Tax: Direct or Indirect?

Whenever union budget is presented, there is always a clamour for reduction in slab rates or concessions in exemptions of income tax. But is it really justified? Is it a better idea for the government to reduce the share of income tax in its overall revenue?

Income tax is a direct tax that is levied on the income or profits of the person who pays it, e.g. corporate tax, property tax, wealth tax and gift tax.

Indirect tax, on the other hand, is charged on goods and services, and is generally imposed on suppliers or manufacturers who pass it on to the final consumers or buyers. GST, customs duty, excise duty are example of indirect taxes.

The first and foremost principle of taxation is fairness, which has two types – vertical and horizontal. Vertical fairness means that the rich should bear a high burden than the poor both in relative and absolute terms. This is largely followed by our taxation policy on income, but often at the cost of what is called horizontal fairness.

Horizontal fairness demands that if income of two persons is the same, their tax liability should also be the same, but it rarely happens. For example, a man earns Rs five million from agriculture, and the same income is earned by two other persons from salary and business respectively, the tax burden for all the three will be different. This anomaly needs to be addressed.

The higher share of direct taxes in total revenue shows the progressive nature of taxation policy. It envisages higher tax payment by rich individuals. The multiple slabs with increasing marginal rates show further maturity of the system.

On the other hand, indirect taxation is regressive in nature, as tax is applied on the price paid for purchasing goods or services, and not on the income of the buyer. So the tax paid on a packet of match-box or on a LED bulb remains the same for both rich and poor individuals, but it will pinch a poor person more, who has less income.

To reduce the impact of generalisation, multiple rates are prescribed for essential and luxury items, but this classification, howsoever applied, will not be satisfactory. Moreover, indirect taxes may enhance inflation, contrary to direct taxes.

Indirect taxes are more efficient, no doubt. These are not as inconvenient and burdensome as direct taxes, because the taxpayer feels the pinch only when he buys the goods. But its impact is far-reaching. An increase in the cost of petrol has the snowballing effect on prices of other products as well.

Though the share of indirect taxes has been brought down from 81% to around 55% during the last three decades, it still cannot be treated as healthy. Lack of proper administration in collection of direct taxes, barring salaries and perquisites, makes tax evasion possible.

The need of the hour is to increase the share of direct taxes, not only from salaries, but also from wealth, inheritance, businesses, agriculture, and of course, capital gains. A higher share of direct taxes will help us achieve the national objectives of growth with equality.

But there is an urgent need for devising a foolproof system to calculate such taxes in a fair and equitable manner by plugging all the loopholes in the tax law.

Taxation is an important tool for social upliftment and economic development. A tax shouldn’t be considered as fine, but yes, the hard-earned tax revenue shouldn’t be splurged as freebies, as politicians are doing now-a-days for winning elections.

–Kaushal Kishore

images: Nataliya Vaitkevich/Pexels


  1. I can’t say for sure that I understood these complex terms completely as my knowledge is limited to the basics of commerce & financial aspect of the budget.
    Horizontal fairness is one of the many terms I agree with. Taxation should be the same if the income falls within the same bracket(Terms & conditions applied).
    Indirect taxation as you mentioned is the same for both rich & poor. It surely is unproductive for poor individuals but, I don’t really think that a new structure is that much easy to form. If we make changes in the Goods taxation for poor & rich then new ID’s will be required with the proof of salary in order to purchase. Furthermore, moment after the implementation there’ll be goons who’ll start producing fake IDs. Although digitalized identification may be a viable option, it will be difficult to implement.

    “The need of the hour is to increase the share of direct taxes, not only from salaries, but also from wealth, inheritance, businesses, agriculture, and of course, capital gains.” ~ This point you mentioned must be imposed(with terms & conditions if-course) without any thoughts. However, we’re talking about India, where politicians blindly follow the trail of black money and large corporations’ loans are relieved.
    With all due respect, we have a finance minister who cannot explain the budget in simple terms when asked to do so during a press conference.
    For the last point, tax revenue shouldn’t be splurged as freebies, I would say that freebies should be provided only for education & infrastructure at most.
    Thank you, Mr. KK for such a profound & informative post as always.

    Liked by 2 people

    1. Thank you, Tanishq for such a detailed and thoughtful response. I do agree with you on all the issues like fairness, direct and indirect taxes and freebies. It’s really very difficult to have a perfect equitable system for indirect taxes. Even if new ID’s are issued, we see how goods sold through ration shops are diverted elsewhere. But I feel a beginning needs to be made in this direction. As regards large corporations’ loans, the same are not relieved or waived. Banks simply make a book entry called write off. Even after the so-called writing off, the cases go on in DRTs and cases for recovery. It’s not waived as happens in case of farmers’ loans.
      Thank you so much, Tanishq for reading the post so carefully and sharing your beautiful reflections!

      Liked by 2 people

  2. Another masterful explanation of important financial news, Kaushal, is full of details that officially are not provided. Perhaps, a post of the Minister of Communication should be offered!
    I know the reasons why you have not become a politician, but I still think it is a shame because you should run the country!


    Liked by 3 people

    1. I don’t know what should be my exact position, but I always respect your feelings and compliments for me, as a well wisher. Thank you so much, Joanna for your kind words of appreciation! Really means a lot !!

      Liked by 1 person

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