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

Tax is a compulsory fee charged by the Central and State Governments on individuals and businesses to fund public expenses and support the economy. It is classified into two types: Direct and Indirect taxes.

Why are Taxes Levied?

Taxes are levied because they are the government's main source of revenue. This revenue is used to fund expenses like defense, education, healthcare, and infrastructure projects such as roads and dams.

Types of Taxes:

What is Direct Tax?

A direct tax is a tax on an individual’s income or profits, such as income tax, personal property tax, and FBT. The burden of direct tax has to be borne by the person on whom the tax is levied, it cannot transfer the burden to others. The Central Board of Direct Taxes (CBDT) oversees its administration.

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, 
• 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.
•  Wealth Tax (Abolished in 2015): Previously levied on net wealth exceeding a threshold, now replaced by a surcharge on high-income individuals.
• Estate Duty (Abolished in 1985): Previously applied to the transfer of wealth through inheritance.

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.

• High Tax Burden on Individuals and Businesses lowers disposable income, impacting savings and investments.
• Since direct taxes are levied directly, individuals and businesses tend to evade taxes or use loopholes to reduce their tax liabilities.

What is Indirect Tax?

On the other hand, indirect tax is charged by the government on goods and services. Thus, it is transferable from one taxpaying person to another. e.g; wholesaler can shift it to retailers, who can shift it to customers. Hence, customers ultimately suffer from indirect taxes. Central Board of Indirect Taxes and Customs (CBIC) administers and governs indirect taxes.

Previously, an indirect tax implied the payment of more than the true cost of a product purchased or a service obtained. And there were a variety of indirect taxes levied 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 introduction of GST, we have already seen a series of positive developments in the financial sector of India. The different taxes that were compulsory before are now redundant, courtesy of this new reformed indirect tax. Not only that, GST is ensuring the slogan "One Nation, One Tax, One Market" becomes the reality of our nation and not merely a dream.

That notwithstanding, with the advent of the Goods & Services Tax (GST), the greatest relief thus far is most obviously the abolition of the 'cascading effect of tax' or the 'tax on tax' dilemma.

Cascading effect of tax is a condition where the final consumer of any product or service will have to bear the cost of the tax to be paid on the previously determined tax and consequently would incur a higher or inflated cost.

Under the GST regime, nevertheless, the customer is relieved of the tax which otherwise would be paid by virtue of the cascading effect.

Types of Supply and Taxes Levied Thereon

Intra state Supply : When goods and services are supplied within the same state, 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 

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

To improve efficiency, India has simplified indirect taxes with GST and continues to refine direct tax policies. An ideal system aims to reduce tax evasion, ensure fairness, and encourage economic participation from all sections of society.