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An Overview of Direct and Indirect Taxes in India
Taxes are basically referred to the obligatory fees imposed upon the earnings of corporations and individuals by the government for financing the nation’s developmental schemes. There are primarily two types of taxes; namely Direct Tax and Indirect Tax.
Direct and indirect taxes comprise of all the various forms of taxes charged by the government. Direct taxes are the taxes which taxpayers pay directly to the government and it cannot be shifted to another individual. Taxpayers who earn a taxable income are required to pay a percentage of their earnings to the government.
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While on the other hand, indirect taxes are the taxes that come added to the bills for the goods and services which you obtain from the seller or the provider — today this is primarily the Goods and Services Tax (GST), which since 1st July 2017 has replaced the erstwhile service tax, Value Added Tax (VAT) and central sales tax on most goods and services. Indirect taxes are transferable. When manufacturers or service providers are levied with an initial tax, they can shift the burden of tax payment to the consumer. As a result, consumers are charged a higher price for the commodity, as the taxes come added with the bill.
Direct and indirect taxes are both fundamental components that add to the revenue earned by the Indian government which is utilized for any developmental initiatives by the government.
What are the Reasons Behind Taxation by the Government?
The obvious reason behind the imposition of taxes is because they are the primary source of revenue earned by the government. These revenues can be utilized by the government for expenditures on defense system, healthcare facilities, providing education, building different infrastructure facilities like the construction of roads, dams, highways etc.
Understanding the Two forms of taxes
1.) Direct Tax
Taxes that are paid directly by organizations or individuals to the imposing entity are the Direct Taxes. A taxpayer pays direct taxes to the government based on different factors like; real estate property tax, personal property tax, income tax and taxes levied on assets.
Direct taxes differ entirely from indirect taxes because with indirect taxes the taxes levied on the service provider or the seller is transferrable to be paid by another. With direct tax, the imposed tax cannot be transferred to another individual or entity. The taxpayer upon whom the tax is levied is solely responsible for fulfilling the tax payment.
Direct Tax Levied as Income Tax
Taxes which are imposed by the government on financial earnings are called Income Tax. The law requires that any business or individual must file income tax return, every year to determine for unpaid dues and to know if one is eligible for a tax refund. Income tax makes up for a huge source of funds that the government utilizes for public service oriented projects. Many countries around the world employ a progressive income tax system where the higher income earners are required to pay a higher tax rate compared to the lower earners.
Direct Tax Levied as Corporate Tax
Corporate Tax is the taxes imposed on the income or gains generated by corporations. Generally, this tax is levied on the earnings of profits where the companies or business establishments are taxed as per the provision Income Tax rules.
Direct Tax Levied as Inheritance Tax
Inheritance Tax, also known as Estate Tax or Death Duty, is a tax imposed on the total value of the property upon the death of the individual who owned the estate. India abolished estate duty in 1985, and no inheritance tax is currently levied in the country.
Direct Tax Levied as Gift Tax
When an individual receives a taxable gift (broadly, gifts exceeding Rs. 50,000 in a year from non-relatives), it is taxed as income from other sources in the hands of the recipient under Section 56(2)(x) of the Income Tax law.
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Benefits of Direct Taxation
There are various benefits that are applicable for Direct Taxation
Equitable
In Direct Taxation, the burden of the levied taxes can’t be transferred. It gives fair obligation of the taxes to be paid only on one’s income and wealth, thereby a consistent taxation system is achieved from all sections of a society.
Economical
All Income Tax and many other types of Direct Taxation are completed at a source with the process of TDS (Tax Deduction at Source) which allows the government to easily collect the taxes.
Certainty
It provides a sense of security and certainty as both the taxpayer and the government are aware of the tax amount to be paid.
Productivity
Direct taxes bring in a huge revenue to the government because the Indian working population is consistently growing and with the growth in the number of taxpayers, the returns from Direct Taxation also multiplies.
Creates Public Consciousness
Direct Taxation is educationally valuable as the taxpayer becomes aware of the burden of tax payment and eventually pays more interest towards how the government utilizes the public funds. The taxpayer also gain more education about the rights and responsibility of a citizen.
Creates Equal Distribution of Wealth
The government of India typically charges more taxes from the higher earners, equalizing the burden of every segment of taxpayers.
Relatively Elastic
The direct taxes are comparatively flexible because when there is an increase in income and wealth of individuals and companies, the return from direct taxes will also increase. This also implies that the government's fund can be expanded by elevating the rates of taxation.
Anti-inflationary
Direct taxes can help in regulating inflation. The government may increase Tax Rates during inflationary periods as a result, the expenditure demand may decline, which in turn may reduce inflation.
2.) Indirect Tax
An indirect tax is collected by an intermediary, from the consumer who is burdened with the financial liability of paying the taxes. Usually, indirect taxes increase the price of services and goods purchased by the consumer. Consumers are the segment who end up paying the taxes on the service renderers and goods manufacturers, by paying higher rates for the products.
Indirect Tax Levied as GST
The Goods and Services Tax (GST) is India's principal indirect tax, levied on the supply of goods and services across the country since 1st July 2017. It subsumed the erstwhile service tax, central excise duty on most goods, VAT, CST and several other levies. The Central Board of Indirect Taxes and Customs (CBIC) administers the central portion of GST. Since 22nd September 2025, most goods and services attract one of two main rates — 5% or 18% — with a 40% rate on select sin and luxury goods. GST is collected by the supplier but ultimately borne by the final consumer.
Indirect Tax Levied as Excise Duty (now limited)
Before GST, a Central Excise Duty was imposed under the Central Excise Act, 1944 on all goods manufactured in India. Today, central excise continues only on a few items kept outside GST — chiefly petroleum products (petrol, diesel, crude oil, natural gas, ATF) and tobacco — while states levy excise on alcoholic liquor for human consumption.
Indirect Tax Levied as VAT (legacy, now limited)
Value Added Tax was levied by states on the sale of movable goods, with tax imposed at each step of the production or distribution chain. From 1st July 2017, VAT on most goods was replaced by GST; state VAT now survives only on goods kept outside GST, mainly petroleum products and alcoholic liquor for human consumption. The consumers are ultimately the ones burdened with paying this tax too.
What are the various factors in which the central government levies taxes upon?
The Central Government can levy taxes on factors like
- Income Tax Tax charged on the income of a person.
- Customs duties Duties imposed on import and export of goods (imports also attract IGST).
- CGST and IGST The central component of GST on intra-state supplies (CGST) and the integrated tax on inter-state supplies and imports (IGST).
- Central excise Now charged only on the manufacture of goods kept outside GST, mainly petroleum products and tobacco. The erstwhile service tax was subsumed into GST in 2017.
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What are the various factors in which the state government levies taxes upon?
The State Government can levy taxes on factors like
- SGST The state component of GST on intra-state supplies of goods and services, which replaced state VAT on most goods. The erstwhile Central Sales Tax on inter-state sales was likewise replaced by IGST. VAT now applies only to goods outside GST, chiefly petroleum products and alcoholic liquor.
- Stamp Duties and Land Revenue Land Revenues are governed by the State Governments so, Stamp Duties on the transfer of immovable properties are imposed by the State Governments.
- State Excise Excise duties are imposed on liquor for human consumption and certain agricultural goods.
Aside from the taxes imposed by the State and Central Government, certain taxation entitlement has been delegated in the hands of the local municipal bodies. The local governing bodies have the right to charge taxes on water, property, shop, establishment etc.
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14th June 2017
Oneindia Hindi
