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Direct and Indirect Taxes – Advantages, Types and Benefits

If you earn an income or you buy some goods or services, you are liable to pay the taxes in both scenarios. It doesn’t matter if you are an individual or a corporate entity paying tax is the only available choice if you live in India. Tax is a kind of compulsory payment made to India’s central and state governments. In order to manage your own taxes, it’s highly important to understand the basic crux of Direct and Indirect tax and its various aspects of taxation.  

What is Direct Tax? 

As the name suggests, Direct tax is applied directly to individuals or entities based on their property, wealth or respective income. This tax cannot be shifted to any other person or entity, resulting in the whole and sole responsibility of paying this tax being of the taxpayer. Direct tax plays a major role in accumulating the Government of India’s total tax revenue. CBDT (Central Board of Direct Tax), which is a Department of Revenue, is the responsible authority for the administration and collection of direct taxes. Some examples of Direct Tax are Income tax, Capital Gains tax, and Security transaction tax. 

Types Of Direct Taxes in India 

 The types of Direct Taxes available in India are as follows: – 

  1. Income Tax – Income tax is arguably the most prevalent form of direct taxation imposed by the Indian government. It is levied on the earnings accumulated during a fiscal year. The Income Tax Department of India has established specific tax brackets based on income levels, and individuals and entities are required to pay taxes according to these brackets. 
  1. Security Transaction Tax – If anyone is into trading securities, that person must pay the securities transaction tax irrespective of whether you make gains. 
  1. Capital Gains Tax – If an individual earns capital gains, they are subject to a tax on those returns paid to the Indian government. Capital gains can be derived from various sources, such as selling property for a profit or investments in equities. The duration for which investments are held determines whether the capital gains tax is classified as long-term capital gains (LTCG) or short-term capital gains (STCG). 

Advantages of Direct Tax 

  1. Reduce Inflation – In order to tackle inflation, the government has the option to raise direct tax rates, which can lead to a decrease in demand for goods and services. This reduction in demand helps alleviate inflationary pressures, thereby curbing inflation. 
  1. Transparency – Direct taxes are usually clear and transparent, as they are directly imposed on individuals or entities. Taxpayers can easily understand the amount they owe and how it is calculated, promoting transparency in the taxation process. 
  1. Revenue Generation – Direct taxes allow governments to target specific sources of income or wealth, enabling them to generate revenue from those who possess higher incomes or significant assets. This helps in achieving fiscal objectives and redistributive goals. 

Also Read: Tax Rules Applicable on Bonds

What is Indirect Tax? 

Indirect Tax is imposed on goods and services at the point of time when they are sold or consumed, and it can be transferred onto some others as well. This tax is not directly paid to the Government but is collected by the various businesses on behalf of the Government and is included in the price of the sold goods and services. Some examples of Indirect taxes are Goods and Services Tax and Customs Duty.   

Types of Indirect Taxes in India 

The types of Indirect Taxes Available in India are as follows: – 

  1. Goods and Services Tax – Goods and Services Tax, popularly known as “GST”, has easily replaced other indirect taxes like service tax, purchase tax, etc. GST is imposed as per the tax brackets on Goods and Services, as per the specification made by the GST authorities in India. 
  1. Customs Duty – When you purchase goods and services from foreign countries, a tax known as customs duty is imposed. This tax levies every product or service entering India from overseas. Indirect taxes have certain benefits like they ensure that every individual contributes to tax payments, making the process simpler for people and allowing the government to collect taxes conveniently. 
  1. Value Added Tax – Whenever the value of products increases at different stages of the supply chain, a tax called Value Added Tax (VAT) is imposed. State governments are responsible for imposing VAT and determining the specific percentage for different goods. Although GST has replaced VAT in many instances, VAT is still applicable to certain products, such as alcohol. 

Benefits of Indirect Tax? 

  1. Wider Tax Base: Indirect taxes have a broader tax base as they are levied on goods and services consumed by a larger population. This widespread coverage ensures that a significant portion of the population contributes to tax revenue, thereby reducing the burden on individual taxpayers. 
  1. Simplicity: Indirect taxes are often relatively easier to administer and collect compared to direct taxes. They are typically collected at the point of sale or consumption, making the tax collection process more straightforward and less complex for both businesses and individuals. 
  1. Economic Stimulus: Indirect taxes can be used as a tool to influence consumer behaviour and promote certain industries or discourage harmful practices. By imposing higher taxes on specific goods or services, such as luxury items or tobacco products, governments can generate revenue while simultaneously encouraging healthier or more sustainable choices. 

What is the difference between Direct and Indirect Tax? 

Here’s a comparison of direct and indirect taxes in India in a tabular form: 

Direct Taxes Indirect Taxes 
Levied directly on individuals or entities Levied on goods, services, or transactions 
Cannot be transferred to another person Can be passed on to another person 
Examples: Income tax, property tax, wealth tax Examples: Goods and Services Tax (GST), customs duty 
Based on the ability to pay Based on consumption or transactional activity 
Paid by the taxpayer directly to the government Paid by the taxpayer to the seller or service provider 
Tax liability depends on the taxpayer’s income Tax liability depends on the value of goods/services 

Is there any impact of Direct/Indirect Tax on Bonds investments? 

Bonds are basically a type of debt instrument issued by governments or corporations in order to raise capital. And direct/ indirect taxes can have an indirect impact on bonds. 

In the case of direct taxes, such as income tax, individuals or entities who earn income from bond investments may be subject to tax on the interest income received. The tax liability on bond income can reduce the overall returns for investors. 

Indirect taxes, such as sales tax or VAT, are not directly linked to bonds. These taxes are typically applied to purchasing or selling goods and services and do not specifically target bond transactions. 

It’s important to note that the taxation of bonds can vary depending on the jurisdiction and specific regulations. Investors should consult with tax professionals or financial advisors to understand the tax implications of bond investments in their respective countries or regions. 

Also Read: Tax Free Bonds for Senior Citizens


In conclusion, direct and indirect taxes play significant roles in generating government revenue and financing public services and infrastructure. While direct taxes ensure a progressive approach by taxing individuals based on their income, indirect taxes distribute the burden across a broader consumer base. By grasping the complexities of direct and indirect taxes, individuals can make informed decisions, comply with legal requirements, and contribute to the development and welfare of their respective societies.