Taxes are a factor in our lives in India, though we do not necessarily pay much attention to them. Taxes in the form of income tax deducted from salary and GST levied on a restaurant bill quietly impact our choices on money. Nevertheless, a significant number of individuals become confused by the difference between direct tax and indirect tax, particularly students, salaried workers and self-employed entrepreneurs.
In this blog, we are going to know about the difference between direct tax and indirect tax in a simple, practical manner. No complex definitions, no dull theory. Only clear explanations using Indian examples so that you can know how it really works in real life.
Table of Contents
What is tax, and why do we pay it?
Tax refers to the revenue that is used to operate the state. It assists in the construction of roads, hospitals, schools, railways, as well as defence and welfare programs. Taxes in India can be broadly classified into two: direct tax and indirect tax.
It is valuable to understand both as it makes you better manage the money, plan the finances and reduces the risks of being confused when filling the returns or paying bills.
What is Direct Tax?
There is a direct tax whereby you are charged a tax directly to the government. To shift this tax to some other person is not possible. In simple terms, when you have, or you earn, something, you pay this tax yourself.
The most typical one is income tax. In case you are a salary earner or a business person, the tax is then computed on the income and paid to the government directly. You can not transfer this tax to another individual. Company and capital gains tax paid on the sale of property or shares are other examples of direct tax.
What is Indirect Tax?
An indirect tax is a tax that is not paid to the government directly. Rather, it is the price of the goods or services that you purchase. This tax is collected by the seller, who remits it to the government.
The best example is GST. As you purchase the clothes, have food ordered online, or as you reserve a hotel, the bill is adjusted with GST. You do not feel the pinch; however, technically, you pay it.
In the past, India existed on VAT, service tax and excise duty. Today, a majority of them fall under GST, and this is the primary indirect tax regime in the country.
The difference Between Direct tax and Indirect Tax
The greatest difference between direct tax and indirect tax is the person who bears it and its collection.
In direct tax, tax is paid, and the burden of the tax is placed on the same individual who earns income or owns wealth. In indirect taxation, the burden of the tax is transferred to the common consumer.
Direct tax is based on your income or profit. The indirect tax is based on how you spend. When you have a higher income, you tend to pay higher direct tax. You will pay more indirect tax as you spend more.
The direct taxes are progressive since the rates of taxation rise with income. Indirect taxes are said to be regressive since all people pay an equal rate, irrespective of their wealth or poverty.
Direct Tax and Indirect Tax Collection in India
Income tax is one of the direct taxes collected by the Government through the Income Tax Department. The deduction of the TDS is done on the salary of the salaried people, and advance tax or self-assessment tax is paid by the owners of businesses.
Collecting indirect tax is done via the GST, where businesses charge customers tax and remit it to the government. Here, technology has a significant role, and GST returns are submitted online.
Over the past years, direct tax and indirect tax collection in India has been enhanced by enhanced compliance, digital payments, and the tightening of the rules. Nonetheless, indirect tax has a significant contribution since it is levied at all levels of consumption.
Direct Tax and Indirect Tax Sections Under Law
The laws, such as the Income Tax Act, 1961, control direct taxes. Various parts characterise salary revenue, business revenue, deductions, exemptions and penalties.
The GST Act includes indirect taxes and has several sections that refer to registration, tax rates, input tax credit, and compliance.
The knowledge of the direct tax and indirect tax sections is particularly helpful to the owners of the business and professionals who are directly involved with the filing of taxes on a regular basis.
Real-life Examples to Understand Better
Suppose that Rahul is earning 10 lakh/year. He pays Income tax according to his slab. It is a direct tax since Rahul himself pays it.
Consider now that Rahul purchases a mobile phone for 20,000 rupees. GST is added to the price. The GST is paid to the shopkeeper by Rahul, who forwards it to the government. This is an indirect tax.
The difference between direct tax and indirect tax has an impact on Rahul’s money, though the effects are quite different.
Advantages and Limitations of Direct Tax
Direct tax fosters equality since individuals with greater earnings get to pay more. It allows for decreasing income inequality and enhancing accountability.
But it is even more painful as the sum is obviously noticeable. Others attempt to evade or defer the payment, and this brings about compliance problems.
Merits and Demerits of Indirect Tax
Indirect tax is not easy to evade since it is included in the price, and it isn’t easy to collect. The contribution is made even by people who are not in the tax bracket when they spend money.
The disadvantage is that it is affecting everybody equally. GST is charged equally to both a poor and a rich individual on basic goods, and this may be considered unjust.
Why understanding Difference Between Direct tax and Indirect Tax Matter
The knowledge of the difference between direct tax and indirect tax is essential in making better financial choices. You know why your salary is lower after being taxed and why the prices go up with GST.
To the business owners, this is the type of knowledge that will assist in pricing the products appropriately and remain in compliance. It can help in tax planning and legal savings of money for salaried individuals.
Summary
Taxes can be confusing, but once that is under your belt, you can easily understand them. Direct tax emphasises income and wealth, whereas indirect tax emphasises spending and consumption. Both of them are crucial to the development of the country, and both of them influence your pocket.
Being informed means that you are prepared. And when money is at stake, we had better have straightforwardness than confusion.
