Tag: Indirect Tax

Types Of Taxes In India: Direct Tax And Indirect Tax

Posted on by CA Meet Dhrangadhariya

Last updated: 28 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Taxes in India are direct (income tax, Securities Transaction Tax) or indirect (GST, customs duty, limited central excise, state VAT on petroleum and alcohol).
  • Direct taxes are borne by the person on whom they are levied; indirect taxes are passed on to the final consumer.
  • Wealth tax, gift tax and fringe benefit tax no longer exist, and GST replaced service tax, sales tax, state VAT on most goods and octroi.
  • The note compares both kinds with advantages, disadvantages and a difference table.

Taxes in India are broadly classified into direct taxes, such as income tax, and indirect taxes, such as GST and customs duty. Direct taxes are paid by the person on whom they are levied. Indirect taxes are included in the price of goods and services, and the burden passes to the final consumer. Knowing the types of taxes helps taxpayers comply with the law and plan their finances.

Types Of Taxes In India

Direct taxes are administered by the Central Board of Direct Taxes (CBDT). Indirect taxes (GST, customs and central excise) are administered by the Central Board of Indirect Taxes and Customs (CBIC).

Direct Taxes

A direct tax is levied on the income or profits of a person, who has to bear it and cannot pass it on to someone else. The main direct taxes in force are:

  • Income tax: charged on the income of individuals, HUFs, firms, companies and other persons. Capital gains tax is part of income tax. Surcharge and the 4% health and education cess are added on top of income tax.
  • Securities Transaction Tax (STT): charged on specified transactions in listed securities. It is a direct tax collected at the time of the transaction.

Several direct taxes that older books still list no longer exist: wealth tax (abolished from AY 2016-17), gift tax (abolished in 1998; gifts above the prescribed limit are now taxed as income) and fringe benefit tax (abolished from AY 2010-11).

Indirect Taxes

An indirect tax is charged on goods and services. It is collected by the seller and the burden is passed on to the end consumer. The main indirect taxes in force are:

  • Goods and Services Tax (GST): a single tax on the supply of goods and services, in force since 1 July 2017. It replaced service tax, central excise on most goods, state VAT on most goods, central sales tax, octroi and entry tax, and removed the cascading effect.
  • Customs duty: charged on goods imported into India.
  • Central excise duty: now limited to a small set of goods, mainly petroleum products.
  • State VAT: still levied by states on petrol, diesel and alcohol for human consumption.

Other levies

Some levies are neither central direct nor indirect taxes: property tax (local municipal), stamp duty and registration fees (state), and professional tax (state, capped at Rs 2,500 a year under the Constitution). A toll is a fee for using a road, not a tax.

Direct taxes Indirect taxes Other levies
Income tax (including capital gains) GST Property tax
Securities Transaction Tax Customs duty Stamp duty and registration fees
Central excise (limited goods) Professional tax
State VAT (petroleum, alcohol) Toll (a fee)

Advantages And Disadvantages Of Direct Tax

Advantages Disadvantages
Progressive in nature: people with lower incomes pay less tax than people with higher incomes. Some taxpayers evade or avoid tax.
Helps reduce income inequality. Compliance and documentation can be complex and time-consuming.
Certainty: the government and the taxpayer both know what is to be paid and when. The burden cannot be transferred to anyone else.

Advantages And Disadvantages Of Indirect Tax

Advantages Disadvantages
Everyone who spends contributes to nation-building. Raises the overall price of goods and services.
Easy to collect from the end consumer. Consumers often do not know how much tax they pay.
Lower rates can be applied to essential goods and higher rates to luxury goods. Regressive in nature, as it takes a larger share of low incomes.
The burden can be passed to the end consumer. Revenue is hard to predict because it depends on what people buy.

Difference Between Direct Tax And Indirect Tax

Basis Direct Tax Indirect Tax
Definition Tax levied directly on the income or profits of a person. Tax levied on the supply of goods and services.
Burden of Tax Cannot be shifted; borne by the person on whom it is imposed. Can be shifted; ultimately borne by the end consumer.
Governing Body Central Board of Direct Taxes (CBDT). Central Board of Indirect Taxes and Customs (CBIC).
Examples Income tax, Securities Transaction Tax. GST, customs duty, central excise.
Impact on Prices Does not directly affect the price of goods and services. Forms part of the price of goods and services.
Payment Paid directly to the government by the taxpayer. Collected by the seller or service provider and paid to the government.

Now that you know the main types of taxes in India, it is easier to see which ones apply to you.

Frequently asked questions

What are the two main types of taxes in India?

Direct taxes, such as income tax, which are paid by the person on whom they are levied, and indirect taxes, such as GST and customs duty, which are passed on to the final consumer.

Is wealth tax still charged in India?

No. Wealth tax was abolished with effect from AY 2016-17. Gift tax was abolished in 1998 and gifts above the prescribed limit are now taxed as income.

Which taxes did GST replace?

GST replaced service tax, central excise on most goods, state VAT on most goods, central sales tax, octroi and entry tax.

Who administers direct and indirect taxes?

Direct taxes are administered by the Central Board of Direct Taxes (CBDT) and indirect taxes such as GST, customs and central excise by the Central Board of Indirect Taxes and Customs (CBIC).

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Features of Indirect Tax Explained

Posted on by CA Meet Dhrangadhariya

Last updated: 10 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Indirect taxes are charged on goods and services and the burden is passed on to the final consumer.
  • Today the main indirect taxes are GST, customs duty, a limited central excise and state VAT on petroleum and alcohol.
  • Key features: shifting of burden, tax on consumption, broad base, easy collection, possible inflationary effect and regressive nature.
  • GST removed the cascading effect of the old regime through input tax credit.

Indirect taxes are taxes on spending rather than on earning. They are built into the price of goods and services, collected by businesses and paid to the government, while the final burden falls on the consumer. Direct taxes, such as income tax, are charged on income. This note explains what indirect tax is, which taxes fall under it in India today, and its main features.

What is Indirect Tax?

An indirect tax is charged on the supply of goods and services and not on the profit of the person who pays it to the government. It is collected by intermediaries in the supply chain, such as manufacturers, wholesalers and retailers, and the consumer who finally uses the product bears the burden.

Which indirect taxes exist in India today?

  • Goods and Services Tax (GST): the main indirect tax on the supply of goods and services. It has replaced most earlier indirect taxes since 1 July 2017.
  • Customs duty: charged on goods imported into India (and on a few exports).
  • Central excise duty: now limited to a small set of goods, mainly petroleum products, as most goods moved into GST.
  • State VAT: still charged by states on petrol, diesel and some other petroleum products, and on alcohol for human consumption, which are outside GST.

Service tax, the earlier central VAT, state VAT on most goods, central sales tax and octroi have been subsumed in GST.

Key features of indirect taxes

1. The burden can be shifted

The person who pays the tax to the government can recover it from the next person in the chain, until it reaches the final consumer.

2. A tax on consumption

The tax depends on what is bought and not on the buyer’s income, so it affects the price of goods and services.

3. A broad tax base

Because almost everyone buys goods and services, indirect taxes reach a very wide base and give the government a steady flow of revenue.

4. Possible inflationary effect

A higher tax rate raises the selling price, which can add to inflation.

5. Easy to collect

The tax is collected in small amounts at the point of sale by registered businesses, so the government collects it from far fewer people than the number who finally bear it.

6. Cascading effect, removed in GST

Under the old regime, tax was often charged on a price that already contained tax, and the effect repeated at every stage. GST avoids this through input tax credit, so tax paid on purchases can be set off against tax on sales.

7. Regressive nature

Everyone pays the same rate on the same item, so the tax takes a larger share of the income of low-income households than of high-income ones. GST softens this with lower rates on essentials.

Impact of indirect taxes

Indirect taxes change prices and spending patterns, and so affect the cost of living and the purchasing power of consumers. For businesses, they influence pricing, competition and cash flow, especially through the timing of input tax credit. For the government, they are a major source of revenue that funds public services and infrastructure.

Conclusion

Indirect taxes are paid by everyone who buys goods and services. Knowing how they are charged helps consumers read the tax on their bills and helps businesses price correctly and claim the credit they are entitled to.

Frequently asked questions

What is an indirect tax?

An indirect tax is a tax on the supply of goods and services. It is collected by sellers and paid to the government, while the final burden falls on the consumer.

Which are the main indirect taxes in India now?

GST, customs duty, a limited central excise duty mainly on petroleum products, and state VAT on petrol, diesel and alcohol for human consumption.

Why is indirect tax called regressive?

Everyone pays the same rate on the same item, so the tax takes a larger share of income from low-income households than from high-income households.

What is the cascading effect of tax?

It is tax charged on a price that already includes tax, repeated at every stage of the supply chain. GST avoids it through input tax credit.

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.