Understanding the differences between

There are two types of taxes – direct and indirect.
Here's a quick guide to understanding the
differences between the two.

Meaning

Tax that is paid directly to the government. It is charged on a person’s income and/or wealth.

Paid indirectly to the government by individuals. It is charged on goods and services consumed.

Impact

Borne by the same person i.e the assessee

Borne by manufacturer or service provider initially and then shifts to the consumer by charging higher prices

Examples

Income tax, corporate tax, property tax, wealth tax, import and export duties, etc.

VAT, GST, excise duty, sales tax, customs duty, etc.

Target

The tax is imposed on and collected from the assessee (individual, firm, company).

Imposed on and collected from consumers of goods and services But the assessee deposits and pays the tax.

Fixation of charges

Levied on the basis of a person’s revenue earned annually. The assessee pays income tax on the actual amount earned.

Charged on the Maximum Retail Price of purchased goods and services.

Nature

Progressive in nature as the ability of a person to pay is measurable. People pay tax based on what they earn if you earn more, you pay more.

Regressive in nature as it is applied uniformly. Different goods and services have different percentages of tax levied on them.

Inflation

Direct tax is paid annually and since it’s levied on an individual, it results in reducing inflation.

An additional charge on prices of goods and services can result in inflation. E.g. A pizza may be advertised at Rs. 200 but at the restaurant you pay Rs. 210 (5% GST) inclusive of all taxes.

Time of payment

For salaried individuals, the tax is deducted every month. For self-employed and corporates it is taxed defined as per by Income Tax Act

Collected instantly from consumers on the purchase of goods and services.

Administrative cost

As direct tax involves many exemptions, administrative costs are higher.

Since the collection is stable, administrative costs are lower.

Limit of coverage

Direct tax is levied on individuals in particular tax brackets.

Wide coverage as all individuals in a society are taxed.

Note: Direct taxes go to the central government while GST gets split between centre and state governments.

Disclaimer:
This infographic is intended for general information purposes only and should not be construed as investment or insurance or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.