Direct and indirect taxes: nature, kinds

and their difference

Submitted in the partial fulfilment of

requirement of BA.LL.B. Degree.

Army Institute of Law, Sector -68, Mohali.

Submitted to: Submitted by:

Dr.Puja Jaiswal Jasdeep Kaur
Jaiswal Roll.no.-1478
BA, LL.B. (3rd Year)
 INDEX

Introduction
Meaning of taxation
Direct Taxes
Indirect Taxes
Difference between Direct and Indirect Tax
Conclusion
 INTRODUCTION
India has a well-developed tax structure. The power to levy taxes and duties is distributed
among the three tiers of Government, in accordance with the provisions of the Indian
Constitution. The main taxes/duties that the Union Government is empowered to levy are:-
Income Tax (except tax on agricultural income, which the State Governments can levy),
Customs duties, Central Excise and Sales Tax and Service Tax. The principal taxes levied by the
State Governments are:- Sales Tax (tax on intra-State sale of goods), Stamp Duty (duty on
transfer of property), State Excise (duty on manufacture of alcohol), Land Revenue (levy on land
used for agricultural/non-agricultural purposes), Duty on Entertainment and Tax on Professions
& Callings. The Local Bodies are empowered to levy tax on properties (buildings, etc.), Octroi
(tax on entry of goods for use/consumption within areas of the Local Bodies), Tax on Markets
and Tax/User Charges for utilities like water supply, drainage, etc.
In the wake of economic reforms, the tax system in India has under gone a radical change, in line
with the liberal policy. Tax, is the payment we make to the Government, for a good/service. It is
this money that Govt uses for all the functions it is expected to do. Military, Infrastructure -
Economic and social, basic amenities, Welfare etc. In India, the Taxes are classified in to two
types, direct taxes and indirect taxes. Direct Taxes are those which are paid directly by the
individual or organization to the imposing authority. They are levied on income and profits
Indirect Taxes are those which are not paid directly by the individual or organization to the
imposing authority. They are levied on goods and services and not on income and profits.
A) Direct Taxes :
Corporation tax , Taxes on income, Estate duty, Interest Tax, Wealth Tax, Gift Tax, Land
Revenue, Agricultural tax, Hotel receipts tax, Expenditure tax , Other’s

B) Indirect Taxes :
Customs, Union excise duties, Service tax, State Excise duty, Stamp and registration fees,
General Sales tax, Taxes on vehicle, Entertainment tax , Taxes on goods and passengers, Taxes
and duties on electricity, Taxes on purchase of sugarcane, others
There are certain grounds by which the difference becomes clear between the direct and indirect
taxes.
Meaning of Taxation
The process whereby charges are imposed on individuals or property by the legislative branch
of the federal government andby many state governments to raise funds for public purposes.1

Essential characteristics of tax

1. It is imposed by the state in a way we can say, it is an enforced contribution.
2. It is generally payable in money.
3. It is proportionate in character, i.e., usually based on the ability to pay.
4. Levied by the state to earn revenue to meet the expenditure for infrastructure and social
welfare.
5. It is generally required to be paid at regular intervals.

Direct Tax2
Broadly, there are two types of taxes that the Indian government levies on its citizens – direct tax
and indirect tax.

Definition or Meaning:
Direct taxes are those which are paid directly to the government by the taxpayer. These taxes
are not paid deducted and paid on behalf of the taxpayer. It’s imposed on the people and
organizations directly by the government. This tax liability has to be paid by the taxpayer in
question and cannot be transferred to any other entity for payment.

List of Direct Taxes In India:

1. Income Tax
o Income tax is the most common and most important tax that an Indian must pay.
o It is charged directly on the income of a person.

1
http://legal-dictionary.thefreedictionary.com/Kinds+of+Taxes assessed on 13-02-2017

2
https://www.bankbazaar.com/tax/direct-tax.html assessed on 6-02-2017
 o The rate at which it is charged varies, depending on the level of income.
o It’s charged to individuals, co-operative societies, firms, companies, Hindu
Undivided Families (HUFs), trusts and any artificial judicial person.
o Income tax is charged on an income known as “taxable income”, which is:
Taxable income = (total income) – (applicable deductions and exemptions).
The different heads of income under which income tax is chargeable are:
o Income from house and property.
o Income from business or profession.
o Income from salaries.
o Income in the form of capital gains.
o Income from other sources.
It is levied differently for different people depending on their residency status.

2. Corporate Tax
o Levied on companies who exist as separate entities from their shareholders.
o Foreign companies are taxed on income that arises, or is deemed to arise, in India.
o It is charged on royalties, interest, gains from sale of capital assets located in
India, fees for technical services and dividends.
o Includes Minimum Alternative Tax (MAT) which was introduced to bring Zero
Tax companies under the income tax net, whose accounts were made in
accordance with the Companies Act.
o Includes Fringe Benefit Tax (FBT) which is a tax that companies pay on the
fringe benefits provided (or deemed to have been provided) to employees.
o Incudes Dividend Distribution Tax (DDT) which is a tax levied on any amount
declared, distributed or paid as dividend by any domestic company. International
companies are exempt from this tax.
o Includes Securities Transaction Tax (STT) which is a tax levied on taxable
securities transactions. There is not surcharge applicable on this.

3. Wealth Tax
o Wealth tax is charged on the benefits derived from property ownership.
o The same property will be taxed every year on its current market value.
o Wealth tax is charged whether the property in earning an income or not.
 o The tax is levied on the individuals, HUFs, and companies alike.
o Chargeability depends on residential status.
The following will not be taxed as they are “working assets”:
o Assets held as stock in trade.
o Property held as a commercial complex.
o Gold deposit bonds.
o House property held for business or profession.
o House property let out over 300 days in a year.

4. Capital Gains Tax

o Taxed on the income derived from the sale of assets or investments.
o Capital investments cover homes, farms, businesses, works of art, etc.
o Capital gains = (money received from sale) – (cost of capital investment).
o Categorized as short-term gains (gains on assets sold within 36 months of
acquisition) and long-term gains (gains on assets sold after 36 months of
acquisition and holding).
o Voluntary tax that is paid by the taxpayer when the asset it sold.

Benefits of Direct Taxation3:

1. Equitable: The burden of direct taxes can’t be shifted, and an equitable sacrifice of
income and wealth can be achieved from all sections of society through progressive
taxation.
2. Economical: Income tax and most other forms of direct taxation are done at source with
the help of TDS (Tax Deduction at Source), and are hence not a problem for the
government to collect.
3. Certainty: There is a sense of certainty from the taxpayer and the government, as each
know how much to pay and how much to expect to collect respectively.
4. Productivity: Direct taxes are very productive in the sense that as the working
population andcommunity grows, so do the returns from direct taxation.
5. Consciousness of duty: When people consciously pay their taxes, they can claim the
right to know how their money is being spent by the government.

3
ibid
 6. Creates equal distribution of wealth: The government charges more taxes from those
that can afford them, and uses this money to uplift the lower and poorer sections of
society.

Indirect Tax4
Meaning of Indirect Tax:
Indirect tax is a type of tax collected by the government from an intermediary such as
manufacturer or retailer. The eventual burden of the tax falls on to consumers who buy goods
and services from the intermediary, as the intermediary applies indirect taxes on the product in
the form of Value Added Tax (VAT), service tax, sales tax etc.
Indirect taxes are called so because they are collected indirectly from consumers by the
government through intermediaries, who are the first payers of the tax to the government. These
taxes are different from direct taxes such as income tax which is collected directly from
taxpayers. Indirect taxes include taxes such as sales tax, service, tax, VAT etc. whereas income
tax, wealth tax, corporation tax etc. fall under the ambit of direct taxes.
Unlike direct taxes, indirect taxes are levied on goods and services rather than individuals.
Individuals pay the taxes indirectly in the form of higher prices on their purchases. A retailer
selling a product to you has already levied indirect taxes on the product, which is then passed on
to the relevant tax-collection authorities.

Features of Indirect Taxes:

 Levied on goods and services sold by an intermediary to final consumers. Consumers
than pay the tax in the form of higher price of items.
 Broadly divided into categories such as sale of goods, imported/exported goods, offering
of services and manufacture of goods.
 Indirect taxes are levied on clearance of goods and services from the origin, instead of
actual sale of the products to the customers. What this means is that the intermediary will
pay excise duties irrespective of whether they could sell the good or service to
consumers.
 Indirect taxes fall under both the central and state governments according to specific type
of indirect tax. For instance, VAT is levied by the state governments whereas CST is
levied by the central government.

4
https://www.bankbazaar.com/tax/indirect-tax.html assessed on 13-02-2017
Types of Indirect Taxes:
Indirect taxes is a broad category under which different kinds of indirect taxes fall. There are 4
basic sub-categories with further sub-divisions according to goods and services.

List of Indirect Taxes or Examples of Indirect Taxes:

 Service tax
 Excise duties
 VAT

Service Tax:
Service tax is applied generally at the rate of 12.36%, which has been revised to 14% from April
2015. This type of indirect tax is levied by the service tax provider and paid by the recipient of
the services. However, in some cases the liability for the tax is divided between the recipient as
well as the provider of service.
There is also a provision for abatement of service tax if the final price is a mixture of services as
well as material, such as restaurant bills. In general, restaurants levy service tax on 40% of the
bill amount as 60% of the amount is considered to be cost of materials. Service taxes fall under
the ambit of the central government.

Excise Duties:
The central government collects excise duties on manufacture of goods subject to clearance of
the products from warehouse or factory. As such, this tax can be said to apply on clearance of
goods from storage rather than being applied on the sale of the manufactured goods. Excise
duties are further divided into 4 categories, of which basic excise duty is levied for the most part
while the others are levied only in special cases.
1. Basic excise duty: This is the most common type of excise duty which is levied on goods
manufacturing and falls under the Central Excise Act, 1944. This tax is exempted in
special cases such as manufacture of salt or export of manufactured goods of less than
Rs.1.5 crores overall value per year, among others. The excise duty rates vary from
product to product.
2. Special excise duty: Levied on a small list of items and falls under Central Excise Tariff
Act, 1985.
3. Textile duties: As the name suggests, only applicable on specific textile goods and falls
under the Additional Duties of Excise Act, 1978.
4. Goods of special importance: This is levied as per the Additional Duties of Excise Act,
1957 on specific goods mentioned under the article.
 5. National calamity contingent duty (NCCD): This is levied on goods like cigarettes,
chewing tobacco, pan masala, mobile phones and crude oil, and is applicable U/S 135 of
the Finance Act, 2001.
Imported Goods:
Imported goods are charged taxes as per excise duties. This is further divides in specific duties
and ad-valorem duties.
1. Specific duties: These are applicable on all individual components of a good imported
into the country, for instance a cloth imported from abroad will be charged excise per
meter of the material, or laptops imported will be charged excise on each unit of the
order.
2. Ad-valorem duties: These are levied on the overall value of goods exported or imported.
For instance, 10% of the overall bill of imported clothes or 10% of the overall order value
for laptops.
3. Anti-dumping duties: These are levied so as to shield the domestic market against
foreign goods dumped at very low or below cost prices. For instance, plastic products
imported from China, which can be cheaper than the domestic market rates.
4. Countervailing Duty of Customs: This is another type of excise duty used to help
Indian produced goods sell on a level playing field. This is additional to the ad-valorem
or specific duties already applied on goods.

Value Added Tax (VAT):

Finally, goods sold directly to consumers are levied Value Added Taxes (VAT), which is
collected by the respective state government on intra-state sales, as well as Central Sales Tax,
which is collected by the central government on inter-state sales. Every state levies its own VAT
figure, which usually lies between 5% and 12.5%. There may be some exceptions to this tax as
per state laws.
Apart from all the types of indirect taxes discussed above, Octroi or Local Body Taxes (LBT) are
also applicable as per local rules and regulations.

Advantages of Indirect Taxes

1. Convenient:- Indirect taxes are imposed on Manufacturers, sellers ad traders but their
burden is imposed on the consumers of the goods and services and thus this consumers
are the final tax payers. They are convenient from point of view as tax payer as he pays
indirect taxes in small amounts. Also they are convenient to government as they collect
these taxes in lumpsum from the manufacturers.
2. Difficult to evade:- As in many cases the selling price is inclusive of indirect taxes , it is
very difficult to evade these taxes.
 3. Wide Coverage: - Indirect taxes have more wide coverage than the direct taxes as
majority of the goods and services have indirect taxes included in their price. So the
consumers have to pay them.
4. Elastic:- Some of the indirect taxes are elastic in nature, when government wants to raise
the revenue, they increase the indirect taxes.
5. Universality:-Indirect taxes are paid by both rich and poor people so they have the
universal appeal.

DIFFERENCE BETWEEN DIRECT AND INDIRECT TAX

BASIS OF DIFFERENCE DIRECT TAX INDIRECT TAX

Direct tax is referred to as the Indirect Tax is referred to as

1.MEANING tax, levied on person's income the tax, levied on a person
and wealth and is paid who consumes the goods and
directly to the government. services and is paid indirectly
to the government

Progressive Regressive
2.NATURE

Falls on the same person. Falls on different person

3. INCIDENCE AND
IMPACT

Wealth Tax, Income Tax, Central Sales tax, VAT

4.TYPES Property Tax, Corporate Tax, (Value Added Tax), Service
Import and Export Duties. Tax, STT (Security
Transaction Tax), Excise
Duty, Custom Duty.
 Tax evasion is possible. Tax evasion is hardly
5. EVASION possible because it is
included in the price of the
goods and services.

Direct tax helps in reducing Indirect taxes promotes the

6.INFLATION the inflation. inflation.

Imposed on and collected Imposed on and collected

7. IMPOSITION AND from assessees, i.e. from consumers of goods and
COLLECTION Individual, HUF (Hindu services but paid and
Undivided Family), deposited by the assessee.
Company, Firm etc.

8.BURDEN Cannot be shifted. Can be shifted

9. EVENT Taxable income or wealth of Purchase/sale/manufacture of

the assessee goods and provision of
services
 CONCLUSION
India has a well-developed tax structure. The power to levy taxes and duties is distributed
among the three tiers of Government, in accordance with the provisions of the Indian
Constitution. Indian taxation structure has gone through many reforms and still it is very far
ahead from being a ideal taxation structure. Many problems like Tax Evasion, Reliance on
indirect taxes, Black money, existence of parallel economy show that Indian taxation system
requires some major reforms in the future ahead to address all this problems. There are various
number of taxes and different tax collection authorities in India. Also it is seen that there is major
dependence on indirect taxes for tax collection than the direct taxes. Both Indirect taxes and
Direct taxes have their own advantages and disadvantages and are thus different from each other
from various aspects.