Q5General Studies
Question
10 marks
[CO5] Differentiate between direct and indirect tax.
Answer
Direct taxes are levied directly on the income or wealth of individuals and entities (e.g., income tax, corporate tax), while indirect taxes are levied on goods and services and collected by intermediaries (e.g., GST, customs duty).
- Income Tax: Levied on individual and HUF income based on progressive slabs
- Corporate Tax: Levied on the net profits of companies
- Capital Gains Tax: Tax on profit from sale of assets
- Wealth Tax (abolished 2015): Was levied on net wealth of individuals
- Securities Transaction Tax (STT): Tax on stock exchange transactions
- Goods and Services Tax (GST): Comprehensive tax on supply of goods and services (rates: 0%, 5%, 12%, 18%, 28%)
- Customs Duty: Levied on imports and exports
- Excise Duty: On manufacture of goods (now part of GST except for petroleum and alcohol)
- Service Tax: Replaced by GST since 2017
- Incidence: Direct tax — burden falls on the person who pays; Indirect tax — burden can be shifted to final consumer.
- Equity: Direct taxes are progressive (higher income = higher rate); Indirect taxes are regressive (same rate regardless of income).
- Administration: Direct taxes require complex assessment; Indirect taxes are collected at the point of sale.
- Compliance: Direct taxes require filing returns; Indirect taxes are embedded in the price of goods/services.
- Revenue: Both contribute significantly to government revenue; GST is now the largest source of indirect tax revenue.