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

Ramesh is paying a Direct Tax (Income Tax), while Pihu is paying an Indirect Tax (GST).

Differences Between Direct and Indirect Taxes:

Basis	Direct Tax	Indirect Tax
Definition	Paid directly by individuals/corporations to the government	Levied on goods and services, collected by businesses and passed to the government
Burden of Tax	Cannot be shifted to another person	Can be shifted to the end consumer
Examples	Income Tax, Wealth Tax	GST, Excise Duty, Custom Duty
Impact	Affects higher-income individuals more	Impacts all consumers equally, regardless of income