GST Registration
GST Return
Quick & Easy Process
Professional Guidance
Legal and Tax Benefits
Taxation has a significant role in human life, is a backbone for government operations, and ensures resources for essential public services. In India, taxation is primarily classified into two categories: direct taxes and indirect taxes. But what do these terms mean, and how are they different from each other?
A tax may be defined as a “financial burden laid upon individuals or property owners to support the government, a payment exacted by legislative authority. In simple words, the tax is nothing but money that people have to pay to the government, which is used to provide public services.
Taxes are broadly classified into 2 Types-
A direct tax is a kind of charge that is imposed directly on the taxpayer and paid directly to the government by the persons( juristic or natural) on whom it is imposed. A direct tax is a tax that cannot be shifted by the taxpayer to someone else. A significant direct Tax imposed in India is income tax.
Note: There used to be a wealth tax in India, but it was abolished later.
They are Transferable taxes from one person to another. The entire burden of the tax is on the ultimate consumer, but the immediate liability to pay tax is on the supplier of goods or services.
They are also called consumption-based taxes and are regressive in nature because they are not burdened by the principle of ability to pay. All consumers, including Bagger, bear the burden of the tax.
Indirect taxes are levied on goods or services but not on income or property. From the 1st of July 2017, all indirect taxes on goods or services are merged into one unified code called the goods and services tax.
Prior to the introduction of the Goods and Services Tax (GST), India had a diverse range of indirect taxes. These taxes were levied at various stages of production and consumption, often leading to cascading effects and increased costs for businesses and consumers.
Here are some of the key indirect taxes that were previously in place:
Here is a detailed comparison of direct and indirect taxes in the table below:
| Feature | Direct Taxes | Indirect Taxes |
|---|---|---|
| Imposition of Tax | Levied directly on the income or profits of individuals or businesses. | Imposed on the purchase or consumption of goods and services. |
| Tax Incidence and Collection | Taxpayer is directly responsible for paying the tax to the government. | Tax is collected by the seller or service provider and then passed on to the government. |
| Tax Impact | Falls directly on the taxpayer. | Falls on the consumer, who ultimately bears the burden of the tax. |
| Method of Collection | Collected by government agencies such as the Income Tax Department. | Collected by businesses at the point of sale or provision of service. |
| Rate of Tax Payment | Varies based on the income or profit of the taxpayer, often following a progressive structure. | Typically uniform for all taxpayers, regardless of income or wealth. |
| Nature of Tax | Progressive, as higher incomes are taxed at higher rates. | Regressive, as it takes a larger percentage of income from lower-income individuals compared to higher-income individuals. |
Types of GST in India are as follows:
Indirect Taxes are collected by intermediaries such as retailers and service providers, who then pass on the tax to the government. This makes the collection process more efficient and ensures that taxes are collected at each stage of the supply chain.
Despite the many benefits of GST for the government, such as bringing uniformity in taxation across the country and eliminating the cascading effect of multiple taxes, GST has its drawbacks. It is considered regressive because it taxes consumption, which disproportionately impacts lower-income individuals.
