To understand taxation in India, you need to know what is a direct tax and an indirect tax. Here are a few essential points:
- You need to pay direct tax to the government based on the income or profits you earn
- Contrary to this, you’ll pay indirect tax only if you purchase any good or service
To know more about them, read on.
Table of Contents
What is a Direct Tax?
Here are some specifications for better clarity:
- It is a tax that you need to pay directly to the authority imposing it
- It means that taxpayers need to bear this tax and can’t transfer it to another tax-paying entity
- CBDT (Central Board of Direct Taxes) manages the collection and administration of these taxes
- The CBDT functions under the Department of Revenue of the Ministry of Finance
Types of Direct Taxes in India
Here’s a list of different categories:
Income Tax
The following are some of its features:
- It is the most common type of direct tax that you need to pay directly to the government
- The government levies this tax on the income generated by an individual in a financial year
- You need to pay this tax based on the income tax slabs you fall under
Capital Gains Tax
Here’s a brief overview:
- The government charges this tax on the profits made by investors on certain instruments
- Based on the duration of investment, there are two types of these taxes- short-term capital gains (STCG) and long-term capital gains (LTCG)
Securities Transaction Tax
Here are some of the specifications:
- You need to pay this tax when you trade in securities
- Note that this tax is levied irrespective of whether you made gains or not
Now that you’re aware of how many types of direct taxes are there in India, you’ll be able to understand the Indian taxation system better.
What is the Difference Between Direct and Indirect Tax?
Now that you have understood what is the meaning of direct taxes, check the following table to understand how it differs from indirect taxes:
| Parameter | Direct Taxes | Indirect Tax |
|---|---|---|
| Applicability | Charged directly on income and profits | Levied indirectly on the sale of goods and services |
| Tax Payment | Individuals and businesses need to pay these taxes | End-users of goods and services need to pay indirect taxes |
| Tax Rate | Based on the slab you fall under or the amount of profit and duration of investment | Depends on the applicable GST rate for the goods and services or notified rates for other types of indirect taxes |
| Transferability | You can’t pass it on to any other tax-paying entity | This tax is transferred to the end-user of the goods or services |
| Nature of Taxation | It is a progressive type of taxation | It is a regressive type of taxation |
| Examples | Income Tax, Capital Gains Tax and Securities Transaction Tax (STT) | GST, Excise Duty and Value-Added Tax (VAT) |
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FAQs on Direct Tax
What is meant by direct tax?
Here is what is meant by a direct tax:
- It is a type of tax that you need to pay directly to the competent authority
- You can’t pass it on to another tax-paying entity
What are the different types of taxes?
Here are the two major bifurcations and how they differ from each other:
- Direct tax: The government levies this on the taxpayer’s income and profits
- Indirect tax: This is charged on goods and services
Which type of tax is a direct tax?
Check out the following specifications:
- The impact and incidence of this type of tax fall on the same entity
- The taxpayer can’t pass it on to another tax-paying entity
- Examples of direct taxes include income tax and capital gains tax
Is GST a direct tax?
No, it is an indirect tax. Here’s what you need to know about the Goods and Services tax:
- This is a unified system introduced by the Indian government to replace multiple indirect taxes regulated by state and central government
- The GST rates for various products are pegged at 0%, 5%, 12%, 18% and 28%.
