Last Updated: Jul 01, 2024 Value Broking 6 Mins 2.7K
difference between direct and indirect tax

Governments can use many types of taxes to meet their revenue needs. Two of the main types of taxes are direct taxes and indirect taxes. The difference between direct and indirect tax is that the direct tax is imposed directly on citizens, while the indirect tax is imposed on producers of goods and services. While indirect tax is imposed on producers, it is generally passed on to consumers. Most countries rely on a mix of direct and indirect taxes to raise revenues. This blog will further examine the differences between these taxes, types, and more.

Key Highlights

  • Direct taxes are levied directly on individuals or organizations and cannot be transferred to others, such as income tax and corporate tax.
  • Indirect taxes are imposed on goods and services and can be passed on to the end consumer, like GST (Goods and Services Tax) or sales tax.
  • Direct taxes are generally progressive, with rates increasing as income rises, while indirect taxes are often regressive, affecting all consumers equally.
  • Direct taxes are collected by tax authorities directly from taxpayers, whereas indirect taxes are usually collected by intermediaries like retailers.

Direct vs Indirect Tax Comparison Table

The following table outlines how these two taxes differ:

Direct TaxIndirect Tax
These include taxes like income tax, corporate tax, wealth tax, capital gains tax etc.Taxes include Goods and Services Tax (GST), excise duty and customs duty
Levied directly on individuals or organisationsImposed on the producers of goods and services
The burden cannot be shifted elsewhereProducers can shift the burden of indirect tax onto consumers. The extent will depend on the elasticity of demand. If demand is inelastic, producers can pass on the entire burden
Considered a progressive tax and for the most part higher the income, the higher the percentage of tax paidConsidered regressive since taxes are imposed on all without distinction. Of course, luxury goods can be taxed more
Evasion is easier since it’s harder for tax authorities to keep track of individual incomesEvasion is difficult since taxes are imposed on producers. It’s easier to keep track of producers since they are fewer in number
Higher administrative costs since it takes much more effort to monitor individual taxpayersAdministrative costs are lower since fewer taxpayers need to be monitored
It cannot be used to influence the consumption of certain productsHigh taxes can be used to dissuade people from consuming certain products, like cigarettes and alcohol. Low taxes can be used to encourage the production and consumption of other products
The taxable pool of people is quite small, especially in a country like India, where only about 2% pay income taxA much wider pool of people can be brought under the tax net, by taxing commonly used commodities like soap
It can help control inflation since the tax will directly affect incomes and thus consumptionIndirect tax may actually raise the inflation rate by increasing the prices of various goods and services
Critics say direct taxes act as a disincentive to private initiative, thus lowering economic growth ratesDo not act as a disincentive to growth, unless commodities are imposed punitive levels of tax

Now that we know what the difference between direct tax and indirect tax is, let’s look at some of their types. 

Types of Direct Tax and Indirect Tax

Direct Tax types include the following:

  • Wealth tax: A wealth tax is a tax imposed on an individual’s assets according to their worth throughout a fiscal year. Individuals, businesses, and HUFs are all subject to this tax.
  • Corporation tax: Companies and businesses are subject to this kind of tax depending on their revenue within a certain fiscal year. Whether an enterprise is located in India or outside determines the tax rate.
  • Income tax: This tax is imposed on people based on how much money they make each year within a fiscal year.
  • Capital gains tax: This type of tax is imposed on the profit made from the sale of real estate. 

Indirect Tax types include the following:

  • Service tax: All service providers are required to pay this kind of tax to the government. The government imposes a levy known as a sales tax on movable commodities.
  • Value-added tax: It is imposed on goods that have additional features added to them at every stage of production, up until distribution.
  • Excise Duty: Excise duty tax is the name given to the government’s levy on manufacturers.

Benefits of Direct Tax and Indirect Tax

These are some of the main advantages of direct taxes:

  1. Curbs Inflation: The government increases tax rates in response to monetary inflation that threatens the economy. This rise reduces the demand for products and services, which lowers inflation.
  1. Social and Economic Balance: The existence of clearly defined tax slabs and exemptions contributes to the reduction of income disparities. As a result, those with lesser incomes pay less in taxes, and vice versa.

The advantages of indirect taxation include:

  1. Equal Contribution: Each person pays the state a certain amount, no matter how small through indirect taxes. It also reaches people in lower income brackets who do not pay direct taxes.
  1. Non-evadable: The cost of the items includes these taxes. Therefore, not using the charged item is the only method for an individual to avoid paying an indirect tax.

Drawbacks of Direct Tax and Indirect tax

There are certain disadvantages to direct and indirect taxation, which include the following:

  1. Tax Evasion: Despite the strict rules that are in place, some utilise dishonest means to either entirely avoid paying taxes or pay less than they should.
  1. Burdensome: Annually, direct taxes are paid in one large payment. Therefore, they are frequently viewed as a burden. The paperwork is also lengthy and laborious, which contributes to the discomfort.
  1. Regressive: People with lesser incomes may feel that indirect taxes are unjust because they apply to all economic classes equally.
  1. Increased Product Price: The cost of goods and services in the nation is increased by an indirect tax, making these commodities more costly.  


Indirect taxes and direct taxes have varied effects on equality, economic efficiency, and revenue collection. They also play diverse functions in a nation’s tax system. Value-added tax (VAT), sales tax, and excise duties are indirect taxes imposed on the use of products and services. Even though they could be unfairly burdening lower-income individuals more indirectly, they are frequently simpler to manage and can increase economic efficiency. In the end, there are trade-offs when deciding between direct and indirect taxes, and most nations choose a combination of both to achieve their fiscal and economic objectives.