Tax is defined as a financial obligation, it is a fee levied by the government of the respective country on income, goods, and activity. The main reason for imposing taxes is that they are the main source of revenue to the government. Taxes are broadly classified as a direct tax and indirect tax, wherein the former is charged directly on the income or wealth of the person, while the latter is imposed on the price of goods and services.
In the case of a direct tax, the taxpayer is the person who bears the burden of it. Conversely, in the case of an indirect tax, the taxpayer, shifts the burden on the consumer of goods and services and that is why the incidence falls on different persons. Come, let’s take a read of the article, which gives you a clear understanding of the difference between a direct tax and indirect tax.
Content: Direct tax Vs Indirect Tax
|Basis for Comparison||Direct Tax||Indirect Tax|
|Meaning||Direct tax is referred to as the tax, levied on person's income and wealth and is paid directly to the government.||Indirect Tax is referred to as the tax, levied on a person who consumes the goods and services and is paid indirectly to the government.|
|Incidence and Impact||Falls on the same person.||Falls on different person.|
|Types||Wealth Tax, Income Tax, Property Tax, Corporate Tax, Import and Export Duties.||Central Sales tax, VAT (Value Added Tax), Service Tax, STT (Security Transaction Tax), Excise Duty, Custom Duty.|
|Evasion||Tax evasion is possible.||Tax evasion is hardly possible because it is included in the price of the goods and services.|
|Inflation||Direct tax helps in reducing the inflation.||Indirect taxes promotes the inflation.|
|Imposition and collection||Imposed on and collected from assessees, i.e. Individual, HUF (Hindu Undivided Family), Company, Firm etc.||Imposed on and collected from consumers of goods and services but paid and deposited by the assessee.|
|Burden||Cannot be shifted.||Can be shifted|
|Event||Taxable income or wealth of the assessee||Purchase/sale/manufacture of goods and provision of services|
Definition of Direct Tax
A direct tax is referred to as a tax levied on person’s income and wealth and is paid directly to the government, the burden of such tax cannot be shifted. The tax is progressive in nature i.e. it increases with an increase in the income or wealth and vice versa. It levies according to the paying capacity of the person, i.e. the tax is collected more from the rich and less from the poor people. The tax is levied and collected either by the Central government or State government or the local bodies.
The plans and policies of the Direct Taxes are being recommended by the Central Board of Direct Taxes (CBDT) which is under the Ministry of Finance, Government of India.
There are several types of Direct Taxes, such as:
- Income Tax
- Wealth Tax
- Property Tax
- Corporate Tax
- Import and Export Duties
Definition of Indirect Tax
Indirect Tax is referred to as a tax charged on a person who consumes the goods and services and is paid indirectly to the government. The burden of tax can be easily shifted to the another person. The tax is regressive in nature, i.e. as the amount of tax increases the demand for the goods and services decreases and vice versa. It levies on every person equally whether he is rich or poor. The administration of tax is done either by the Central Government or the State government.
There are several types of Indirect Taxes, such as:
- Central Sales Tax
- VAT (Value Added Tax)
- Service Tax
- STT (Security Transaction Tax)
- Excise Duty
- Custom Duty
- Agricultural Income Tax
Key Differences Between Direct and Indirect Taxes
- The tax, which is paid by the person on whom it is levied is known as the Direct tax while the tax, which is paid by the taxpayer indirectly is known as the Indirect tax. The direct tax is levied on person’s income and wealth whereas the indirect tax is levied on a person who consumes the goods and services.
- The burden of the direct tax is non-transferable while that of indirect tax is transferable.
- The incidence and impact of direct tax falls on the same person, but in the case of indirect tax, the incidence and impact falls on different [persons.
- The evasion of tax is possible in case of a direct tax if the proper administration of the collection is not done, but in the case of indirect tax, the evasion of tax is not possible since the amount of tax is charged on the goods and services.
- The direct tax is levied on Persons, i.e. Individual, HUF (Hindu Undivided Family), Company, Firm, etc. On the other hand, the indirect tax is levied on the consumer of goods and services.
- The nature of a direct tax is progressive, but the nature of the indirect tax is regressive.
- Direct tax helps in reducing the inflation, but the indirect tax sometimes helps in promoting the inflation.
- Direct tax is collected when the income for the financial year is earned or the assets are valued at the date of valuation. As against this, the indirect taxes are collected, when the purchase or sale of goods or services are rendered.
- Direct tax is imposed on and collected from the assessee. Unlike indirect tax is imposed on and collected from consumer but deposited to the exchequer by the dealer of goods or provider of services.
- Payable to the government.
- Penalty for the non-payment.
- Interest on Delayed Payment.
- Improper administration can lead to tax avoidance or tax evasion.
Both the direct and indirect tax has its own merits and demerits. If we talk about the direct taxes they are equitable because they are charged on person, according to their paying ability. The direct tax is economical because its cost of collection is less but however, it doesn’t cover every section of the society.
On the other hand, if we talk about the indirect tax, they are easy to realize as they are included in the price of the product and services, and along with that, it has an excellent coverage of every section of the society. One of the best advantages of the indirect tax is, the rate of tax is high for harmful products as compared to the other goods which are necessary for life.