Difference Between Direct and Indirect Tax
In India, every earning individual has to pay income tax as per the different slab rates. Similarly, when individuals purchase some goods or avail services, they have to pay tax on that product or service. It is here, the need to understand various types of tax and their difference arises.
This piece will discuss the difference between direct and indirect tax in a tabular form to help you understand every pointer easily.
Keep reading!
Direct Tax vs Indirect Tax
Refer to the table given below to distinguish between direct and indirect tax.
| Point of Difference | Direct Tax | Indirect Tax |
| Definition | Individuals pay this amount directly to the Government, and others cannot transfer it. There are different acts that monitor this amount. | End-use consumers of products, goods and services are liable to pay indirect tax. This variant is applicable for manufacturers and suppliers for the sale, import and purchase of goods. However, the accountability to pay this type of tax is passed on to consumers. |
| Benefits | The collection of direct tax occurs annually and is mostly deducted at the source, which makes it more cost-effective and reduces administrative costs. The tax amount is certain, which allows the Government to estimate revenue accurately. The collection of such taxes helps in controlling inflation and reduces inequalities. | Consumers have to pay indirect tax only at the time of purchase. As such, tax collection is easy and convenient. Indirect tax payments ensure equitable contribution as taxpayers bear lower tax rates on basic items and higher rates on luxury goods. |
| Imposition of Tax | As the name suggests, this amount is imposed directly on the income of a taxpayer. | The Government imposes this on taxpayers for the goods and services purchased or availed. |
| Course of Payment | Individuals can pay this directly to the Government. | Individuals can pay this to the Government via an intermediary. |
| Paying Entity | Businesses and individuals pay such taxes. | End-use consumers pay such taxes. |
| Rate of Payment | The Government decides the rate on the basis of income and profit. | The Government decides the rate on the basis of products and end-use. |
| Transferability of Payment | Non-transferrable | Transferrable |
| Nature of Tax | This type is progressive, meaning the rate increases with an individual’s income and profit. | This type is regressive, meaning the rate remains the same, irrespective of an individual's income. |
FAQs about the Difference between Direct and Indirect Tax
Who administers and governs Direct Tax in India?
The Central Board of Direct Taxes (CBDT) administers Direct Taxes in India and the Department of Revenue governs it.
Who administers and governs Indirect Tax?
The Central Board of Indirect Taxes and Customs (CBIC) administers Indirect Tax in India and the Department of Revenue governs it.
What are the types of Direct Tax?
Types of Direct Tax include income, wealth, corporate, and capital gain taxes.
What are the types of Indirect Tax?
Types of Indirect Tax include Goods and Services Tax, value-added tax, sales, and service taxes.