Types of Taxes in India: Direct Tax and Indirect Tax

Tax is an obligatory expense enforced on an individual by the state and central government. It is one of the government’s most significant sources of income that helps them build a country’s economy and infrastructure. 

Therefore as a responsible citizen, you must pay taxes. However, it is also crucial to know the different types of taxes in India implemented in the taxation system of India.

Here’s all about the types of taxes.

How many types of taxes are there in India?

The tax structure in India is a three-tier structure: local municipal bodies, state, and central government. Typically taxation in India is broadly classified into direct tax and indirect tax. Let us look at these two types of taxes and catch the difference between direct and indirect taxes.

Direct taxes

Direct tax is levied on the income or profits of people. 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 be passed on to someone else. Direct tax is governed and administered by the Central Board of Direct Taxes (CBDT).

Indirect taxes

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. Indirect taxes are governed and administered by the Central Board of Indirect Taxes and Customs (CBIC).

Difference between Direct and Indirect tax

Major types of Indirect taxes and Direct taxes in India

Here is the list of major types of Indirect taxes:

• Goods and Service Tax– It is one of the existing indirect taxes imposed on various goods and services. One significant benefit of GST is that it eliminates the tax-on-tax or cascading effect of the previous tax regime.
• Excise duty – It is a tax imposed on licensing, sale or production of certain goods produced within the country.
• Sales Tax - Sales tax is a type of indirect tax in which the seller charges a buyer at the time of selling or exchanging a taxable good. Then the seller repays the tax to the government on behalf of that buyer.  However, the sales tax generally relies upon the authority in power and the policies implemented by the authority. Some major sales tax types are manufacturer’s sales tax, wholesale sales tax, use tax, value-added tax, and retai sales tax.

Here is the list of major types of Direct taxes:

• Income tax – It is a type of tax that is imposed on the profits and income earned during the year. Income tax is the most common example of direct tax. As the term “income tax” suggests, it is a tax levied by the Central government on income generated by individuals and businesses in a particular financial year. However, the amount payable for your income tax depends on how much money you earn under different heads of income. Additionally, for the financial year of 2022-2023, income tax is applicable to those with an annual income exceeding Rs 2.5 lakh p.a.

In addition, other examples of direct and indirect tax include corporate tax, value-added tax, customs duty, and many more.
 

Now that you know about some of the common types of direct and indirect taxes, it is important to know the pros and cons of direct and Indirect taxes.

Advantages and disadvantages of direct tax

Benefits

1. Individuals with lower incomes pay lower taxes than people with higher incomes. Therefore, it is known to be impartial and progressive in nature.
2. It curbs inflation and reduces inequalities.

Drawbacks

1. There are many fraudulent practices through which taxpayers often pay lower tax or avoid taxes.
2. The documentation process is sometimes complex and time-consuming, thereby creating inconvenience. Therefore, it is often considered a burden.

Advantages and disadvantages of indirect tax

Benefits

1. It ensures that every individual, including the poor, contributes toward nation-building.
2. This payment is more convenient as such taxes are already included in the price when purchasing any product or service.

Drawbacks

1. It can result in an increase in the overall price of goods and services.
2. Consumers often lack civic consciousness of the tax they are paying.
3. The rich and the poor pay the same tax. Therefore, it known to be regressive in nature.

Now that you are aware of the different types of taxes in India, you will have a better idea of the types of taxes you are paying.