Direct versus Indirect Tax

Definition

Two broad categories of taxes: a direct tax is levied on income or wealth and is borne by the same person who pays it, while an indirect tax is levied on goods and services and can be passed on to the final consumer.

Key points

• In a direct tax the impact and incidence fall on the same person, so the burden cannot be shifted; examples are income tax and corporation tax.
• In an indirect tax the impact and incidence fall on different persons, so the burden is shifted to the consumer; examples are GST and customs duty.
• Direct taxes are generally progressive (rate rises with income), while indirect taxes are often regressive (the same rate burdens the poor more in relative terms).
• The bulk of central direct-tax administration sits with the CBDT and indirect-tax administration with the CBIC; see concept gst.
• The mix between direct and indirect taxes shapes equity and the tax to GDP ratio.

Why it matters for CAPF

The impact-versus-incidence test, the progressive-versus-regressive nature, and standard examples of each are core taxation facts, often in matching form.

Common confusion

Direct tax (burden not shifted, on income or wealth) versus indirect tax (burden shifted, on goods or services); GST and customs are indirect, income and corporation tax are direct.

Parent note

taxation and gst