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Everything to know about the difference between direct and indirect taxes

Taxes can be categorised into two types: direct taxes and indirect taxes. While direct taxes are levied on profits and income, indirect taxes are charged on products and services. Read on to know all the differences between direct and indirect taxes.

Difference between direct and indirect taxes

Direct taxes can be defined as taxes that are non-transferable in nature. These are paid by the taxpayer to the government. Indirect taxes, on the other hand, are transferable in nature. Here, the onus to pay the tax can be shifted to another person. For example, Income Tax is a kind of direct tax and Value Added Tax (VAT) is an indirect tax. Similarly, GST is an indirect tax, since it is levied on goods and services.

Let’s understand both direct and indirect taxes in detail.

Direct Taxes

Difference between direct and indirect tax
Image: Photo by Nataliya Vaitkevich/Pexels

Income Tax, Corporate Tax, Wealth Tax, Estate Duty, and Gift Tax are all direct taxes. These are charged by the government on income and activities conducted. In the case of direct taxes, the burden of tax can’t be moved to others. The concerned taxpayer is required to pay it directly. Direct taxes are paid once the taxpayer gets his or her income. It is challenging to collect direct taxes.

Indirect Taxes

Difference between direct and indirect tax
Image: Shutterstock

Excise Duty, Customs Duty, Sales Tax, and Entertainment Tax fall in the category of indirect taxes. These are charged on products and services. In the case of indirect taxes, the burden of tax can be shifted to others. This means that such taxes are paid by one person after recovering the same from another person. This means that the final taxpayer in this case is the ultimate consumer or the end-user. One has to pay these taxes before the goods or services reach them. It is far easier to collect indirect taxes than direct taxes.

Some other major differences

  • Direct taxes, if not collected strictly, could lead to tax evasions. On the other hand, one can never get away without paying indirect taxes.
  • Direct taxes can reduce inflation while indirect taxes can increase it.
  • From an equality point of view, direct taxes can assist in diminishing inequalities. Thus, they are considered progressive. Indirect taxes, on the contrary, can lead to further inequalities in the society, thus being regressive.
  • To collect direct taxes, higher adminsitrative costs are required, while collection of indirect taxes is much easier and stable.
  • In terms of growth, indirect taxes help us in saving money by not consuming too many goods or services. But direct taxes can reduce one’s savings and prevent them from making further investments, thereby reducing growth.
  • Indirect taxes, when levied on injurious products like cigarettes and alcohol, can help towards the betterment of the country, from a social point of view.
  • And lastly, indirect taxes are charged from almost every consumer. But only 6.25 percent Indians pay Income Tax.

Featured and hero image courtesy: Nataliya Vaitkevich/Pexels

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