All Types of Taxes in India: Direct & Indirect Explained

India's tax system is structured into two main categories: direct and indirect taxes. Direct taxes are imposed directly on individuals and organizations, while indirect taxes are levied on goods and services consumed. Knowing these tax types is important for proper financial management and staying compliant. This article provides a clear overview of the types of taxes in India, explaining their significance and impact on taxpayers.

Types of Taxes in India

Types of taxes in India are structured into two primary categories:

1. Direct Taxes.
2. Indirect taxes.

Direct taxes are levied directly on individuals and entities based on their income, wealth, or property. Examples include Income Tax, Corporate Tax, Capital Gains Tax, and Professional Tax. These taxes are progressive, which means higher incomes are taxed at higher rates, and the burden cannot be shifted to others. Indirect taxes, on the other hand, are imposed on goods and services, and the tax burden can be passed on to the end consumer. The Goods and Services Tax, which subsumes multiple indirect taxes like excise duty, service tax, and VAT, is a significant example. Other indirect taxes include Customs Duty, Excise Duty, and Stamp Duty. Understanding these tax types is crucial for individuals and businesses to ensure compliance and effective financial planning.

Direct Taxes in India

Direct taxes in India are levies imposed directly on individuals and entities based on their income or wealth, forming a significant component of the nation's revenue system.

• Income Tax

Income tax is levied on the earnings of individuals and entities, with rates varying based on income levels and the chosen tax regime. Taxpayers can file returns using forms like ITR-1 and ITR-4, available on the Income Tax Department's e-filing portal.

• Corporate Tax

Corporate tax applies to the profits of companies operating in India. Domestic companies can opt for a concessional base tax rate of 22%, while the standard rates remain at 25% or 30%. This depends on turnover thresholds.

• Capital Gains Tax

Capital gains tax is imposed on profits from the sale of assets. Short-term capital gains from equity investments are taxed at 20%, while long-term capital gains are taxed at 12.5% without indexation benefits.

• Securities Transaction Tax

STT is a tax on the trading of securities on recognized stock exchanges. For delivery-based equity trading, the STT rate is 0.1% on both buy and sell sides.

• Other Direct Taxes

Historically, India had taxes like the Wealth Tax and Gift Tax. The Wealth Tax was abolished in 2015, and the Gift Tax Act was repealed in 1998.

Indirect Taxes in India

Indirect taxes are levies imposed on goods and services rather than on income or profits. These taxes are typically collected by intermediaries, such as retailers or manufacturers, who then remit the tax to the government. The burden of these taxes is ultimately passed on to the consumer through higher prices.

• Goods and Services Tax (GST)

The Goods and Services Tax is a comprehensive indirect tax that replaced multiple state and central taxes, implemented on July 1, 2017. This includes excise duty, service tax, and value-added tax. This unified tax system aims to simplify the tax structure and reduce the cascading effect of taxes, thereby promoting a seamless national market. GST is levied on the supply of goods and services and is categorized into:

1. CGST: Central Goods and Services Tax
2. SGST: State Goods and Services Tax
3. IGST: Integrated Goods and Services Tax
4. UGST: Union Territory Goods And Services Tax

1. CGST: Central Goods and Services Tax
CGST is levied by the Central Government on intra-state transactions of goods and services. It is collected alongside SGST or UGST and contributes to the central revenue used for nationwide infrastructure, administration, and development purposes.

2. SGST: State Goods and Services Tax
SGST is imposed by individual State Governments on intra-state supplies of goods and services. It is collected together with CGST, and the revenue goes to the respective state to fund state-level services, welfare programs, and development projects.

3. IGST: Integrated Goods and Services Tax
IGST is charged on interstate transactions of goods and services, including imports and exports. It is collected by the Central Government and later distributed between the centre and states to maintain fair and balanced tax sharing across regions.

4. UGST: Union Territory Goods and Services Tax
UGST is applicable to intra-Union Territory supplies of goods and services where no legislature exists. It is levied alongside CGST, and the revenue collected is used by the concerned Union Territory for administrative and developmental purposes.

The tax rates under GST vary depending on the category of goods or services and range from 0% to 28%, depending on the essentiality of products or services. When they are highly essential and life-saving, it charge less GST, and when it is a fashionable product or service, it cost higher GST up to 28% as of now.

There are two other types of variations of GST that you need to understand. They are:

Forward Charge Mechanism (FCM) – GST

Under the Forward Charge Mechanism, the supplier (seller) is responsible for collecting GST from the buyer at the time of sale and paying it to the government. This is the default and most common method of GST payment in India.

Example:

A manufacturer sells machinery worth Rs 1,00,000 to a buyer. GST @18% is added, making the invoice Rs 1,18,000. The manufacturer collects the tax and pays Rs 18,000 to the government.

Reverse Charge Mechanism (RCM) – GST

Under the Reverse Charge Mechanism, the recipient (buyer) of goods or services is liable to pay GST directly to the government, instead of the supplier. It applies to specified goods/services or unregistered dealer transactions.

Example:

A registered business avails legal services from an independent advocate. Since legal services fall under RCM, the business (recipient) must pay GST on the lawyer's fee directly to the government.

• Customs Duty

Customs duty is an indirect tax imposed on goods imported into or exported from India. The rates of customs duty are determined based on the Harmonised System code of the product and its country of origin. For instance, the basic customs duty on edible oils was recently reduced from 20% to 10% to curb inflation and make essential kitchen items more affordable.

Customs duties are calculated as a percentage of the assessable value, which includes the cost of goods, insurance, and freight. Additionally, a 1% customs handling fee is levied on all imports.

• Excise Duty

Excise duty is a form of indirect tax levied on the manufacture or production of specific goods within India. It is imposed at the time of production rather than at the point of sale. Common examples include taxes on alcohol, tobacco, and petroleum products.

The responsibility for collecting excise duty lies with the Central Board of Indirect Taxes and Customs. Excise duty rates vary depending on the type of goods and are specified in the Central Excise Tariff Act, 1985.

• Other Indirect Taxes

In addition to GST, customs duty, and excise duty, India levies several other indirect taxes, including:

1. Entertainment Tax: Imposed on commercial entertainment such as movie tickets, exhibitions, and sports events. Tax rates and their applicability differ across states.
2. Stamp Duty: Charged on legal documents, particularly in property transactions, and varies by state.
3. Entry Tax: Levied by state governments on goods entering a particular state for consumption, use, or sale. However, with the implementation of GST, entry tax has been largely subsumed.

Difference between Direct Tax and Indirect Tax

Recent Developments in Indian Taxation

India's tax landscape is witnessing significant positive shifts, marked by record-breaking GST collections and substantial tax contributions from major corporations, such as the Adani Group. These developments reflect robust economic activity and improved compliance, bolstering the nation's fiscal health.

• Surge in GST Collections

India's Goods and Services Tax collections have demonstrated remarkable growth in recent months, reflecting strong economic activity and improved tax compliance. In April 2025, GST revenues reached a record high of Rs.2.37 lakh crore, marking a 12.6% increase compared to April 2024. This surge was driven by a 10.7% rise in domestic transactions and a 20.8% increase in imports, with import revenues totaling Rs.46,913 crore.

Continuing this positive trend, May 2025 saw GST collections of Rs.2.01 lakh crore, a 16.4% year-on-year increase from Rs.1.72 lakh crore in May 2024. This growth was fueled by a 13.7% rise in domestic transactions and a significant 25.2% jump in import revenues, which amounted to Rs.51,266 crore.

The consistent rise in GST collections can be attributed to several factors:

1. Increased Imports: Higher import volumes have led to greater tax revenues, with import-related GST collections reaching their highest monthly contribution in nearly three years.
2. Enhanced Compliance: The implementation of digital tools, such as e-invoicing and real-time GST reconciliation, has improved tax compliance and reduced evasion.

Taxes on Alcoholic Beverages

In India, alcohol is taxed through state-level excise duty and Value Added Tax (VAT). While the Goods and Services Tax (GST) does not apply to alcohol, states retain the power to levy these taxes, resulting in varying prices across regions.

Detailed Breakdown:

1. Excise Duty:

This is a tax levied on the production or sale of alcoholic beverages. It's a primary source of revenue for many state governments.

2. Value Added Tax (VAT):

States also impose VAT on alcohol, which is calculated as a percentage of the sale price.

3. Other Taxes:

Some states may impose additional taxes, surcharges, or fees on specific types of alcohol, further increasing the price for consumers.

Taxes on Alcoholic Beverages:

Alcoholic beverages do not go under GST. It charges VAT and other charges. Let’s discuss it. 

Why No GST on Alcohol?

1. State Revenue:

Alcohol sales are a significant revenue generator for states, and allowing them to retain control over taxation helps maintain this revenue stream.

2. State-Level Regulations:

States have the authority to regulate and tax alcohol, and this control over taxation is maintained by keeping it outside the GST framework.

3. Price Variation:

The current system allows states to set their own tax rates, leading to price variations across different regions in the country.

Example:

Imagine a bottle of liquor costing Rs 100. A state might levy a 20% excise duty (Rs 20) and a 15% VAT on the final price (Rs 15), resulting in a total tax of Rs 35, and a final price of Rs 135 for the consumer.

Taxes on Petroleum Products

In India, petroleum products like petrol, diesel, and gas are subject to various taxes, primarily including central excise duty, state-levied Value Added Tax (VAT), and potentially a Goods and Services Tax (GST) in the future. Currently, petrol and diesel are not under the GST regime, meaning they are taxed separately by the central and state governments.

Here's a more detailed breakdown:

1. Central Excise Duty:

The central government levies excise duty on petrol and diesel, which is a significant component of the final price.

2. Value Added Tax (VAT):

Each state imposes its own VAT on petrol and diesel, leading to price variations across different states.

3. Potential for GST:

While not currently implemented, there have been discussions about bringing petrol and diesel under the GST regime. The GST Council would ultimately decide on the implementation date and rate.

4. Other taxes:

There may also be cess (additional levies) on petroleum products, according to a report from a government source.

Exclusions from GST:

Petroleum products are not currently included in the GST framework.

Conclusion

India’s taxation system is a structured blend of direct and indirect taxes, designed to support the nation’s economic development and public welfare. From income and corporate taxes to GST and customs duties, each type plays a vital role in revenue generation, ensuring a balanced contribution from individuals, businesses, and trade sectors. Understanding these taxes helps citizens and enterprises stay compliant while participating in the country’s growth. For businesses aiming to stay compliant and efficient in GST filing, Online Legal India offers expert assistance, ensuring timely and accurate submissions to avoid penalties and streamline operations.