Direct Tax vs Indirect Tax

  • June 18, 2024
  • Dushyant Sharma
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Whether you are earning or making a purchase of any goods or services as an individual or a company, you are obliged to pay taxes. Taxes are one of the most important sources of income for the Government of India. The taxes help the Government of India to repay its debts, work on infrastructure for education, national defense, social service programmes and so forth.


In general, taxes are categorized into two categories: Direct Taxes and Indirect Taxes In India. In this article, we will discuss the direct tax vs indirect tax in India.

What is Direct Tax? 

Direct Tax is a type of tax imposed by the Government of India on individuals or organizations on the basis of their income, assets or profits. The taxpayers are required to pay direct tax directly to the government and it can’t be shifted to others. Taxes such as Capital gains tax, wealth tax, corporate tax are all direct income tax examples.


Generally speaking, direct taxes are progressive in nature, meaning that as a taxpayer's income or earnings rise, so does the tax rate. This is done in order to redistribute wealth and achieve economic equality by requiring people with greater incomes to pay a larger share of it in taxes.


As the direct taxes in India provide the Government of India with a source of income or revenue that can be used to pay for public goods and services like infrastructure, healthcare, and education, direct taxes are really important to the Indian economy. Apart from encouraging fiscal discipline and mitigating income disparity, direct taxes also make sure that individuals with higher gains/profits allocate a greater part of their income to social welfare and public services.

What are the Different Types of Direct Taxes in India?

Let’s learn about different types of direct taxes in India or direct tax examples.

  • Capital Gains Tax: Any individual making capital gains is required to pay tax on the gains to the Government of India. Capital gains may be achieved out of land or from investments like equities. The capital gain tax is either charged as long-term capital gains tax aka LTCG tax or short term capital gains tax or STCG tax depending on the duration for which the investment is held.
  • Income Tax: It’s the most common direct tax example for the type of direct tax paid directly to the Government of India. Income that is earned in a financial year has income tax imposed on it. The income tax is paid as per the income tax slabs (latest) of the Income Tax Department.
  • Securities Transaction Tax: If you are involved in trading securities, then you must know that you are required to pay securities transactions tax, regardless of any gains made out of it or not. Securities Transaction Tax is also one kind of direct tax example in India.

Pros and Cons of Direct Tax in India

Here are some direct tax pros and cons:


  • Direct tax helps to curb inflation in the country
  • It is considered as equitable for all social classes
  • Raises the revenue of the Government of India directly


  • The documentation process is time-consuming
  • Direct tax collection is a complicated process
  • Restricts financial investments

What Is Indirect Tax?

Indirect Tax refers to a type of tax levied on goods and services rather than on individuals or organizations in a direct manner. The end consumer bears the burden of paying indirect taxes which are included in the cost of goods and services. Value-added tax (VAT), sales tax, excise duty, customs duty, and GST are a few examples of indirect taxes.


Since the low income individuals/households typically spend a larger percentage of their income on goods and services, indirect taxes are regressive in character, which means that they disproportionately burden low income individuals or households with taxes. This may affect those belonging to marginalized/disadvantaged communities and cause economic inequality.


The role played by indirect taxes is really crucial for the economy since they provide a significant source of revenue for the Government of India, which can be used to fund public goods and services. Potentially speaking, indirect taxes may have an impact on consumer behavior and promote economic efficiency because they encourage individuals to consume less of certain goods or services that are heavily taxed. For example, many states impose heavy VAT on liquor so that people will purchase it less.

What are the Different Types of Indirect Taxes in India?

Let’s learn about different types of indirect taxes in India or indirect tax examples.

  • Goods and Services (GST): Goods and Services Tax or GST Tax is the most popular indirect tax type or indirect tax example. It is the largest tax in India and has replaced various indirect taxes in India like purchase tax, excise duty, service tax, value added tax and so forth. GST is a single, unified and comprehensive indirect tax imposed on goods and services across India based on the tax slabs laid by the GST Council. Companies require GST registration if they exceed the threshold limit of Rs. 40 lakhs p.a. (Rs. 20 lakhs p.a. for certain states).
  • Customs Duty: If you purchase any goods or services from overseas, customs duty will be levied on you. This indirect tax must be paid regardless of whether the product reached you by sea, land or air. Therefore, customs duty is an indirect tax imposed to ensure that each and every product coming under the national borders of India is taxed.


Ever since the concept of GST was introduced in 2017 under GST law, a major change has occurred in the entire tax system of India. Various indirect taxes like VAT, services tax, sales tax, etc. have been abolished (although VAT is still charged on liquor.)

Pros and Cons of Indirect Tax in India

Here are some indirect tax pros and cons:


  • Every individual has to make a contribution
  • Payment of indirect tax is convenient for taxpayers
  • The tax collection is pretty easy


  • Indirect tax has a regressive trait
  • Makes goods and services costlier
  • Less transparency for end-consumers

Difference between Direct Tax Vs Indirect Tax

Now let’s learn what is the difference between direct tax and indirect tax through the table below which shows direct tax vs indirect tax difference.

Direct Taxes

Indirect Taxes

Imposed on individuals or entities on the basis of their income/assets/profit

Imposed on goods and services

Paid directly by the eligible taxpayers to the Government of India

The end-consumer pays it indirectly

Non-transferrable to others

Transferable to others

Direct Tax makes sure people with greater incomes pay a larger share of them in taxes.

The burden of taxes is faced more heavily by low income individuals/households when it comes to indirect tax.

Serves as an important source of revenue for the Government of India and promotes fiscal discipline

Serves as a significant source of revenue for the Government of India and impacts consumer behavior

Encourages income equality and redistributes wealth in India

Can have an impact on income inequality and may disproportionately affect vulnerable or marginalized communities in India

Income tax, corporate tax, and wealth tax are few direct tax examples

Sales tax, excise duty, customs duty, and value added tax are few indirect tax examples

Knowing the difference between direct and indirect taxes is important to understand their implications on individuals, entities and the Indian economy.


Both direct tax vs indirect tax have their own pros and cons. Direct tax helps to promote income equality and serves as a major revenue source for the Government of India but they can be complex and their documentation process is rather complicated. But when we talk about indirect taxes, these taxes are easier to administer and can impact consumer behavior. However, they increase the cost of living and cause inflation in the country. Both direct taxes and indirect taxes need to be paid by the individuals and entities in India for economic development and stability. If you need help in filing Income Tax, which is a direct tax, you can get in touch with Registrationwala for a smooth and hassle free experience.

Frequently Asked Questions (FAQs)

Q1. How to know the difference between direct and indirect tax?

A. Direct and indirect taxes are completely different in every manner. Direct taxes are paid by individuals directly to the Government of India and are imposed on income, profits and assets. But in case of indirect taxes, it’s the complete opposite as they’re paid to the Government of India if one makes a purchase of goods and services.


Q2. What are indirect examples?

A. Value Added Tax (VAT), Goods and Services Tax (GST), custom duty and excise duty are all indirect tax examples.


Q3. What are direct tax examples?

A. Income tax, securities and transaction Tax (STT), capital gains tax all direct tax examples.


Q4. What does Goods and Services Tax mean?

A. GST means a comprehensive indirect tax which is imposed on the manufacture, sale and consumption of goods and services at a national scale in India. 

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Dushyant Sharma
Author: Dushyant Sharma

Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.

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