Last Updated on May 24, 2022 by

Income tax is a major source of Government income. As citizens, most of us are familiar with the taxes we pay. But taxes are of different kinds, and as taxpayers, it is essential for us to know their significance. 

Broadly, taxes are categorized into two types – direct and indirect. But what is the difference between direct and indirect tax? And what do these taxes entail? 

Here is a quick guide to all you need to know about the difference between direct and indirect tax in India.

What is a direct tax?

Direct taxes are taxes that you pay directly to the Government. A direct tax is non-transferable, which means that there are no intermediaries in the taxation process between you and the Government. For example, income tax is a direct tax that you pay directly to the Central Government of India. Direct taxes are implemented and monitored by the Central Board of Direct Taxes or CBDT.

What is indirect tax?

Indirect taxes are taxes that are paid via a third party and are thus transferable. This means that the liability to pay the tax to the Government is shifted to another entity. For example, GST or goods and services tax is an indirect tax. The entities we purchase the things from, such as a supermarket, are then responsible for passing the tax to the Government. Indirect taxes are governed by the Central Board of Indirect Taxes and Customs or CBIC.

The difference between direct and indirect tax

There are several features that help us distinguish between direct tax and indirect tax. While both types of taxes are important and compulsory to be paid, knowing the difference and significance adds a layer of responsibility and accountability to the process. Here is a comprehensive table highlighting the difference between direct and indirect tax in India:

Differentiating factorDirect taxIndirect tax
On whom is the tax imposed?It is imposed directly on your income or any activity you conduct.It is imposed on the goods and services that you purchase from third parties.
Who pays the tax?Businesses pay a direct tax on their profits and individuals on their incomes.An intermediary pays it to the government but recovers it from the end-consumer.
Can the tax be transferred?A direct tax is non-transferable.An indirect tax is transferable.
What is the course of payment?It is paid directly to the Government.It is paid via an intermediary.
What is the tax rate?It varies for different income or profit groups.It is uniform throughout the country.
What is the nature of the tax?A direct tax is progressive, which means that its rate increases with higher income levels.An indirect tax is regressive, which means that its rate decreases with higher income levels.
When is it paid?It is paid after you receive your income or profit.It is paid at the time of the purchase of the goods or services.
Effect on the economyA direct tax may reduce inflation.And indirect tax may increase inflation.
Cost of implementationA direct tax has more costs involved because of its variable nature and presence of exemptions.An indirect tax has lesser costs involved because of stable and uniform collection.

Different types of direct tax

The major direct taxes levied in India in 2022 are:

  • Income tax, which is paid by any earning citizen of the country based on the tax bracket their income level falls in.
  • The corporate tax, which is paid by companies on the profits they make. The tax rate is decided by whether the company is incorporated within India or outside.

Earlier, direct tax included 2 more taxes. Inheritance tax levied on property inherited by the taxpayer and wealth tax levied on property owned by the taxpayer. But these were abolished in 1985 and 2015, respectively.

Different types of indirect tax

The major indirect taxes levied in India in 2022 are:

  • The Goods and services tax or GST, which is imposed on the purchase of goods and services across the country. It was introduced in 2017 and usurped many of the pre-existing indirect taxes such as VAT, excise duty, etc.
  • Central excise duty, which is levied on the goods produced within the country.

It is important to note that the direct and indirect taxes mentioned here are not an exhaustive list of the taxes in our country. But these are the most noteworthy ones which contribute a major chunk to the Government’s earnings through taxes.

Pros and cons of direct and indirect taxes

Direct taxes are known to help curb inflation and are generally considered more equitable. They come with well-defined tax brackets and exemptions, ensuring a much-needed social and economic balance, especially in a diverse country like India. However, because of the variability, direct taxes are easier to evade. Moreover, because they have to be paid in a lump sum every year, they can also prove to be burdensome.

On the other hand, indirect taxes are uniform and non-evadable as they are incorporated within the price of a commodity. However, the uniformity of indirect taxes often fails to take into consideration the existing wealth gap in our country. Moreover, it also makes commodities expensive and can thus add to inflation.


Taxes play a vital role in the growth and balance of an economy. Even with the difference between direct and indirect tax, each tax is important as it contributes to the Government’s revenue, which is then used for the betterment of the country. It is the responsibility of the Government to implement fair taxes, and it is your responsibility to pay taxes on time.

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