In India, direct tax is levied on what your business earns, mainly income tax (including corporate tax, collected partly through TDS, TCS and advance tax), and you bear it yourself. Indirect tax is levied on what you sell or import, mainly GST and customs duty, which you collect from customers and pass to the government, so the final consumer bears it. One shrinks your profit; the other passes through your bank account on its way to the exchequer.
That one-line answer hides most of what matters in practice. The two families of tax behave differently on your invoices, in your cash flow and on your compliance calendar, and most of the trouble we see comes from treating them as one big "tax" bucket.
What counts as direct tax for a business?
Direct tax is charged on income, and the person who earns the income pays it. For a business owner, that means:
- Income tax on profits. Companies pay corporate tax; proprietors, partnership firms and LLPs pay income tax on their business income. Domestic companies can opt for the concessional regime at a 22% base rate (plus surcharge and cess), now under section 200 of the new Act, in exchange for giving up most deductions.
- Advance tax. Instead of paying everything at year end, you pay tax in instalments during the year on estimated income.
- TDS (tax deducted at source). When you pay salaries, rent, professional fees or contractors, you often have to deduct tax and deposit it. It is the recipient's income tax, but the compliance burden is yours.
- TCS (tax collected at source). Certain sellers collect tax from buyers on specified transactions and deposit it.
The Income-tax Act, 2025 changed the vocabulary
From 1 April 2026, the Income-tax Act, 2025 replaced the Income-tax Act, 1961. The most visible change is the "tax year": the old pairing of "previous year" and "assessment year" is gone, and income earned from April 2026 to March 2027 simply belongs to tax year 2026-27. Section numbers have changed across the board (the 22% company regime that business owners knew as 115BAA is now section 200), so old notes, contracts and checklists that quote section numbers need updating. Returns for income earned up to March 2026 are still filed under the old Act, which means many businesses are working with both statutes this year.
What counts as indirect tax?
Indirect tax is charged on transactions, not on income. The business collects it, but the burden moves down the chain to whoever finally consumes the goods or service.
- GST covers almost all domestic supplies of goods and services. It is split into CGST and SGST on sales within a state, and IGST on sales between states.
- Customs duty applies on imports. You typically pay basic customs duty plus IGST at the border.
GST 2.0: fewer slabs since September 2025
The 56th GST Council meeting rationalised the old four-slab structure. From 22 September 2025, most goods and services moved to a merit rate of 5% or a standard rate of 18%, with a 40% de-merit rate for a narrow list such as tobacco products, sugar-sweetened beverages, certain luxury vehicles and betting. If your price lists, item masters or contracts still carry 12% or 28% rates, check them against the current notifications. A wrong rate on an invoice is the kind of error that compounds silently every month.
Who actually bears each tax?
This is the heart of the direct vs indirect tax distinction.
With direct tax, the liability sits with you. If your company makes a profit of Rs 1 crore, the tax on it comes out of that profit. You can plan legitimately through timing, the choice of regime and the deductions you are entitled to, but you cannot invoice it to anyone.
With indirect tax, you are a collection agent. You charge GST on your sale, claim credit for the GST you paid on your purchases, and deposit the difference. If the system works as designed, GST costs a registered business nothing. The consumer at the end of the chain, who cannot claim credit, carries the full tax.
That "if" is doing a lot of work. Your credit depends on your supplier filing their own outward return so that the invoice appears in your GSTR-2B, and on you paying the supplier within 180 days of the invoice. Miss either condition and the credit is lost or reversed, and suddenly GST becomes a real cost to your business.
How do direct and indirect taxes affect pricing and cash flow?
Pricing
GST sits on top of your price, so a rate change alters what the customer pays, not what you keep (unless the market forces you to absorb it). Income tax sits underneath your price: it reduces your margin after the fact. When you quote a B2B customer, GST is usually a pass-through they will claim back. When you sell to consumers, it is part of the sticker price they see, and an 18% item feels very different from a 5% one.
Customs works differently again. IGST paid on imports is creditable, but basic customs duty is not, so it becomes part of your landed cost and has to be priced in.
Cash flow
The single most useful habit we recommend: GST collected is not your money. Treat it as held in trust. Businesses that dip into collected GST to pay suppliers or salaries end up scrambling on the 20th, paying interest, or both.
Direct tax hits cash flow in lumps. Advance tax falls due on four dates, and a good quarter can leave you with a larger September or December cheque than expected. TDS works the other way round: customers deducting TDS from your invoices means you receive less cash now and recover it only when you file your return. Check your annual tax statement (Form 168, which replaced Form 26AS from tax year 2026-27) so those credits are not lost.
How often do you file? The compliance rhythm side by side
| Direct tax | Indirect tax (GST) | |
|---|---|---|
| Charged on | Income and profits | Supply of goods and services, imports |
| Who bears it | The earner (your business) | The final consumer |
| Can it be passed on? | No, it is your cost | Yes, collected from the buyer |
| Main law | Income-tax Act, 2025 (from 1 April 2026) | CGST, SGST and IGST Acts; Customs Act for imports |
| Payment rhythm | Advance tax: 15% by 15 June, 45% by 15 September, 75% by 15 December, 100% by 15 March (cumulative) | Monthly, by the GSTR-3B due date |
| Main returns | Annual income tax return; quarterly TDS and TCS returns | GSTR-1 and GSTR-3B monthly or quarterly; GSTR-9 annual |
| Typical due dates | Return by 31 October for companies and audited businesses; TDS deposit by the 7th of the next month (30 April for March) | GSTR-1 by the 11th; GSTR-3B by the 20th (22nd or 24th under QRMP, depending on state) |
| Credit mechanism | TDS and TCS credited against final tax | Input tax credit on purchases |
These dates are as of FY 2026-27. Businesses with turnover up to Rs 5 crore can opt for the QRMP scheme, which allows quarterly GST returns while tax is still paid monthly. Advance tax applies once your estimated tax for the year, after TDS and TCS, reaches Rs 10,000.
The pattern is clear: indirect tax is frequent and operational, while direct tax is less frequent but carries higher stakes per filing. If you are setting up a new entity, our tax compliance guide for new companies in India lays out the first-year calendar in more detail.
What mistakes do business owners make most often?
- Using GST collections as working capital. It feels like free money until the return is due.
- Not checking GSTR-2B before claiming credit. Credit claimed on invoices your supplier never reported is credit you will be asked to reverse, with interest.
- Ignoring the 180-day payment rule. Slow-paying a supplier can cost you the credit as well as the relationship.
- Skipping advance tax because "we will pay at the end". Interest on shortfalls adds up, and it is avoidable with a quarterly estimate.
- Missing TDS on vendor payments. If you fail to deduct, the expense itself can be disallowed in your income tax computation, so a GST-side saving turns into a direct-tax cost.
- Mismatched numbers. Turnover in your GST returns, your books and your income tax return should reconcile. The department compares them.
Notice that most of these are not technical tax errors. They are bookkeeping and process gaps. Clean monthly books, the kind an outsourced accounting team maintains, prevent most of them before they reach a return.
How Contrarian helps with direct and indirect tax
At Contrarian, we usually start by putting both sides of a client's tax on one calendar: GST returns, TDS deposits and returns, advance tax estimates and the annual return. Because our Chartered Accountants work from the same books for all of them, the turnover in GSTR-3B, the TDS credits in the annual tax statement and the profit in the income tax return tell the same story.
Our taxation services cover GST registration and returns, input tax credit reconciliation, advance tax planning, TDS and TCS compliance, and income tax filing under the new Act. When Contrarian runs a client's payroll, salary TDS is computed and deposited as part of each pay run rather than as a separate chore. We work in Tally, QuickBooks, Zoho Books and Xero, so we can usually pick up from whatever system you already use.
Tax rules change often, and how they apply depends on your entity, turnover and transactions, so treat this as a starting point and check specifics with an advisor before acting. If you would like that advisor to be us, our Bengaluru team works with businesses across India. Book a free consultation, call +91 99168 60307 or WhatsApp +91 99801 60307, and we will reply within one business day.
