The Key Difference Between Direct Tax and Indirect Tax

Direct Tax vs Indirect Tax
Feature	Direct Tax	Indirect Tax
Definition	A tax directly imposed on individuals or organizations and paid to the government.	A tax imposed on goods and services, indirectly paid by consumers via sellers.
Taxpayer	Person or entity earning income (e.g., salary, profit).	End consumer who purchases goods or services.
Collection Method	Collected directly by the government from taxpayers.	Collected by intermediaries (sellers) and then submitted to the government.
Examples	Income Tax, Corporate Tax, Capital Gains Tax.	GST, VAT, Excise Duty, Customs Duty.
Incidence & Burden	Both incidence and burden fall on the same person.	Incidence falls on seller, burden is passed to consumer.
Nature	Progressive — higher income, higher tax.	Regressive — same rate applied, regardless of income level.
Transparency	Transparent — paid knowingly by the taxpayer.	Often hidden in prices — consumers may not realize it.
Affect on Inflation	Minimal direct impact on prices.	Can increase prices and contribute to inflation.
Administration	Collected by income tax department or relevant authority.	Collected by sellers, then submitted to tax departments.
Evasion Possibility	Higher risk of evasion if not properly tracked.	Difficult to evade due to built-in structure in pricing.
Impact on Savings	Reduces disposable income and thus may affect savings.	Impacts expenditure but not directly linked to savings.
Tax Rate	Varies based on income slabs or profit levels.	Generally uniform or product-specific rates.
Filing Requirement	Requires filing returns (e.g., ITR) annually.	No filing by consumers; businesses handle returns.
Government Control	More direct control over revenue collection.	Less direct control; relies on business compliance.
Revenue Stability	Relatively stable source of government revenue.	Fluctuates with consumption and economic activity.
Objective	Reduce income inequality and fund public services.	Raise revenue through consumption without targeting income.