Direct vs Indirect Taxes: Key Differences

16^th Jan 2026...

Published By : Team 811

The Indian taxation system is complex and interconnected, making it essential for taxpayers to understand the distinctions between different types of taxes. Responsible Indian taxpayers should be aware that direct tax is paid straight to the government on income, profits or assets, while indirect tax is collected from consumers when they purchase goods or services, with sellers acting as intermediaries.

What is Direct Tax?

Direct tax is imposed directly on the income or wealth of an individual or entity. The liability for paying this tax cannot be shifted to another person or organisation under any circumstances.

In India, the Central Board of Direct Taxes (CBDT), under the Department of Revenue, manages the planning, imposition, collection and administration of these taxes. Common forms of direct taxation include:

Income tax: Charged on earnings of individuals.
Corporate tax: Levied on company profits.
Capital gains tax: Applied on profits from the sale of capital assets.

What is Indirect Tax?

Indirect tax is levied on the sale or provision of goods and services. Consumers pay this tax at the point of purchase, and the seller or service provider transfers it to the government. Here, the tax burden can be shifted, as businesses act as intermediaries between consumers and the state.

In India, the Central Board of Indirect Taxes and Customs (CBIC), under the Department of Revenue, oversees its administration. Major categories of indirect taxation include:

Goods and Services Tax (GST) – A unified tax on most goods and services.
Customs duties – Taxes on imports and exports.

Significant differences

Parameter	Direct tax	Indirect tax
Imposition	Applied on wealth profit and income	Applied on goods and services
Taxpayer	Business entities and individuals mainly pay direct tax	End consumer pays
Payment mode	It is paid directly to the government	The customer pays this to the government through the intermediary
Tax rate	It is based on the tax liabilities of an individual, income, wealth, and profit.	It applies equally to everyone but has different rate based on services and products.
Liability transfer	It cannot be transferred	It can be transferred
Collection method	It requires complicated documentation	It is convenient for the taxpayer to pay to the government
Avoidance	It is possible to evade direct tax	While harder to evade then direct tax, it is still possible through under-reporting, fake invoices, or misclassification.

Types of Direct Tax in India

Direct tax is imposed on income, profits and wealth. Its main categories include:

Income tax

Individuals pay this tax based on their applicable slab rates for a given financial year. Under the Income Tax Act, this also applies to entities such as cooperative societies, trusts and juridical persons. Taxable income is calculated after deducting exemptions and allowances, with rates revised periodically through the Union Budget.

Corporation Tax

This tax is levied on the profits of companies and organisations operating in India. The applicable rate depends on factors such as turnover and location of business operations.

Wealth tax

Wealth Tax was abolished from FY 2015–16. Before its abolition, it was levied at 1% on the value of specified assets exceeding ₹30 lakh and applied to individuals, Hindu Undivided Families (HUFs), and companies. The tax covered certain non-productive assets such as jewellery, luxury vehicles, vacant land, and additional residential properties.

Productive assets including commercial property, shares, mutual funds, and fixed deposits were excluded. As of 2026, wealth tax is not applicable in India, with high-value asset ownership now indirectly taxed through income tax surcharges, capital gains tax, and other applicable levies.

Capital gains tax

Imposed on profits earned from the sale of capital assets such as property, bonds and shares. It is categorised into short-term capital gains tax and long-term capital gains tax, each with its own applicable rates.

Types of Indirect Tax in India

Indirect tax is collected on the supply of goods and services.

Types include:

Goods and services tax

A comprehensive indirect tax that replaced multiple earlier levies, such as central excise duty and service tax. It applies nationwide to most goods and services.

Excise duty

Traditionally levied on the manufacture of goods within India. Though largely subsumed by GST, it still applies to specific products such as petroleum, liquor and luxury goods.

Customs duty

Charged on goods imported into India from abroad. The rate varies depending on the type of goods and the country of origin, with payment required regardless of the transport mechanism.

Conclusion

Direct and indirect taxes are the two primary revenue streams for the Government of India, each contributing to the nation’s economic growth and development. Direct tax applies to income, profits and wealth, while Indirect Tax is levied on the consumption of goods and services. Understanding both helps taxpayers and businesses comply with regulations and make informed financial decisions.

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