Question

Two friends, Ramesh (a software engineer) and Pihu (a bakery owner), are discussing their contribution to the nation’s economy through tax payments. Ramesh earns ₹ 8,00,000 per year, which makes him liable to pay income tax. Pihu pays Goods and Service Tax (GST) on the sale of cakes and pastries.

On the basis of the given text, identify whether Ramesh is paying a direct tax or an indirect tax. Explain valid differences between two types of taxes.

Answer 1

It is a direct tax because Ramesh pays his income tax directly to the government, based on his earnings of ₹ 8,00,000. GST is an indirect tax since Pihu collects it from consumers and sends it to the government.

Aspect	Direct Tax	Indirect Tax
Definition	Paid directly by the individual to the government.	Paid indirectly through intermediaries (e.g., sellers).
Incidence	Cannot be shifted to others; borne by the taxpayer.	Can be shifted to consumers (e.g., GST on goods).
Examples	Income tax, corporate tax, wealth tax.	GST, sales tax, excise duty.