What is the difference Between Direct Tax and Indirect Tax?

What is the difference Between Direct Tax and Indirect Tax?

Tax is defined as a financial obligation, it is a fee levied by the government of the respective country on income, goods, service, and activity. The main reason for imposing taxes is that they are the main source of revenue to the government.

Taxes are generally classified as a direct tax and indirect tax, wherein the former is charged directly on the income or wealth of the person and other is imposed on the price of goods and services.

Administration of tax is done by the central government or the state government

Direct Tax: referred to as the tax, levied on person's income and wealth and is paid directly to the government.

Followings are some of direct taxes:

·        Income tax

·        Wealth tax

·        Property tax

·        Corporate tax

·        Import and Export duties

Indirect Tax: referred to as the tax, levied on a person who consumes the goods and services and is paid indirectly to the government.

Followings are some of direct taxes:

·        GST

·        Excise

·        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 income and wealth whereas the indirect tax is levied on a person who consumes the goods and services.

2.    The burden of the direct tax is transferable and in indirect tax is non-transferable.

3.    The incidence and impact of direct tax falls on the same person, but in the case of indirect tax, the incidence and impact falls on different [persons.

4.    The evasion of tax is possible in case of a direct tax if the proper administration of the collection is not done, but in the case of indirect tax, the evasion of tax is not possible since the amount of tax is charged on the goods and services.

5.    The direct tax is levied on Persons, i.e. Individual, Company, Firm, etc. and in a indirect tax is levied on the consumer of goods and services.

6.    The nature of a direct tax is progressive, but the nature of the indirect tax is regressive.

7.    Direct tax helps in reducing the inflation, but the indirect tax sometimes helps in promoting the inflation.

8.    Direct tax is collected when the income for the financial year is earned or the assets are valued at the date of valuation. As against this, the indirect taxes are collected, when the purchase or sale of goods or services are rendered.