No. Goods and Services Tax (GST) is a type of indirect tax.

What is Direct Tax Definition, Types and Differences from Indirect Tax

Name: What Is Direct Tax
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A direct tax is a type of tax that is levied on an individual or an organization directly by the tax authorities. Some examples of direct tax include income tax, tax on income from other sources, capital gains tax, etc. All of these

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Written by

Abhishek Chakravarti

Taxation and Compliance Writer

Abhishek Chakravarti brings 13+ years of experience in BFSI Content with specialization in Tax content, with a strong focus on personal taxation. At Axis Max Life, he crafts easy-to-consume content on deductions, exemptions, and tax-saving plans.

Reviewed by

Alok Mishra

Taxation and Compliance Expert

Alok Mishra has 10+ years of experience in digital marketing and content strategy in BFSI domain with a sharp focus on tax-saving instruments under various Income tax sections and beyond. His domain expertise helps in building informative and rich content on taxation benefits, laws and deductions.

What Is Direct Tax?

Direct Tax is defined as a type of tax where the impact and incidence of the tax fall on the same entity. So, the payment direct taxes cannot be passed on to a different individual or a different entity. The organization or individual upon which this type of tax is levied is responsible for its payment. The most common examples of direct taxes in India are income tax, corporation tax, property tax and gift tax.

Additionally, direct taxes in India operates on the basis of an individual or entity’s ability to pay. So this type of tax usually features a progressive tax regime i.e. the higher the tax payer’s ability to pay, the higher is the tax rate applicable. Perhaps the most commonly know instance of this are the income tax slab rates, where individuals with higher income have to pay taxes at a higher rate than individuals with a lower income.

Types of Direct Taxes in India

Now that you have a better idea of what is direct tax and its definition, let's understand the different types of direct tax in India. Direct taxes that are imposed by the various tax authorities in the Government of India and are as below:

Income Tax:

Income tax in India is payable depending on the earning and age of an individual tax payer. Income tax slab rates are notified by the government of India and determine the amount of income tax that must be paid. The taxpayer must file income tax on an annual basis. An individual not paying income tax may have to pay large penalties and even serve a jail sentence.

Wealth Tax:

This type of tax must be paid on an annual basis and depends on the market value of the property and the ownership of the property. If an individual owns a property, wealth tax shall be paid even if the property does not generate any revenue. Currently wealth tax in India has been abolished as of April 1, 2016.

Corporate Tax:

Domestic companies, apart from shareholders, need to pay corporate tax on their income in India. The foreign organizations that earn in India will also need to pay corporate tax. Income earned through the sale of assets, the technical service fee, royalty, dividends, and interest which is based in India, is considered taxable.

Securities Transaction Tax (STT):

Securities transaction tax must be paid whenever transaction of securities like shares and mutual funds is carried out by an individual or entity.

Dividend Distribution Tax (DDT):

In case a domestic company decides to distribute or declare an amount as a dividend by shareholders, dividend distribution tax is levied on the company. DDT was discontinued as per an announcement by the Finance Minister in Budget 2020.

Minimum Alternative Tax (MAT):

Under current rules of direct tax in India, MAT is applicable only zero tax organizations that have accounts prepared as per the Companies Act.

Capital Gains Tax:

This is a type of direct tax which is paid on an income earned from the sale of assets or investments. Investment in property, art, business, shares, mutual funds, and bonds are considered as capital assets. Based on the holding period, capital gains tax can be classified as short-term or long-term capital gains. The applicable holding period for long-term capital gains can vary from one type of capital asset to another.

Benefits of Direct Tax

We went into the details of what is direct tax, but what are its advantages?

The main advantages of direct taxes in India can be as follows:

Social and economic balance:

The government of India has launched a well-balanced tax slab based on the age and earnings of an individual. These tax slabs are determined based on the country's economic situation. Exemptions are also put in place so that the income inequalities are well balanced out.

Higher productivity:

As there is a growth in the number of people who work, the return on direct taxes also increases. Therefore, direct taxes are considered to be very productive.

Control of inflation:

Taxes are often increased when there is an increase in inflation. This increment in taxes reduces the necessity for services and goods, leading inflation to decrease.

Certainty:

Direct tax regime provides a sense of certainty to both the taxpayer and government. The amount of tax that must be paid and the amount of tax that must be collected is easy to calculate and known in advance by both the government and the taxpayer.

Progressive Regime:

Higher tax is charged by the government on individuals or companies which can afford them. This ensures that individuals and companies with lower income are not disproportionately impacted by taxes.

What Are the Differences Between Direct and Indirect Tax?

An important question that arises is how direct tax differs from indirect tax. Direct taxes cannot be shifted to a different party and remains to be your responsibility to pay. All the individuals who are liable to pay indirect taxes can shift the burden to a different individual or entity.

The below table shows the key differences between direct and indirect taxes in India:

Comparison Criteria	Direct Tax	Indirect Tax
Applicability	On income and profits	On all goods and services
Eligibility	Individuals and businesses	End-consumers/end-user of goods and services
Tax Rate	Depends on income and/or profits	Same for everyone
Transferability	Not transferable	Transferable
Nature of Taxation	Progressive	Regressive
Common examples	Income tax and capital gains tax	GST, VAT and excise duty

Who is Eligible to Pay Direct Tax?

The following types of individuals and groups are required to file Income Tax returns and pay applicable tax on their income in India:

Individuals aged up to 60 years earning over Rs. 2.5 lakh annually
Senior citizen individuals aged between 60 years and 80 years earning over Rs. 3 lakh annually
Super senior citizens aged over 80 years earning over Rs. 5 lakh annually
Hindu Undivided Family (HUF)
Body of Individuals (BOI)
Association of Persons (AOP)
Corporate Firms and Companies
Artificial Judicial Person

Additionally, other types of direct tax like property tax and capital gains tax is payable by individuals, associations or organizations engaged in specific activities like property ownership and buying and selling of capital assets. The rate of direct tax in case of property tax can vary based on the jurisdiction i.e. the circle where the property is held.

Frequently Asked Questions (FAQs)

Is land tax a type of direct tax?

What is direct tax in India?

What is indirect tax with an example?

Is GST a direct tax?

What is meant by net direct tax?

ARN: Sep23/Bg/03S

Sources:

economictimes.indiatimes.com/definition/direct-tax

www.business-standard.com/about/what-is-direct-tax

www.adityabirlacapital.com/abc-of-money/direct-vs-indirect-tax-what-is-the-difference

corporatefinanceinstitute.com/resources/knowledge/other/direct-taxes/

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