What is Direct Tax -Types & How is it different from Indirect Tax?

• Written by Ritika Malik

  Reviewed by Akhil Pillai

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Taxation is the cornerstone of government revenue, it fuels economic transformation and social progress within the country. In India, the tax system can be broadly categorised into two main types- Direct taxes and indirect taxes.

But, the question is how much do you know about them?. In this guide, we will understand direct taxes, their benefits, types, and key differences from indirect taxes.. Stay tuned!!

What is Direct Tax?

A direct tax is a government levy imposed on an individual or entity based on their wealth, property, and income. The taxpayer is directly responsible for paying taxes like income tax, corporate tax, and wealth tax. Importantly, direct taxes cannot be transferred to others..

Unlike indirect taxes, which can be passed on to consumers (like VAT or GST), direct taxes are paid directly to the government by the taxpayer, whether they are an individual or a business.

What is Indirect Tax?

Indirect taxes are applied to goods and services and are passed on  to the consumer. The tax burden shifts from seller to buyer. Examples include excise duty, sales tax, and GST. While direct taxes target income, indirect taxes impact the cost of living, product prices, and services, making their effect less noticeable to the average consumer.

Types of Direct Taxes

Several direct tax types exist, each with a specific purpose. Here are main types that affect taxpayers:

• Income tax is a common direct tax where the government taxes an individual's income. The tax rate is progressive, meaning the more an individual earns, the higher the tax rate.
• Corporate tax is a tax levied on the profit of businesses. The tax rate fluctuates depending on the business size, but large corporations are usually liable to pay higher taxes.
• Wealth tax, another type of direct tax in India, applies to people whose wealth exceeds a specified threshold. It applies to assets, including monetary investments, property, and invaluable possessions.
• Capital gains tax is a tax that applies to profit earned from sale of stocks, bonds, properties, and other long term investment tools.
• The estate tax is levied on deceased individual’s estate, including property or money, depending on the value transferred to inheritors.

Who is Eligible to Pay Direct Tax?

Individuals and businesses of any size are liable to pay direct taxes. Eligibility to pay direct taxes revolves around several factors, such as income type, income level, and business size. In India, a person who earns more than 2.5 lakhs annually is liable to pay income tax.

Businesses are liable for corporate tax based on their profit margins.

People with significant assets may also be liable for wealth or capital gains tax.

Benefits of Direct Tax

Direct taxes have extensive benefits and are  essential for a nation's economic resilience. Some key advantages include:

• Economic Development: Direct taxes are a crucial source of government revenue. This helps boost the country's economic development through investment in public services and enhanced quality of life.
• Long-term Benefits: While paying taxes may seem burdensome initially, it ultimately offers taxpayers enhanced infrastructure, social security, and national progress.
• PromotesSocial Equity: Direct taxes, mainly income tax, are often progressive, meaning higher earners pay more. This ensures fair allocation of taxes and helps reduce income inequality.
• Transparency: Direct taxes are based on personal assets and income, providing taxpayers with a clear understanding of their tax liability.

>>Read More: Tax Benefits on Health Insurance under Section 80D

Difference Between Direct and Indirect Tax

The table below illustrates the difference between direct and indirect tax:

Wrapping up!

While direct taxes might be perceived as a financial burden, they are crucial to any country's progress. They ensure fair wealth allocation, fund public services, and assists in shaping a responsible, fair society. Understanding the different types of direct taxes in India and their benefits, simplifies navigating the complex enabling you to contribute meaningfully to the nation's collective well-being.

So, the next time you file taxes, remember that it is not a legal burden, but you play a crucial role in the nation's development. 

Disclaimer: The above information is for reference purposes only. The tax exemptions are subject to the rules and regulations of the Income Tax Act of India 1961.