax amount.
Also, Check: What is Income Tax Return (ITR)?
Features of Indirect Tax
There are also some notable features of indirect tax that you need to be aware of. Check them out below:
Tax Liability:
The vendors transfer their customers' indirect tax responsibility to the buyers. As a result, the customer has to pay this tax at the moment of sale. Thus, the person making the tax payment to the government and the person who owes the tax are two separate individuals.
Payment of Tax:
There is typically an intermediary to collect indirect taxes from the end consumer. Government cannot impose it directly on the income of an individual. Alternatively, the customer has to pay the tax along with the cost of the items or services the seller purchases.
Nature of Tax:
They are taxes all taxpayers should pay, regardless of their income, so everyone must pay them. The manufacturer or merchant includes the tax in the cost of a good or service that is then passed on to the consumer.
Saving and Investment:
Indirect taxes are generally growth-oriented because they incentivise consumers to save and invest. Since indirect taxes are levied on consumer spending rather than directly on income, they stimulate saving and investment.
Evasion:
Since indirect taxes are now implemented directly through goods and services, it is harder to evade them.
Now that we know the features of direct and indirect taxes, we should also be aware of the different types of direct and indirect taxes.
Different Types of Indirect Taxes
While there are different types of indirect tax, the GST has absorbed most of them. So let's take a look at the various indirect tax categories.
1. Service Tax
It is an indirect tax in which the service provider collects the service tax from the customer and forwards it to the Indian government. When paying the bill, the customer pays the service provider the applicable service tax. For instance, your restaurant bill includes service tax.
2. Value Added Tax (VAT)
The state government imposes VAT and determines the amount of VAT to be applied to specific commodities. For instance, if a product costs Rs 100 and the VAT is 15%, the customer must pay the seller Rs 115. The business keeps Rs 100 and sends the government Rs 15.
3. Excise Duty
The consumer does not pay excise duty directly to the government. Instead, the manufacturer or retailer adds this to the cost of the goods and then passes it on to the buyer via higher prices.
4. Custom Duty
When you import items into India from other nations, you have to pay for them. Therefore, imports and items carried into India after being purchased elsewhere are subject to customs duty.
5. Entertainment Tax
A person pays an entertainment tax levied by the state governments on movie tickets, cultural events, amusement parks, and live performances. The collected tax is used to promote and develop the entertainment industry.
6. Stamp Duty
State governments impose stamp duty on real estate transfers within their jurisdiction. Additionally, the government imposes it on all legal documents. It is due by Section 3 of the Indian Stamp Act of 1899. The stamp duty due will depend on how much the property is worth at the time of registration.
7. Goods and Service Tax
It is one of the many indirect taxes on a range of products and services currently in place. Sales within one state are subject to both central and state sales taxes.
The country's whole tax system has undergone a significant transformation with the implementation of the GST. There are no longer any mandatory indirect taxes, like the service tax, VAT, sales tax, and others that were once there. "One Nation, One Tax, One Market" is the phrase GST lives up to.
Different Types of Direct Taxes
In India, there are three primary categories of direct taxes. These direct taxes include the following:
1. Income Tax
The most prevalent form of direct tax act imposed on your income is income tax. In the case of corporations, corporate tax is due on their income. Through income tax revenue the government pays public services, government duties, citizen goods, and so on.
2. Capital Gains Tax
You can deduct all the capital gains from your taxable income. If you transfer a capital asset and make profit off of it, you must pay capital gains tax on that profit. While all capital gains are subject to taxation, long-term gains typically follow a different tax strategy than short-term gains.
3. Securities Transaction Tax (STT)
If you trade equities, you will have to pay a fee known as STT. Even if you lose money on the trade, you still have to pay this tax.
Due to their close ties to the national economy, both direct and indirect taxes are vital to the nation. The government works for the nation's welfare using the money collected through these taxes. Depending on the type of tax imposed, the central government and corresponding state governments both collect direct and indirect taxes.
Difference between Direct and Indirect Tax
As we are not aware of direct and indirect taxes, let’s get a better idea of direct tax vs indirect tax.
| Context | Direct Tax | Indirect Tax |
| Governed by | Central Board of Direct Taxes (CBDT) | Central Board of Indirect Taxes and Customs (CBIC) |
| Method of payment | Direct payment from taxpayers to the government. | The government receives it from the taxpayers through a middleman. |
| Who is the taxpayer? | HUF, People, and Businesses | Ultimate consumer |
| Levying of taxes
| Government assesses it against a taxpayer's earnings or profits. | Instead of income or profits, products, and services are subject to indirect taxes. |
| Tax payment rate | According to earnings and profits. | The same for every taxpayer. |
| Impact and Incidence | The same person is responsible. | It affects several people. |
| The type of tax | A progressive tax is one whose rate rises with the income of the taxpayer. | Regressive taxes are those whose rates drop as income rises. |
| Evasion
| It's possible to evade taxes. | Since taxes are a part of the cost of goods and services, evasion is not possible. |
| Inflation | Reduces inflation. | Leads to inflation. |
Evaluating Tax Efficiency
Tax efficiency compares how effectively different tax systems achieve revenue goals with minimal economic distortion. Direct taxes, like income or property taxes, directly impact income and savings behavior, influencing economic decisions. Indirect taxes, such as Goods and Services (GST), affect consumption patterns without directly altering production choices. Indirect taxes often have lower administrative costs due to simpler collection methods. Achieving optimal tax efficiency involves balancing revenue needs with economic incentives while promoting fairness and minimizing compliance burdens.
Conclusion
Now we are aware of direct tax vs. indirect tax. Tax collection is crucial for society's general well-being and serves as a tool for economic growth. The following traits of a good tax system are important: predictability, equity, convenience, flexibility, redistribution, and encouragement of investments.
Frequently Asked Questions
1. Is Tds a Direct or Indirect Tax?
A sort of indirect tax known as tax deducted at source, or TDS, sees revenue directly collected from the source of the recipient's income. Pay as you go and collect when it's due are concepts used by TDS.
2. Is the Gst a Direct or Indirect Tax?
In India, the Goods and Services Tax is an indirect type of tax that has typically eliminated other indirect taxes from the year 2017, including the VAT, services tax, and excise duty. Parliament approved the GST Act on March 29, 2017, and it became effective on July 1.
