Difference between Direct and Indirect Tax

Difference between Direct and Indirect Tax
Many different types of taxes are broadly categorized under direct tax and indirect tax.The main reason for imposing taxes is due to the main source of revenue to the government.Direct tax, the taxpayer is the person who pay tax directly to government. Indirect tax, the tax paid to the goods and services on amount of end user.

Key differences between direct tax and indirect tax:

Direct Tax

  • Direct tax is paid directly by an individual to government.
  • Direct Taxes are based on the ability,which means if you earn more, your tax will also be more.
  • The purpose of Direct Tax is to distribute the revenue of a nation.
  • Direct taxes cannot be passed to a different person.
  • The individual upon which the taxed is responsible for full tax payment.
  • It is considered as progressive tax because it is depended on ability of the taxpayer.
  • Progressive in nature
  • Impact on taxpayer only
  • It helps in reducing inflation.
  • Imposed and collected on Individuals,company,firms etc.
  • Burden cannot be shifted.
  • Income or wealth of payer is taxable.
  • Examples: income tax, corporation tax, wealth tax etc.

Indirect Tax

  • Indirect tax is a tax that is collected by one person but actually born by another person.
  • An indirect tax is taxed on goods or services, which increases the price of a good or services.
  • The tax is actually paid by the end consumer with higher retail price.
  • Indirect taxes are taxed equally upon all taxpayers irrespective of income.
  • It is considered as regressive tax since all taxpayers whether rich of poor have to pay the same amount.
  • Indirect tax increases inflation
  • Imposed and collected from consumers.
  • Burden can be shifted.
  • Example:Purchase tax,Sales tax,Manufacturer tax and service tax.
Both the direct and indirect tax have merits and demerits. Direct taxes they are equal because they are charged on person, according to their ability to pay.Indirect tax includes price of the product and services and it has paid by every section of the society.

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