Difference between Direct and Indirect Tax

Difference Between Direct Tax and Indirect Tax

Everyone of us, have heard about the tax, it is a compulsory financial obligation, payable to the government. But this definition is not sufficient to understand the complete tax system. It has been mainly divided into two broad categories Direct tax and Indirect tax, comprising of the different nature of taxes. Come lets understand the meaning and the difference between Direct Tax and Indirect Tax.

Content: Direct tax Vs Indirect Tax

1. Comparison Chart
2. Definition
3. Key Differences
4. Similarities
5. Conclusion

Comparison Chart

BASIS FOR COMPARISON	DIRECT TAX	INDIRECT TAX
Meaning	Direct tax is referred to as the tax, levied on person's income and wealth and is paid directly to the government.	Indirect Tax is referred to as the tax, levied on a person who consumes the goods and services and is paid indirectly to the government.
Burden	The person on whom it is levied bears its burden.	The burden of tax can be shifted to another person.
Types	Wealth Tax, Income Tax, Property Tax, Corporate Tax, Import and Export Duties.	Central Sales tax, VAT (Value Added Tax), Service Tax, STT (Security Transaction Tax), Excise Duty, Custom Duty.
Evasion	Tax evasion is possible.	Tax evasion is hardly possible because it is included in the price of the goods and services.
Inflation	Direct tax helps in reducing the inflation.	Indirect taxes promotes the inflation.
Levied on	Persons, i.e. Individual, HUF (Hindu Undivided Family), Company, Firm etc.	Consumers of goods and services.
Nature	Progressive	Regressive

Definition of Direct Tax

A direct tax is referred to as a tax levied on person’s income and wealth and is paid directly to the government, the burden of such tax cannot be shifted. The tax is progressive in nature i.e. it increases with an increase in the income or wealth and vice versa. It levies according to the paying capacity of the person, i.e. the tax is collected more from the rich and less from the poor people. The tax is levied and collected either by the Central government or State government or the local bodies.

The plans and policies of the Direct Taxes are being recommended by the Central Board of Direct Taxes (CBDT) which is under the Ministry of Finance, Government of India.

There are several types of Direct Taxes, such as:

• Income Tax
• Wealth Tax
• Property Tax
• Corporate Tax
• Import and Export Duties

Definition of Indirect Tax

Indirect Tax is referred to as a tax charged on a person who consumes the goods and services and is paid indirectly to the government. The burden of tax can be easily shifted to the another person. The tax is regressive in nature, i.e. as the amount of tax increases the demand for the goods and services decreases and vice versa.  It levies on every person equally whether he is rich or poor. The administration of tax is done either by the Central government or the State government.

There are several types of Indirect Taxes, such as:

• Central Sales tax
• VAT (Value Added Tax)
• Service Tax
• STT (Security Transaction Tax)
• Excise Duty
• Custom Duty
• Agricultural Income Tax

Key Differences Between Direct and Indirect Taxes

1. The tax, which is paid by the person on whom it is levied is known as the Direct tax while the tax, which is paid by the taxpayer indirectly is known as the Indirect tax. The direct tax is levied on person’s own income and wealth whereas the indirect tax is levied on a person who consumes the goods and services.
2. The main difference between the direct and indirect tax is that the burden of direct tax cannot be shifted whereas the burden of indirect tax can be shifted.
3. The evasion of tax is possible in case of direct tax, if the proper administration of the collection is not done, but in case of indirect tax, the evasion of tax is not possible since the amount of tax is charged on the goods and services.
4. The direct tax is levied on Persons, i.e. Individual, HUF (Hindu Undivided Family), Company, Firm etc. On the other hand, the indirect tax is levied on the consumer of goods and services.
5. The nature of a direct tax is progressive, but the nature of indirect tax is regressive.
6. Direct tax helps in reducing the inflation, but the indirect tax sometimes helps in promoting the inflation.

Similarities

• Payable to the government.
• Penalty for the non-payment.
• Interest on Delayed Payment.
• Improper administration can lead to tax avoidance or tax evasion.

Conclusion

Both the direct and indirect tax has its own merits and demerits. If we talk about the direct taxes they are equitable because they are charged on person, according to their paying ability. The direct tax is economical because its cost of collection is less but however, it doesn’t cover every section of the society.

On the other hand, if we talk about the indirect tax, they are easy to realize as they are included in the price of the product and services, and along with that it has a good coverage of every section of the society. One of the best advantages of the indirect tax is, the rate of tax is high for harmful products as compared to the other goods which are necessary for life.