Topic 01 of 6 · Chapter 08 · Indian Economy
Direct vs Indirect Taxes — Differences & Examples
Income tax, corporate tax (direct) vs GST, customs duty (indirect) — differences, examples, and who bears the burden.
1. Direct Taxes
Direct taxes are taxes paid directly by the person on whom they are levied. The burden cannot be shifted to others.
- Income Tax: Tax on individual income; progressive rates (higher income = higher rate)
- Corporate Tax: Tax on company profits
- Capital Gains Tax: Tax on profit from sale of assets (shares, property)
- Securities Transaction Tax (STT): Tax on stock market transactions
- Dividend Distribution Tax (DDT): Tax on dividends (abolished 2020)
⭐ CBDT: Direct taxes are administered by the Central Board of Direct Taxes (CBDT) under the Ministry of Finance.
2. Indirect Taxes
Indirect taxes are collected by an intermediary (seller) and passed on to the government. The burden can be shifted to consumers.
- GST (Goods and Services Tax): Comprehensive indirect tax on supply of goods and services (replaced most other indirect taxes)
- Customs Duty: Tax on imports and exports
- Excise Duty: Tax on manufacture of goods (now mostly subsumed in GST; still applies to petroleum, alcohol)
💡 CBIC: Indirect taxes are administered by the Central Board of Indirect Taxes and Customs (CBIC) under the Ministry of Finance.
3. Direct vs Indirect — Comparison
| Feature | Direct Tax | Indirect Tax |
|---|---|---|
| Who pays | Person on whom levied | Collected by seller, paid by consumer |
| Burden shifting | Cannot be shifted | Can be shifted to consumers |
| Progressive? | Yes — higher income = higher rate | No — same rate for all |
| Examples | Income tax, corporate tax, capital gains tax | GST, customs duty, excise duty |
| Administered by | CBDT | CBIC |
| Impact on inequality | Reduces inequality (progressive) | May increase inequality (regressive) |
💡 Who Bears the Tax Burden?
Direct Tax (Income Tax): You earn ₹10 lakh. You pay ₹1 lakh income tax directly to the government. You cannot make someone else pay this for you.
Indirect Tax (GST): You buy a TV for ₹50,000. The price includes 18% GST = ₹7,627. The TV shop collects this GST from you and pays it to the government. You (the consumer) bear the burden, but the shop pays it to the government.
4. Key Points for Exam
🔑 Must-Remember Facts
- Direct taxes administered by: CBDT
- Indirect taxes administered by: CBIC
- Direct tax = cannot be shifted; Indirect tax = can be shifted
- Direct taxes are progressive; Indirect taxes are regressive
- Income tax = direct tax; GST = indirect tax
- Largest direct tax: Income tax
- Largest indirect tax: GST
- Capital gains tax = direct tax on profit from asset sale
- STT = Securities Transaction Tax (direct tax on stock market)
- Customs duty = indirect tax on imports/exports