What is Direct and Indirect Tax?

The tax which is applied to a person’s income is known as direct tax. And the tax which is applied on the purchase of goods and services is known as indirect tax. In this way, you can distinguish between Direct Tax and Indirect Tax.

Tax is the main source of income for both state and central governments. The amount that the government collects in the form of tax boosts the economy. Tax helps in building good infrastructure, healthcare departments etc. to help the general public.

For example: Raghav goes to a restaurant for breakfast. If he orders food of ₹500 then an additional 18% GST is applied.

Cost of Food: 500

Tax: 18% of 500 = 90

Total Amount = 590

Therefore Raghav has to pay 590 in total.

Note: If you are earning any type of income then it becomes necessary for you to pay the income tax.

Direct Tax

As the name suggests, direct tax is the tax that goes directly to the government. A person cannot pass the direct tax to another person or entity. That person or organization has to make sure that tax deduction happens from their income.

The CBDT department handles the procedures of direct taxes. CBDT stands for Central Board of Direct Taxes. It comes under the Department of Revenue.

Direct Tax Types

The different types of direct taxes are as follows :

Corporate Tax: Tax from the profits of corporations is corporate tax. It is imposed on the company’s income.
Income Tax (IT): Tax on the income of an individual or organization is income tax. Most of the time the state government imposes it.
Capital Gains Tax (CGT): A tax that comes from the sales of an asset or investment is called capital gains tax.
Wealth Tax: The tax on the wealth of an individual is the wealth tax.

Direct Tax Example

Let's say a company has a turnover of Rs 1Cr and it pays 25% of its profit to the government. So we have to find how much tax the company pays to the government.

To understand it properly direct tax calculation is done in the following manner :

Turnover amount = Rs. 1,00,00,000

Tax on turnover = 25%

Tax Paid to Government = Rs. 1,00,00,000 * 25% = Rs . 25,00,000

Therefore Rs. 25 lakhs will go as a direct tax to the government.

Indirect Tax

An indirect tax is a tax that the government collects from manufacturers or retailers. The manufacturers and detailers get it directly from the consumer when the consumer purchases any goods or services. So the process of collecting indirect tax is simple, the main thing is that the manufacturer plays an intermediary role i.e. from collecting the tax to submitting it to the government.

The CBIC stands for Central Board Of Indirect Taxes and Customs and it manages the indirect tax that comes from goods and services. In this way, indirect tax helps the government to generate more revenue.

Indirect Tax Types

The indirect tax types are as follows :

Excise Tax: Excise tax is imposed when a consumer buys specific goods or services.
GST: GST stands for goods and services tax. It is a VAT tax on the delivery of services and goods. VAT is value added tax that mainly focuses on the consumption of goods.
Entertainment Tax: An indirect tax imposed on the entertainment industry like movies, video games etc.
Custom Duty: Tax on the import and export of goods across borders is custom duty tax.

Indirect Tax Example

Let's say Rohini buys a movie ticket for Rs.600 therefore 18% of GST will apply to the movie ticket.

Indirect Tax Calculation:

Ticket Price = Rs. 600

GST = 18% of 600 = Rs. 108

Total Price = Rs. 600 + Rs. 108 = Rs. 708

Therefore Rohini will have to pay Rs. 708 as the ticket price.

Also, check - GST Calculator

Direct Vs. Indirect Tax

Sno.	Direct Tax	Indirect Tax
1.	Direct Tax is a tax which the payer pays directly to the government.	An intermediate person pays the tax to the government by collecting it from the consumer.
2.	The direct tax is imposed on a person's income, or company’s profit.	Indirect tax is imposed on goods and services, sales etc.
3.	Here tax rates vary as per the income or profit of a company.	Here the tax rates are the same.
4.	You cannot transfer the direct tax.	Indirect tax is transferrable.
5.	The direct tax is governed by Central Board of Direct Taxes (CBDT)	The indirect tax is governed by the Central Board of Indirect Taxes and Customs (CBIC).

Q1. Which tax is better, direct or indirect?

Ans. Direct tax is better because it lowers the burden on people who are not well-versed financially. The indirect tax collection happens on daily goods because of which the burden increases on the lower class.

Q2. Is GST a direct or indirect tax?

Ans. Tax on goods and services is known as Goods and Services Tax(GST). And GST is an indirect tax.

Q3. What is an example of an indirect tax?
Ans. VAT(Value Added Tax), GST(Goods Services Tax), and customs duty are examples of indirect tax.