Types of Taxes: Direct, Indirect, Progressive & Regressive
1. Direct Taxes
Definition: Taxes directly paid to the government by individuals/organizations. Burden cannot be shifted.
Examples in India:
- Income Tax (Govt revenue: ~₹14 lakh crore in 2023-24)
- Corporate Tax (Base rate: 22% for domestic companies)
- Capital Gains Tax (Short-term: 15%, Long-term: 10%)
- Securities Transaction Tax (STT)
Features:
- Progressive (Higher income → Higher tax rate)
- Covered under CBDT (Central Board of Direct Taxes)
2. Indirect Taxes
Definition: Taxes on goods/services, where burden can be shifted to consumers.
Examples in India:
- GST (Goods and Services Tax) – Replaced VAT, excise, etc.
- Customs Duty (On imports/exports)
- Excise Duty (Now limited to petroleum, alcohol)
Features:
- Regressive (Poor pay higher % of income)
- Covered under CBIC (Central Board of Indirect Taxes)
3. Progressive vs Regressive Taxes
| Progressive Tax |
Regressive Tax |
| Tax rate ↑ as income ↑ (e.g., Income Tax) |
Tax rate ↓ as income ↑ (e.g., GST) |
| Reduces income inequality |
Increases income inequality |
| Example: India’s income tax slabs |
Example: Fuel taxes (same for rich & poor) |
4. Other Tax Types (Prelims Focus)
A. Proportional Tax
Flat rate for all incomes (e.g., Corporate Tax for some companies).
B. Value Added Tax (VAT)
Earlier state-level tax on goods (now subsumed under GST).
C. Cess & Surcharge
- Cess: Earmarked tax (e.g., Education Cess).
- Surcharge: Extra tax on high-income earners.
5. Recent Tax Reforms in India
- GST (2017): "One Nation, One Tax" (except petroleum, alcohol).
- Corporate Tax Cut (2019): Reduced from 30% to 22%.
- New Tax Regime (2020): Optional lower rates with no deductions.
Key Terms to Remember
- Tax Buoyancy: Tax revenue growth vs GDP growth.
- Tax-to-GDP Ratio: India’s ~11% (low vs global avg. of ~15%).
- Laffer Curve: Relationship between tax rates & revenue.
Conclusion
Understanding tax types is crucial for UPSC Prelims (Economy). Focus on GST, progressive/regressive nature, and recent reforms.