Difference Between Direct and Indirect Taxes

The government of every country collects taxes from its citizens. That’s how it becomes capable of fulfilling the needs of a whole nation. Taxes can be used to achieve multiple goals.

There are various types of taxes respective to their countries and direct and indirect taxes are one of them.

Direct vs Indirect Taxes

The main difference between direct and indirect taxes is that the direct tax is collected by the government and goes directly to the government. On the other hand, indirect taxes are collected by intermediate mediums from the citizens. There are many other major differences between both terms that are very essential to be studied.

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Direct taxes are paid by individuals from their pockets. Direct tax is imposed upon property or the income of a person. The entity that imposes this tax gets directly paid that’s why it is known as a direct tax.

The main example of direct tax is the income tax. There is no medium required in the process of collecting direct tax.

Indirect taxes are imposed by the government upon the services and goods rather than on property or income. Indirect tax is collected from the customer or consumer by marketers or providers and then it is paid to the government.

The main example of indirect tax is GST. GST replaced Vat, Service Tax, Excise, Customs, etc.

Comparison Table Between Direct and Indirect Taxes

Parameters Of ComparisonDirect TaxIndirect Tax
SourceThe main source of direct tax is the citizens and their income.The main source of indirect taxes are foods and services produced by citizens.
BurdenThe burden indirect tax is not shiftable.The burden in Indirect Taxes is shiftable.
TimingThe direct tax is paid when the person revives his income.The indirect tax has to be paid before the goods and services reach the consumer.
DifficultyThe process of collecting direct tax is quite difficult.The process of collecting indirect tax is not so difficult.
ExampleExamples of direct taxes are wealth tax, income tax, etc.Examples of indirect tax GST, excise duty, customs duty, sale tax, service tax, etc.

What is Direct Taxes?

Direct taxes are those taxes that are imposed by the government and are paid by people directly to the government. Direct taxes include different types of taxes like income tax, property tax, wealth tax, gift tax, or taxes on assets.

Mainly these taxes are on income or wealth. Generally, these taxes are computed on the capability of the taxpayers to pay. If their capability is higher then it means their tax will also be higher.

For instance, in the case of income tax which is also a type of direct tax, if the income of an individual is higher, then their income tax will also be higher as compared to a person earning less than him.

Let’s consider another example where a person is earning Rs.5,00,000 annually and he is paying 40,000 as income tax to the government then this amount of Rs 40,000 is his direct tax.

Governments levy these taxes on people for various purposes or we can also say that there are several benefits of paying direct taxes such as inflation control, equality, etc.

It also promotes certainty as they are fixed and made final without even being paid like annual income tax is the same every year as long as the salary changes. Direct taxes keep the taxpayers in different categories based on their capability to pay.

What is Indirect Taxes?

Indirect taxes are levied by the government on people for goods and services. These taxes are not imposed on income, property, or any type of revenue and thus the responsibility of paying these taxes can be changed from an individual to another.

Indirect taxes include various types of taxes like custom duty, excise duty, GST, etc.

Customs duty is paid by any individual who imports or exports goods out of the country. On the other hand, excise duty is paid by the manufacturers of goods in the country.

GST which stands for “goods and services tax” can be taken as a prime example of indirect taxes.

It was introduced by the Indian Government in June 2017 which subsumed the excise taxes. But even after imposing GST, some goods were still kept under excise duty.

GST includes taxes on the supply of goods and services which is paid by those businessmen who have earned more than the fixed limit.

Indirect taxes are called indirect because these taxes are not paid directly by those who enjoy the goods and services, instead, they are charged by the traders or servitors, and then the government charges the tax from them.

Indirect taxes are easy to pay for the taxpayers and there is less burden because it has only to be paid at the time of some purchase.

Main Differences Between Direct and Indirect Taxes

  1. Direct tax is imposed upon the wealth or income of the person while indirect tax is imposed upon services and goods.
  2. Direct tax is paid by a person ( sometimes by his office) or organizations. On the other hand, indirect taxes are collected by sellers from buyers.
  3. If the income earned by a person is higher, the amount of direct tax would also be higher while the rate of indirect taxes is flat for everyone.
  4. The evasion of direct taxes is possible while the evasion of indirect taxes is difficult to execute.
  5. The term inflation is reduced with the help of direct taxes. On the other hand, indirect taxes help in the increment of the term inflation.

Conclusion

The biggest source of income of the government is taxes paid by the citizens. Taxes have been around everyone’s lives from ancient times in different forms.

When a person watches movies at multiplex, receives his salary, eats at restaurants, uses the medium of transportation, or makes a simple purchase at a general store, pays many different types of taxes.

It is the duty of every citizen to pay their taxes. Taxes are a very important aspect of the economy of a country. They affect the lives of people and the system of government.

There has been a remarkable revolution due to increased taxes. When the amount of taxes is increased by the government or ruling party, the lives of citizens become miserable. Hence, there should be reasonable prices imposed upon people.

References

  1. https://www.jstor.org/stable/3550705
  2. https://www.sciencedirect.com/science/article/pii/0047272794900817
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