Direct tax, Indirect Tax & Difference

what is Direct Tax?

  • A direct tax is a tax that a person/organization pays directly to the entity that imposed it.
  • For example: Income tax, real property tax, personal property tax, and taxes on assets.
  • These taxes are paid by   an individual directly to the government.
  • There are also indirect taxes, such as sales taxes, wherein a tax is levied on the seller but paid by the buyer.
  • Direct taxes cannot be shifted on to a different person or entity.
  • An individual on whom the direct tax is levied is responsible for paying the direct tax.
  • A type of tax where the impact and the incidence fall under the same category can be defined as a Direct Tax.
  • Direct taxes display the importance of taxes by reducing income inequalities, thereby encouraging social and economical equality.
  • Depending on the income of the taxpayer, every person is charged separately. This enables a sense of not being overcharged even if the income of a person is low.
  • A direct tax is an equitable tax.
  • Through it the rich can be made to pay more than the poor.

What is Indirect tax?

  • Indirect tax is the tax levied on the consumption of goods and services.
  • It is not directly levied on the income of a person.
  • Instead, he/she has to pay the tax along with the price of goods or services bought by the seller.
  • These are levied on the sellers of goods or the providers of service, where it is passed on to the consumer in the form of service tax, excise duty.
  • Taxes like this are considered indirect because they are paid indirectly pai by the final consumer who enjoys the use of the goods or services.
  • Indirect taxes are commonly used and imposed by the government in order to generate revenue.

    They are essentially fees that are levied equally upon taxpayers, no matter their income, so rich or poor, everyone has to pay them.

Difference between Direct tax and Indirect tax

  Areas of differenceDirect taxIndirect tax
Incidence and ImpactWhen a tax is levied on a person and the tax is paid by the same person, then it is said to be direct tax.A tax is said to be indirect when the tax is levied on one person but is shifted to another person. Example: GST
BurdenDirect tax is imposed on an individual or organization, which cannot be shifted to others.Indirect tax is imposed on goods, services, commodities and burden will be paid by the buyer/ end consumer.
Impact of paymentDirect taxes are lesser burden to people when compared to indirect tax, as it is imposed on the income earned by an individual.Indirect tax have to be paid by an individual, no matter   whatever the income of a person, as MRP includes all the taxes.
Omission of taxesImproper administration may result in tax evasion.No chance of escaping the taxes, as Indirect taxes are covered in prices of goods and services.