Types of Taxes: Direct Tax And Indirect Tax
Taxes are compulsory financial charges imposed by the government to fund public services and development activities. From roads and defense to education and healthcare, taxes keep a country running. But not all taxes are the same — they are categorized based on how they are collected and who bears the burden.
In this blog, we’ll explore the main types of taxes with detailed explanations and relevance in India’s tax system.
| Taxes | ||
| Direct Taxes | Indirect Taxes | Other Taxes |
| Income Tax | Sales Tax | Property Tax |
| Corporate Tax | Service Tax | Registration Fees |
| Securities Transaction Tax | Octroi Duty | Toll Tax |
| Capital Gains Tax | Custom Duty | Education Cess |
| Gift Tax | Value Added Tax (VAT) | Entertainment Tax |
| Wealth Tax | Goods & Services Tax (GST) | Professional Tax |
🔹 1. Direct Tax
What is it?
Direct tax is paid directly by individuals or organizations to the government. It is levied on income, profits, or wealth.
Types of Direct Taxes:
- Income Tax: Paid by individuals, professionals, and salaried employees based on their annual income.
- Corporate Tax: Imposed on companies’ net profits.
- Capital Gains Tax: Tax on profits from the sale of assets like property or stocks.
- Securities Transaction Tax (STT): Tax on buying/selling shares through recognized stock exchanges.
- Dividend Distribution Tax (DDT): (Now abolished in India; earlier paid by companies on dividends distributed.)
Key Features:
- Progressive in nature — higher income = higher tax
- Cannot be shifted to another person
- Paid annually or quarterly (advance tax)
🔹 2. Indirect Tax
What is it?
An indirect tax is collected by intermediaries (like sellers or service providers) and passed on to the government. The burden of the tax is borne by the end consumer.
Types of Indirect Taxes (in India):
- Goods and Services Tax (GST) – replaced multiple taxes like VAT, service tax, and excise duty.
- Customs Duty – imposed on imported and exported goods.
- Excise Duty – earlier levied on manufactured goods (now limited to specific products like alcohol or fuel).
Key Features:
- Regressive in nature — same rate for all income groups
- Collected at the point of sale
- Indirectly affects the cost of goods/services
🔹 3. Goods and Services Tax (GST)
What is it?
GST is a comprehensive, destination-based tax on the supply of goods and services. It has replaced multiple cascading taxes in India.
Types of GST:
- CGST (Central GST) – Collected by the central government
- SGST (State GST) – Collected by the state government
- IGST (Integrated GST) – For inter-state transactions
- UTGST – For Union Territories
GST Slabs in India:
- 0% – Basic essentials (milk, rice)
- 5%, 12%, 18%, 28% – For other categories based on necessity or luxury
Example:
If a product is manufactured in Delhi and sold in Mumbai, IGST is applied.
Key Features:
- Unified tax structure
- Avoids double taxation
- Paid at every stage of value addition
🔹 4. Capital Gains Tax
What is it?
It is the tax on profits earned from the sale of capital assets like property, shares, or gold.
Types:
- Short-Term Capital Gains (STCG) – For assets held less than 36 months (for property) or 12 months (for stocks).
- Long-Term Capital Gains (LTCG) – For assets held longer than the above durations.
🔹 5. Corporate Tax
What is it?
Companies are required to pay a percentage of their net profits as tax.
Rates in India (as of FY 2024-25):
- Domestic companies: 25% (if turnover < ₹400 crore)
- Foreign companies: 40% (with applicable surcharge & cess)
Other taxes for companies:
- Minimum Alternate Tax (MAT)
- Dividend tax (now taxed in hands of shareholders)
🔹 6. Property Tax
What is it?
Property tax is levied by municipal corporations on real estate, including residential and commercial properties.
Calculation Basis:
- Location
- Property size
- Usage (residential/commercial)
- Age of property
Example:
If your flat is in Mumbai, the BMC may charge ₹5,000 annually as property tax.
Key Features:
- Paid annually or half-yearly
- Funds local development (roads, drainage, lighting)
🔹 7. Professional Tax
What is it?
It is a tax levied by state governments on individuals earning income from salary or profession.
Applicability:
- Salaried employees
- Chartered accountants, doctors, lawyers, freelancers
Maximum Limit:
₹2,500 per annum (as per Article 276 of the Constitution of India)
Example:
In Karnataka, ₹200/month is deducted as professional tax from eligible employees.
🔹 8. Stamp Duty & Registration Fee
What is it?
This tax is levied on the legal documentation of property transactions like sale deeds, lease agreements, and mortgage deeds.
Rates:
- Vary from state to state
- Often ranges from 5% to 7% of property value
Registration Fee:
Usually 1% of the transaction value.
🔹 9. Customs Duty
What is it?
A tax imposed on imported or exported goods. It helps regulate foreign trade and protect local industries.
Types:
- Basic Customs Duty
- Countervailing Duty
- Anti-dumping Duty
Example:
Importing a mobile phone from China attracts customs duty of 20–30%.
🔹 10. Entertainment Tax
What is it?
A tax levied on entertainment services like:
- Movie tickets
- Events
- Amusement parks
Note:
Most entertainment taxes in India are now subsumed under GST, but some local taxes still apply.
✅ Advantages and Disadvantages of Direct Taxes
✔️ Advantages of Direct Taxes
- Equitable (Fair)
- Tax burden is based on the ability to pay. Higher income = higher tax.
- Helps reduce income inequality.
- Economical
- Collection cost is lower as it is collected directly by the government from the taxpayer.
- Certainty and Transparency
- The taxpayer knows exactly how much is to be paid and when.
- Promotes Social Welfare
- Government can impose higher taxes on luxury income and use that revenue for social schemes.
- Helps in Controlling Inflation
- High direct tax rates reduce disposable income, which can help control inflationary trends.
❌ Disadvantages of Direct Taxes
- Tax Evasion
- There’s a high chance of people under-reporting income or hiding wealth.
- Discourages Savings and Investment
- High income tax can demotivate individuals and businesses from saving or investing more.
- Inconvenience in Filing
- Taxpayers need to maintain records, calculate income, and file returns — it can be complex for common people.
- May Be Perceived as Burdensome
- People may feel they are unfairly taxed or over-taxed, especially the middle class.
✅ Advantages and Disadvantages of Indirect Taxes
✔️ Advantages of Indirect Taxes
- Easier to Collect
- Collected at the point of sale, often by businesses or retailers, which reduces evasion.
- Broad Coverage
- Everyone who buys goods or services pays the tax — spreads the tax net.
- Convenient for Taxpayers
- Paid in small portions with every purchase instead of a lump sum.
- Encourages Voluntary Compliance
- Consumers pay indirectly and usually do not feel the tax burden.
- Useful for Regulating Consumption
- High taxes on harmful goods (like tobacco, alcohol) reduce their use.
❌ Disadvantages of Indirect Taxes
- Regressive in Nature
- Same tax for everyone, rich or poor — can burden lower-income groups more.
- Inflationary Impact
- Increases the price of goods and services, leading to inflation.
- Cascading Effect (in Non-GST Regimes)
- Before GST, taxes were applied on taxes, increasing the cost multiple times.
- No Direct Link with Income
- The rich and poor pay the same rate on basic goods — unfair for economically weaker sections.
Learn more about the tax system in our The Indian Tax System: What You Need to Know.
✅ Conclusion
Understanding the different types of taxes not only helps you stay compliant but also empowers you to make better financial decisions — whether you’re a salaried individual, a business owner, or an investor.
