Direct Taxes and Indirect Taxes in India – Types, Advantages, Disadvantages & Rates

Tax is a mandatory fee imposed upon individuals or corporations by the Central and State Government to help build the economy of a country by meeting various public expenses. 
Taxes are broadly divided into two categories- Direct and Indirect taxes.

Why are Taxes Levied?

The levy of taxes is necessary because they constitute the basic source of revenue for the Government. The revenue raised is utilized for meeting government expenses like defence, provision of education, health care, and infrastructure facilities like roads and dams.

Types of Taxes :

What is Direct Tax?

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 passed on to someone else. Central Board of Direct Taxes (CBDT) governs and administers the Direct Tax.

What are the Direct Taxes Imposed in India?

Some of the important direct taxes imposed in India are mentioned below:

• Income Tax- It is imposed on an individual who falls under the different tax brackets based on their earnings or revenue, and they have to file an income tax return every year, after which they will either need to pay the tax or be eligible for a tax refund.
• Corporate tax- Companies incorporated or having operations in India have to pay tax to the government. They need to pay tax on the profits earned from the business. Unlike, income tax slab rates of individuals, the companies have to pay tax at flat rates prescribed by the government.
• Securities Transaction Tax (STT)- STT is a tax levied while dealing with securities listed on a recognised stock exchange. It is an amount that is levied over and above the trade value, and hence, it increases the transaction value.
• Estate and Wealth taxes are now abolished.

What are the Advantages of Direct Taxes?

Direct taxes do have a certain advantage for a country’s social and economic growth. To name a few,

• It curbs inflation: The Government often increases the tax rate when there is monetary inflation, which in turn reduces the demand for goods and services. As a result of descending demand, inflation is bound to condense.
• Social and economic balance: Based on every individual’s earnings and overall economic situation, the Government has well-defined tax slabs and exemptions in place so that the income inequalities can be balanced out.

What is the Most Common Disadvantage of Direct Taxes?

Direct taxes have a handful of disadvantages. However, filing tax returns is a taxing task itself, as it is very time-consuming.

What is Indirect Tax?

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.

Earlier, an indirect tax meant paying more than the actual price of a product bought or a service acquired. And there was a myriad of indirect taxes imposed on taxpayers.

Goods and Service Tax (GST) is one of the existing indirect tax levied in India. It has subsumed many indirect tax laws. 
Let’s discuss a few indirect taxes that were earlier imposed in India:

• Customs Duty- It is an Import duty levied on goods coming from outside the country, ultimately paid for by consumers and retailers in India.
• Central Excise Duty - This tax was payable by the manufacturers who would then shift the tax burden to retailers and wholesalers.
• Service Tax - It was imposed on the gross or aggregate amount charged by the service provider on the recipient.
• Sales Tax– This tax was paid by the retailer, who would then shift the tax burden to customers by charging sales tax on goods and services.
• Value Added Tax (VAT – It was collected on the value of goods or services that were added at each stage of their manufacture or distribution and then finally passed on to the customer.

GST as Indirect Tax

With the implementation of GST, we have already witnessed a number of positive changes in the fiscal domain of India. The various taxes that were mandatory earlier are now obsolete, thanks to this new reformed indirect tax. Not just that, GST is making sure the slogan “One Nation, One Tax, One Market” becomes the reality of our country and not just a dream.

That said, with the dawning of the ‘Goods & Services Tax (GST), the biggest relief so far is clearly the elimination of the ‘cascading effect of tax’ or the ‘tax on tax’ quandary.

Cascading effect of tax is a situation wherein the end-consumer of any goods or service has to bear the burden of the tax to be paid on the previously calculated tax and as a result would suffer an increased or inflated price.

Under the GST regime, however, the customer is exempted from the tax they would otherwise pay as a result of the cascading effect.

Types of Supply and Taxes Levied Thereon

Intra state Supply : Supply of goods and services within the state. In such cases GST is levied at equal rates by Central govt and by State govt. Types of taxes levied are

• Central Goods and Services Tax (CGST) : It is levied and collected by Central Government on intra-State supplies of taxable goods and services.
• State Goods and Services Tax (SGST) or Union Territory Goods and Services Tax (UTGST) : It is levied and collected by State Government or Union Territories without Legislatures on intra-State supplies of taxable goods and services.

Interstate Supply : Supply of  goods and services between different states and union territories. Type of tax levied is

• Integrated Goods and Services Tax (IGST) : IGST is the sum total of CGST and SGST/UTGST and is levied by the Centre on all inter-State supplies.

What are the Advantages of Goods and Service Tax (GST)?

There are several benefits of GST. Let’s list a few:

• Input Tax Credit: At the time of paying tax on the final product, one can reduce the tax they have already paid on their purchases and pay just the balance amount. This is called Input Tax Credit which again reduces the burden of a hefty tax.
• Composition Scheme under GST: The government has done a commendable job by introducing Composition Scheme for small businesses with a turnover below Rs.1.5 crore. In case of North-Eastern states and Himachal Pradesh, the limit is now Rs.75 lakh. As per the scheme, they don’t have to go through the time-consuming formalities of GST but only pay the tax at a fixed rate based on their business turnover. Isn’t that a relief for small taxpayers? It sure is!
• Zero-rated exports: GST on the export of any kind of goods or services will not be charged. It will be considered as a zero-rated supply.
• Compliance: Various digital products, including new returns, e-wallets, and e-invoicing are created to facilitate easier and more efficient tax management. 

Conclusion

From a larger perspective, we can agree that both direct and indirect taxes are important for the betterment of our economy.