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Direct tax is paid by individuals directly to government, whereas indirect tax is collected by government on supply of goods & services. More on direct tax vs indirect tax.
Most people know about taxes as it gets deducted regularly from their salary and is charged while buying or consuming something. But have you tried to differentiate GST from corporate tax? Though not many are gleeful about the income tax deductions, they keep going on without knowing about taxes. Today let’s distinguish between direct tax and indirect tax and better understand the difference between them./p>
Direct tax is a type of tax that is paid by an individual to the government. This individual can be a person or an organization. As this type of tax is directly imposed by the government, it cannot be transferred to another entity. Some advantages of direct tax are that it aids in curbing inflation and also distributing wealth equally in the society.
Income tax is a common tax paid by most salaried and self-employed persons. This tax varies from person to person as one pays income tax according to the tax bracket their income falls in which is directly levied on the salary. Besides, the Government of India allows taxpayers income tax exemption for various investments and expenditure schemes.
Wealth tax is levied on the value of certain assets in the market for that particular financial year. This asset can be held by an individual, HUFs (Hindu Undivided Family) or companies. Though wealth tax was widely used before, now it has been abolished.
Corporate tax is levied on the profits of companies and businesses in India. This tax is also applicable to foreign companies where the income is arising from India.
Capital Gains tax is taxed on the income arising out of the sale of investments. The tax is levied based on how long you hold the asset. Capital gains are of two types, Long Term Capital Gains (LTCG) and Short Term Capital Gains (STCG) - according to which the tax rates differ.
Here are some benefits of direct taxes:
Direct taxes can influence the demand for goods and services and help keep inflation in check. In case of a rise in the rate of inflation, the government increases direct taxes. With a rise in taxes, the demand for goods and services falls and inflation is controlled.
Direct taxes are directly proportional to the income of the payer. So, people with a high income pay higher direct taxes and people with a lower income pay lower direct taxes. These taxes help maintain equality.
The tax collected by people with higher incomes is used to provide better facilities and initiatives to the poor. This stabilizes the inequality in incomes and helps lower-income groups in their day to day lives.
Here are some disadvantages of direct taxes:
Direct taxes are paid by the citizens of the country just like income tax. Since this is an obligatory tax, some people may try fraudulent ways to avoid paying them.
Since direct taxes are paid as per the income, high-income groups can feel overburdened. Similarly, lower-income groups may sense the economic divide that leads to social inequality.
Unlike indirect taxes, direct taxes are not included in the price of goods or services. They can come with their fair share of paperwork that can seem troublesome.
Capital gains taxes may lead people to avoid investments in order to reduce their tax liability. This further disrupts the growth of the economy and hampers the individual’s financial health too.
Indirect tax is a type of tax imposed by the government on the supply of goods and services and can be transferred from one entity to another. Recently, the Goods and Services Tax (GST) was introduced by the government on 1 July 2017 which subsumed all the other kinds of indirect taxes. Some of the benefits of GST as indirect tax are the elimination of multiplicity of taxes and an eventual decrease in the cost of goods due to the reduction in the cascading effect of taxes.
GST is charged twice where the Central Government levies Central GST (CGST) and the State Government levies State GST (SGST) on intra-state supply of goods or services. The Centre also levies Integrated GST (IGST) on the inter-state supply of goods or services.
Taxes on liquor and petrol products do not come under GST and are taxed separately.
Here are some benefits of indirect taxes:
Since indirect taxes are the same for all citizens, everyone gets to contribute to indirect taxes irrespective of their incomes.
There is no heavy paperwork involved in paying indirect taxes. The collection happens at the time of the sale and is paid to the government by the supplier.
Indirect taxes charged on harmful substances such as alcohol, cigarettes, etc., are considerably higher than other routine products. This creates awareness and discourages people from using such products.
Indirect taxes are usually included in the price of the product or service which is why they do not appear as high. People simply pay them when they make a purchase. There is no separate payment.
Here are some disadvantages of indirect taxes:
Indirect taxes are included and hidden in the price of the goods or services purchased. Hence, people do not always know how much tax they end up paying to the government.
Indirect taxes remain the same for all irrespective of the income. This implies that people from a lower income group will pay the same indirect tax on a product or service as people from a higher income group. This may be equal, but it is not equitable.
Indirect taxes increase the price of goods and services for the local people. They end up paying a higher price than the original price of the product, and these taxes ultimately interfere with their monthly budgetary constraints.
When looking at what is direct tax and indirect tax, there are various differences that you need to know. Here are some of the key differences:
Direct taxes are levied on every individual, HUFs, and company. For indirect taxes, the end-consumer becomes the taxpayer
Direct taxes are applicable only to the taxpayer whereas indirect taxes are levied on every single stage of the production-distribution stage of the goods.
Direct taxes cannot be transferred as compared to indirect taxes which can be transferred.
Direct tax can be evaded by investing in tax-savings instruments whereas indirect tax cannot be evaded.
Here is a table for direct vs indirect tax to help you understand the distinction between the two better:
For activities conducted and income earned
For products and services
Tax burden cannot be shifted
Tax burden can be shifted
The concerned person pays it directly
It is paid by one person and recovered by another
Collection is difficult
Collection is significantly easier
Example: Income Tax, Corporate Tax
Example: GST, Tax on Liquor