by Mar 12 2022

Difference between direct tax & indirect tax.

Direct tax is tax payable directly by the person or institution that possesses the income or profits to which tax is applicable. Income tax, corporate tax, etc. are all direct taxes. On the other hand, indirect tax is a government tax that is to be paid by the consumer either when he buys a product or when he receives his salary. VAT, sales tax, etc. are all indirect taxes. Any tax which is not paid by the person or institution, but by another party is also called indirect taxes. Both direct tax and indirect tax are important for a country’s economy. Good Direct TAX collection indicates the income of individuals & corporates has gone up. Good Indirect TAX collection indicates the consumption is increasing so is the growth of the economy. 

Key differences

 1. Direct tax is levied and paid for by individuals, Hindu undivided Families (HUF), firms, companies, etc. whereas indirect tax is ultimately paid for by the end-consumer of goods and services. 

2. The burden of tax cannot be shifted in the case of direct taxes while the burden can be shifted for indirect taxes. 

3. Lack of administration in the collection of direct taxes can make tax evasion possible, while indirect taxes cannot be evaded as the taxes are charged on goods and services. 

4. A direct tax can help in reducing inflation, whereas an indirect tax may enhance inflation. 

5. Direct taxes have better allocative effects than indirect taxes as direct taxes put a lesser burden over the collection of amounts than indirect taxes, where the collection is scattered across parties and consumers’ preferences of goods are distorted from the price variations due to indirect taxes. 

6. Direct taxes help in reducing inequalities and are considered to be progressive while indirect taxes enhance inequalities and are considered to be regressive. 

7. Indirect taxes involve lesser administrative costs due to convenient and stable collections, while direct taxes have many exemptions and involve higher administrative costs. 

8. Indirect taxes are oriented more towards growth as they discourage consumption and help enhance savings. Direct taxes, on the other hand, reduce savings and discourage investments. 

9. Indirect taxes have a wider coverage as all members of the society are taxed through the sale of goods and services, while direct taxes are collected only from people in respective tax brackets. 

10. Additional indirect taxes levied on harmful commodities such as cigarettes, alcohol, etc. dissuade over-consumption, thereby helping the country in a social context. 

Direct and indirect taxes are defined according to the ability of the end taxpayer to shift the burden of taxes to someone else. A direct tax allows the government to collect taxes directly from consumers and is a progressive type of tax, which also allows for cooling down inflationary pressure on the economy. Indirect taxes allow the government to expect stable and assured returns and bring into its fold almost every member of the society – something which the direct tax has been unable to do. 

Both direct and indirect taxes are important for the country as they are intricately linked with the overall economy. As such, the collection of these taxes is important for the government as well as the well-being of the country. Both direct taxes and indirect taxes are collected by the central and respective state governments according to the type of tax levied.

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