Direct vs Indirect Taxes: Difference and Comparison

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.

Key Takeaways

1. Direct taxes are paid directly by taxpayers to the government, while indirect taxes are collected by intermediaries and passed on to the government.
2. Examples of direct taxes include income tax and property tax, while indirect taxes include sales tax and value-added tax (VAT).
3. Direct taxes are based on taxpayers’ ability to pay, while indirect taxes are levied on consumption or transactions.

Direct vs Indirect Taxes

The difference between direct and indirect taxes is that the government collects the direct tax 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 essential to be studied.

Individuals from their pockets pay Direct taxes. 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.

The government imposes indirect taxes upon 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

Parameters Of Comparison	Direct Tax	Indirect Tax
Source	The main source of direct tax is the citizens and their income.	The main source of indirect taxes are foods and services produced by citizens.
Burden	The burden indirect tax is not shiftable.	The burden in Indirect Taxes is shiftable.
Timing	The 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.
Difficulty	The process of collecting direct tax is quite difficult.	The process of collecting indirect tax is not so difficult.
Example	Examples 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 imposed by the government and 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, their tax will also be higher.

For instance, in the case of income tax, which is also a type of direct tax, if an individual’s income is higher, then their income tax will also be higher 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 revenue and thus, the responsibility of paying these taxes can be changed from one 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.

References

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

Last Updated : 13 July, 2023