Direct and Indirect Tax are two types of taxes imposed on the property and income of individuals and companies, which is paid by them directly and indirectly to the government respectively.
Table of Content
What is Direct Tax?
Tax that is imposed on the property and income of individuals and companies, and is paid by them directly to the government is known as Direct Tax. For example, Corporate Tax, Income Tax, Death Duty, Capital Gains Tax, etc. The features of Direct Tax are as follows:
- Direct Tax is imposed on companies and individuals.
- These taxes have a direct impact on the income level and purchasing power of people and also help in changing the level of aggregate demand in the economy.
- The liability to pay tax and the actual burden of the tax lie on the same individual. It means that one cannot shift the burden of paying taxes on others. For example, Income Tax tax is a tax for which the liability to pay the tax and the actual burden lies on the same person to whom the tax is levied.
- Direct Tax Systems can be Progressive, Regressive, and Proportional.
What is Indirect Tax?
Tax that has an impact on the income and property of individuals and companies through their consumption expenditure is known as Indirect Tax. For example, GST (Goods and Services Tax). The features of Indirect Tax are as follows:
- Indirect Tax is imposed on goods and services.
- The liability to pay tax and the actual burden of the tax lie on different persons. It means that one can shift the burden of paying taxes on others. For example, the liability to pay GST to the government is on the seller. However, the actual burden of the tax lies on consumers because the sellers collect the tax from them.
- Indirect Taxes can be avoided. It is compulsory to pay indirect taxes. However, one can avoid indirect taxes by not entering into the transactions which call for these taxes.
- For example, one can purchase Khadi Gram Udyog items to avoid paying taxes, as there is no indirect tax on khadi items.
Difference between Direct Tax and Indirect Tax
|
Basis |
Direct Tax |
Indirect Tax |
|---|---|---|
|
Meaning |
These are those taxes whose final burden falls on the person who makes the payment to the government. | These are those taxes that are paid to the government by one person, but their burden is borne by another person. |
|
Incidence and Impact of Tax |
When the incidence and impact of the tax lie on the same person, it is called direct tax. | When the incidence and impact of the tax lie on a different person, it is called an indirect tax. |
|
Shift of Taxation |
The impact of direct taxation can not be shifted. | The impact of indirect taxation can be shifted. |
|
Nature |
These are generally progressive in nature. | These are generally regressive in nature. |
|
Effect on the market price |
These taxes do not affect the market price of the product. | These taxes have a direct and positive effect on the market price of the product. |
|
Example |
Income Tax, Wealth Tax, Corporation Tax, etc. | Goods and Services Tax (GST). |
How to Determine Whether a Tax is Direct or Indirect?
- In the case of direct tax, the burden can not be shifted to another. For example, income tax is a direct tax since it has an impact and incidence on the same person.
- In the case of indirect tax, the burden can be shifted to another. For example, Goods and Service Tax is an indirect tax since it has an impact and incidence on different persons.
Question:
Classify the following items as Direct and Indirect Tax:
- Capital Gains Tax
- Goods and Services Tax
- Corporation tax
- Income Tax
Answer:
1. Capital Gains Tax: It is a direct tax as the impact and incidence of the tax lie on the same person.
2. Goods and Services Tax: It is an indirect tax as the impact and incidence of the tax lie on different persons. Hence, the burden of the tax can be shifted.
3. Corporation Tax: It is a direct tax as the impact and incidence of the tax lie on the same person.
4. Income Tax: It is a direct tax as the impact and incidence of the tax lie on the same person.