Direct Tax vs Indirect Tax

Difference Between Direct Tax and Indirect Tax

Direct tax refers to all those taxes which are directly borne by the person and incidence of such tax does not passes to the other person whereas indirect tax refers to all those taxes which are not directly borne by the person and incidence of such tax passes to the other person i.e., to end consumer.

Taxes are sources of revenue for the government, which the government charges on individuals or corporations. When a corporation makes a profit or an individual earns money over a limit, they need to pay taxes to the government. Taxes can broadly divide into two types; they are direct and indirect tax.

What Is Direct Tax?

The government directly collects direct taxes from individuals or companies. A direct tax is imposed on individuals and the liability to pay that tax is on that individual; the individual cannot pass on that tax to any other individual. In a way, the direct tax is relatively less burden on an individual as the quantum of the payment is decided by the income level of that individual.

If an individual has less income, then the amount of direct tax paid by that individual is also less and vice versa. One problem with direct tax in India from the standpoint of government is that there are chances of direct tax evasion by individuals or organizations. The reason behind that is the administrative cost to collect direct tax is comparatively higher and hence results in not being able to map effectively every individual. The different types of popular direct taxes are income tax, wealth tax, corporation tax, property tax, gift tax, and inheritance tax.

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What is Indirect Tax?

Indirect taxes, on the other hand, are kind of taxes collected by the manufacturers or sellers or goods or services and paid to the government. The various intermediaries pass that tax to the consumers, which is paid to the government in the first place. The chances of evading indirect taxes are lesser than that of direct taxes, as, in case of indirect taxes, the taxes are already embedded in the prices of goods and services sold.

The different types of indirect taxes are central excise, central sales tax (CST)Central Sales Tax (CST)CST is Central Sales Tax imposed by the central government of India upon the inter-state sale of goods and services. It is not applicable on import or export or sales made within one state and is not required to be paid in the state where the goods or services are sold.read more, service tax, customs duty, octroi, value-added tax (VAT)Value-added Tax (VAT)Value-added tax (VAT) refers to the charges imposed whenever there is an accretion to a product's usefulness or value throughout its supply chain, i.e., from its manufacturing to its final selling point. It is an indirect tax levied on the product consumption.read more, and securities transaction tax (STT).

Direct Tax vs. Indirect Tax Infographics

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Key Differences

The key differences are as follows –

Direct Tax vs. Indirect Tax Comparative Table

Basis Direct Tax Indirect Tax
DefinitionThey are the kind of taxes that is directly collected by the government from individuals or companies. A direct tax is imposed on individuals and the liability to pay that tax is on that individual; the individual cannot pass on that tax to anyone else.They are the kind of taxes collected by the manufacturers or sellers or goods or services and paid to the government, the intermediaries than pass on that tax to the consumers.
NatureDirect taxes are the liabilities of the individual or companies and cannot be passed on to other entities.Indirect taxes are also known as consumer taxes as these taxes are passed to consumers by the manufacturers or sellers of goods and services.
Cost involvedThe administrative cost of collecting direct taxes is relatively higher.It is less costly in the administrative front to collect an indirect tax.
BurdenDirect taxes relatively put fewer burdens on an individual as the quantum of the payment is decided by the income level of that individual. If an individual has less income, then the amount of direct tax paid by that individual is also less and vice versa.Indirect taxes are generally charged on the purchase of goods and services irrespective of the level of income of that individual; thus, in a way for the section of society who earns lesser, it’s a lot of burden for them.
Chances of evasionSince the cost involved to collect direct taxes are higher, it becomes difficult for the government to bring everyone under the purview of tax. Hence, a lot of individuals and businesses end up evading direct taxes.The chances of evading indirect taxes are lesser than that of direct taxes, as, in case of indirect taxes, the taxes are already embedded in the prices of goods and services sold.
Types of taxesThe different types of popular direct taxes are income tax, wealth tax, corporation taxCorporation TaxCorporate tax is a tax levied by the government on the profits earned by a company at a fixed rate each year and is calculated in accordance with specific tax regulations.read more, property tax gift tax, and inheritance tax.The different types of indirect taxes are central excise, central sales tax, service tax, customs duty, octroi, value-added tax (VAT), and securities transaction tax (STT).

Final Thought

If we compare both the taxes, then both have their own sets of positives and negatives. Indirect taxes are easy to be collected since they are passed on by the manufacturers or sellers to the consumers who have to essentially pay these taxes if they purchase goods and services.

Direct taxes are relatively harder to collect if there is no proper collection process and are entirely dependent on the income level of the individual.

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