Home›Learning Center›What are Direct Tax and Indirect Tax? Differences & Examples

Author

LoansJagat Team

Read Time

5 Min

07 Aug 2025

What are Direct Tax and Indirect Tax? Differences & Examples

tax

Taxes help the government fund public services. They are mainly of two types: direct and indirect.

Direct Tax: Paid directly to the government by individuals or companies based on income or profits.

Examples: Income Tax, Corporate Tax, Capital Gains Tax

Indirect Tax: Charged on goods or services and collected by sellers on behalf of the government.

Examples: GST, Customs Duty, Excise Duty

Let’s understand from Tanuka’s story:

Tanuka works as a marketing executive in Kolkata and earns ₹60,000 each month. She pays ₹7,200 from her salary as income tax directly to the government. One weekend, she buys a fridge for ₹30,000. The price includes 18% GST, which means she also pays ₹5,400 in tax through her purchase. This is an indirect tax that the shop collects and passes on to the government.

This simple example shows how we pay both direct and indirect taxes in everyday life. In this blog, you will explain what direct and indirect taxes are, how they differ, and how they impact our income and spending.

What Are Direct Taxes?

Direct taxes are paid straight to the government by individuals or businesses, based on their income or wealth. These taxes are visible and usually increase as people earn more.

Type of Direct Tax	Description
Income tax	Charged with the money people earn from work.
Corporate tax	Paid by companies from their profits.
Capital gains tax	Paid on profit from selling assets like property or shares.
Property tax	Charged annually on land or buildings owned.
Estate or gift tax	Tax on inherited property or large gifts.

These direct taxes help governments fund public services fairly by asking people to pay according to their ability.

Examples: Income Tax, Corporate Tax, Capital Gains Tax, Property Tax, Securities Transaction Tax

What Are Indirect Taxes?

Indirect taxes are added to the price of goods and services. You do not pay them directly to the government. Instead, the shop or seller collects the tax and sends it to the government.

Type of Indirect Tax	Description
VAT / GST	A tax added during the making and selling of goods or services.
Sales tax	Charged at the time you buy something and added to your bill.
Excise duties	Charged on items like alcohol, tobacco and fuel.
Customs duties / Tariffs	Taxes on goods brought into the country from abroad.

These taxes increase the final price of the things you buy, even if you do not notice them on the receipt.

Examples: GST, Customs Duty, Excise Duty, Entertainment Tax, Green Tax

India's GST Reform (2017)

India introduced GST on 1 July 2017 under the 101st Constitutional Amendment Act. It replaced several older indirect taxes, like VAT, central excise, service tax, octroi, entry tax, luxury tax, and central sales tax, with one unified system. This major reform removed the problem of tax-on-tax (also called cascading tax) and helped create a single national market across the country.

Pros & Cons of Each Tax Type

This table shows the main benefits and drawbacks of both direct and indirect taxes in everyday life.

Tax Type	Advantages	Disadvantages
Direct Tax	It is fair because people with higher incomes pay more.	It can be difficult to manage and takes time to file.
	It is clear because you know how much tax you pay.	Some people find the forms and rules confusing.
	It helps reduce income gaps by taxing the rich more.	It needs proper records and regular checks.
Indirect Tax	It is easy to collect because shops add it to the price.	It affects lower-income people more because they spend a bigger part of their income.
	It brings regular income to the government from many small payments.	It can make goods and services more expensive.
	It is hard to avoid since it is included in almost every purchase.	People often do not realise how much tax they are paying.

Example:

Raj earns ₹80,000 per month and pays ₹12,000 in income tax. This is a direct tax.

He then buys a new TV for ₹50,000. GST at 12% adds ₹6,000, which is an indirect tax.

So, in one month, Raj pays ₹18,000 in total taxes through both income and spending.

Why Splitting Taxes This Way Matters?

This table shows how dividing taxes into direct and indirect types helps different groups and supports modern tax policy.

Who	Why It Matters	Real-World Example
Governments	Direct tax helps reduce inequality by taxing higher incomes more. Indirect tax provides steady revenue from everyday spending.	Income tax from high earners funds public services; GST on fuel and groceries adds to national income.
Businesses	Understanding tax rates helps set fair product prices and manage costs. GST input credits reduce the tax burden.	A shop owner includes 18% GST in product pricing and claims input credit to lower the overall tax paid.
Citizens	Transparency in taxes helps people plan their income and spending. It shows how much tax they pay on purchases.	When Tanuka buys a ₹30,000 fridge with ₹5,400 GST, she clearly sees the tax share in her spending.
Policy Trends	Many countries use GST/VAT for simplicity. Digital tools like e-invoicing and online portals make compliance easier for all.	A small business in Delhi files GST returns online without hiring a full-time accountant, saving costs.

Splitting taxes into clear types supports fair policy, helps with planning, and makes modern tax systems work better for everyone.

Conclusion

Direct and indirect taxes both play important roles in funding public services and running the country. Direct taxes ask people to pay based on what they earn or own, making them fair and clear.

Indirect taxes are added to things we buy and help governments collect money easily from many people. Understanding the difference helps you see how taxes affect your income and your everyday spending.

FAQs

1. Can I avoid paying indirect taxes?

No, indirect taxes are included in the price of most goods and services. When you buy something, you pay the tax even if you don’t see it separately.

2. Why do direct taxes feel harder to handle?

Direct taxes often require you to fill in forms and declare your income, which takes time. But this helps keep things fair by charging more to those who earn more.

3. Do indirect taxes affect everyone the same?

No, indirect taxes tend to take a bigger part of income from people who earn less because they spend more of their money on goods and services.

4. How has technology changed tax collection?

Technology lets governments collect taxes faster and simply. For example, online tax filing and digital GST systems make it easier for both taxpayers and businesses to comply.

Apply for Loans Fast and Hassle-Free

About the Author

LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?

Quick Apply Loan

100% Digital Process

Loan Upto 50 Lacs

Best Deal Guaranteed

Other Service

Debt Consolidation Loan
Personal Loan in Indore
Personal Loan in Jaipur
Personal Loan in Surat
Personal Loan in Ahmedabad
Personal Loan in Coimbatore

Subscribe Now