DIFFERENCE BETWEEN DIRECT AND INDIRECT TAX, BEST 12 POINTS

Taxes are the prime source of income and outlay of the government. Taxes are levied on various items, duties, services etc.

Taxes pay a major in calculating and generating the total expenditure or production which is Gross Domestic Product (GDP) of any country. The premier uses of tax are to get economic stability, balancing the rate of products, controlling inflation, currency redistribution etc.

Every individual above a certain limit has to pay tax. Taxes are differentiated on the basis on who it is being levied on. It can be organization, individual, goods or any service.

It is foremost important for every individual to understand the difference between Direct and Indirect Tax as they are prime taxes in the country.

Being an Indian citizen, it is important for every individual to know about the tax system in India. The rate of various tax, types of taxes and its difference, the procedure to pay taxes etc.

Now, to understand the difference between the taxes, it is important to know about it. Let us acknowledge the types of taxes and their difference.

TYPES OF TAXES

Government levies different taxes such as income tax, wealth tax, corporate tax, value-added tax, goods and services tax, tax on liquor and petrol, excise duties, transport tax etc.

The differentiation of taxes is based on their implementation and various aspects. The two main types of taxes are Direct tax and indirect tax. To know the difference between Direct and Indirect tax it is important to know them individually in detail.

DIRECT TAX

Direct tax is the taxes which are directly rewarded to the administration or government that imposes it. Since they are directly imposed by the officials, it cannot be transferred to other organization or entity.

In India, The Central Board of Direct Taxes collects the Direct tax from the individuals or organization. Any entity’s income exceeding the limit decided has to pay Direct tax. Direct tax is non-transferable.

Following list shows some of the Direct Tax in India:

1. Income Tax

Income Tax is the major Direct tax in India. It is to be paid every year by individual or entity on which it is levied on. Income Tax must be paid according to the tax bracket framed by the income tax department.

Income tax is levied directly on the salary of employees. An individual has to pay the part of their income as tax to the government.

2. Corporate tax

Corporate tax is imposed on companies and businesses in India. Foreign companies investing in the country also have to pay corporate tax.

Corporate tax is levied upon the profit generated by the companies.

3. Wealth tax

Wealth tax is imposed on the value of certain assets the individual or company holds. It can be property, house, Buildings etc.

4. Tax on Capital gains

The tax levied on capital Gains is the tax generated when any assets are sold. The part of profit produced from capital is paid to the government in form of tax.

This Capital gains tax is further differentiated into Short term Capital gains and Long-term Capital gain.

5. Estate duty

This direct tax is imposed in the case where of legacy or inheritance.

 

INDIRECT TAX

Indirect tax is the tax which is levied on goods and services. Since they are levied on products and services, they are indirectly submitted to government intermediately.

As they are not imposed directly, they can be transferred to another entity. The Goods and Service Tax (GST) which was introduced in July 2017 has incorporated various indirect tax including States value-added tax, service tax etc.

Following list shows some of the Indirect Tax in India:

1. Goods and Service Tax (GST)

Goods and Service Tax is imposed on the manufacture and consumption of goods and services. It includes the CGST and SGST on the supply of goods from one state to another.

2. Entertainment Tax

This tax is imposed on the entertainment department such as cinema halls, gaming centres etc.

3. Tax on petrol and diesel

These taxes are imposed on fuels such as petrol and diesel and they do not come under GST.

4. Custom Duty

Customs duty is the indirect tax which is imposed when foreign goods are exported or imported to and from another country.

 

DIFFERENCE BETWEEN DIRECT TAX AND INDIRECT TAX

Following lists shows the difference between Direct and Indirect tax based on various aspects.

1. Imposition

The prime difference between Direct and Indirect tax is on which they are levied on.

Direct tax is imposed on an Individual or profit earning organization.

Direct tax is imposed only on those who fall under the particular tax bracket category. This includes income tax, corporate tax etc.

Whereas Indirect tax is imposed on goods and services. These indirect taxes are levied on products and any consumer buying it has to pay the tax associated with it. For example, tax on liquor.

2. Application of tax

The major difference between Direct and Indirect tax is based on whom the tax is applicable to.

Direct tax is levied to the taxpayer alone. The taxpayer can be individual, entity, organization or company. These direct taxes are applicable to those who come under the tax bracket of a particular category.

Whereas Indirect taxes are paid at every stage of the product or service being formed.

The application of Indirect tax includes stages like manufacturing, retailing, transporting and also at the consumer end.

3. Exchangeability of tax

Exchangeability refers to the transfer of the taxes from one entity to another. It is one of the biggest difference between Direct and Indirect tax.

Direct tax is levied upon individual so it cannot be transferred to another. They are directly paid to the authority. For example, income tax is directly paid to the income tax department. This tax can not be transferred to another organization.

Indirect tax is imposed on goods and services therefore it is transferrable to other entity. This Indirect Taxes can be transferred at different stages from one taxpayer to another.

For example, the manufacturer can transfer his/ her tax to retailer and retailer can transfer it to the consumer. This may lead to inflation in many cases.

4. Tax weight

Tax weight or tax burden is another important aspect of the difference between Direct and Indirect tax. It refers to the burden that taxpayer faces while paying it.

In the case of Direct tax, the burden cannot be shifted to other as tax is imposed solely on them.

For example, individuals have to pay income tax from their own salary. No other individual can remove that burden.

Whereas in the case of Indirect tax the burden can be shifted to another taxpayer.

For example, the burden of tax can be shifted at various stages like in the manufacturing stage, transport stage to service stage and then eventually to the consumer stage.

5. Evasion from paying tax

Evasion or avoidance of paying tax is another chief difference between Direct and Indirect tax.

Direct tax can be evaded by investing in various tax saving initiative or it can also be possible due to lack of attentiveness while collecting taxes. So, direct taxpayers can escape from paying taxes.

Whereas Indirect taxes cannot be avoided as they are imposed on products and services. Therefore, indirect taxpayers cannot escape from paying tax

For example, it is compulsory to pay taxes on petrol, air conditioner etc.

6. Administrative cost

The administrative cost is another aspect which helps to understand the difference between Direct and Indirect tax.

The administrative cost for Direct tax is much higher as they are levied on individual and has many freedom and exclusion.

Therefore, direct tax requires higher administrative costs.

Administrative costs for Indirect tax are much lower than a direct tax as indirect tax is much suitable and secure.

This makes administrative costs lessor for indirect tax.

7. Inflation

Inflation is the dominant factor of difference between Direct tax and indirect tax. Inflation is the term used for the increase in prices or rate of any product or service in the market.

Direct tax can be used to reduce inflation. If the direct tax is high then the individual would spend less money on goods and services.

Indirect tax can lead to an increase in inflation. As it is imposed on goods and services, its price can be increased at every stage. This leads to increase in the rate of commodities in many cases.

For example, the manufacturer can increase the price for wholesaler, a wholesaler can increase the price for the retailer. And retailer can eventually increase the price for the consumer. This way it leads to an increase in inflation.

8. Collection of taxes

Collection of taxes is another aspect of the difference between Direct and Indirect tax. Collection of taxes is usually carried out by the Central Board of income and other related departments.

As direct tax is directly levied on entities, it is easier to collect it. Since the taxpayer has to pay the tax directly to the authority, it makes the task of collection much convenient.

Whereas the collection of indirect tax is not a trivial matter. As the taxes are distorted at various stages, it is difficult to collect it. The authority does not have direct access to collect it.

For example, the authority needs to collect taxes from the manufacturer, wholesaler, retailer and then from the consumer. This takes larger time and it can be inconvenient in many cases

9. Market growth

Taxes play a major role in influencing the market growth. This is another chief difference between Direct and Indirect tax.

Indirect taxes are compulsory to pay and has a higher rate. So, people spend less on assets and increase their savings. This reduces the consumption of products in the market.

This encourages people in investments.

Whereas in the case of Direct tax, only individuals above certain limit have to pay it. This decreases the savings and people buy more goods. This makes people to not do investments.

But there are various tax-saving methods such as life insurance which reduces the burden of taxes. Therefore, people do invest in such schemes to reduce their taxes.

10. Nature

Nature of tax can be regressive or progressive. This is another important aspect of the difference between Direct and Indirect tax.

Direct taxes are progressive in nature. As stated, it is levied on an individual based on an individual’s income. So, a rich person will have to pay more tax as their income is more. This makes the nature of direct tax progressive.

In the case of Indirect tax, every individual consuming the same goods have to pay the same tax. It doesn’t differ based on the economic status of the individual. This makes the nature of indirect tax regressive.

11. Coverage

Coverage is another known aspect which helps to understand the difference between Direct and Indirect tax.

In India, direct tax has lessor coverage as it is imposed on individuals having income above a certain limit.

Whereas indirect tax has much broader coverage than direct tax. As it is to be levied on whoever consumes the goods or services.

So, in simple terms, indirect tax has more coverage than direct tax in India.

12. Effect on social context

This aspect helps us to understand the difference between Direct and Indirect tax in much broader way.

The higher tax imposed on harmful items such as alcohol, cigarette, liquors reduces its consumption which is good for consumers health.

Indirect Taxes imposed on petrol and diesel makes people consume it less and tend to use natural fuels for their vehicles as it is comparatively cheaper. This eventually is a better option for the environment as less pollution would be there.

Whereas direct tax does not have any such social effects.

This was the best 12 points which describe the difference between Direct and Indirect tax.

Both direct and indirect tax is important for country’s economic stability. Direct tax reduces inflation and have less burden. It is also easier to collect than indirect tax.

But direct tax is not paid by every citizen.

This problem is resolved in case of indirect tax as every individual or citizen has to pay the indirect tax levied on goods and services.

In one way or the other, both direct tax and indirect tax are interrelated to one another.

It is essential for every individual to understand the types of taxes and the difference between Direct and indirect tax.

This concept of tax system in India helps individual to contribute more towards the country’s economy in better way as taxes are a major source of generating revenue.