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Differences Between Direct And Indirect Tax

We are liable to the Indian govt. and paying tax is paying off that liability.

In the scenario where the introduction of GST tax in India has taken all the attention, it evokes our need to know even more about the tax systems and types of taxes.

Tax is nothing but an obligation for the citizens of a nation on their incomes, goods- services, and activity. The tax is considered an obligation as it’s the core source of revenue to the government of any of the countries. There are two types of tax system direct and indirect taxes.

Direct Tax

These are the form of taxes which is directly paid to the central and state government by the people levied. The burden of paying direct tax cannot be shifted to another person as the name suggests it, it is to be directly paid to the central or state govt.

Types of direct taxes in India :

  • Income Tax: Levied on and paid by the same person according to tax brackets as defined by the income tax department stating the tax payable limits on the basis of higher income.
  • Corporate Tax: for companies and corporations on their profits.
  • Wealth Tax: Levied on the value of the property that a person holds.
  • Gift Tax: for an individual receiving the taxable gift pays tax to the government.
  • Fringe Benefits Tax: Paid by an employer that provides fringe benefits to employees, and is collected by the state government.

Indirect tax

Unlike a direct tax, the burden of the tax can be shifted onto others, or consumers specifically on the goods and services they are availing them. Indirect taxes are paid to the government within the chain which includes the consumers and retailers.

A current example for this would the GST tax which consumers are paying while availing services and buying goods. GST is the sum of all the different taxes like VAT, Entertainment tax, etc.; payable to both the state as SGST and to the central government as CGST.

Both taxes are paid to the government directly and indirectly. Not paying taxes leads to the penalty too whereas delayed payment results in the fine payment. Improper administration of tax collection can lead to evasion of taxes affecting the economy. It can still be tedious to differentiate between the two.

Here are the top 5 differences between direct tax and indirect tax

1. Possibility of Tax Evasion

If the administration process for the collection of the direct tax gets improper or malfunctioned then there is a possibility of tax amount getting evaded. Consequently there’ll be mistake in the stats of the collection as it is imposed taking availability of assets as basis determining that what possible amount can heshe will be able to pay whereas there is no such risk involved in the collection of indirect taxes as they imposed on the purchase of goods and services and taken immediately before availing and buying the services and goods respectively.

For e.g.- manipulations made by the person or an organization in the financial documents showing lesser income than actual can result in the tax valued lesser than what actually it should be and there is no such issue involved with the collection of the indirect tax as they are collected immediately.

2. Inflation

Indirect tax causes inflation in the economy as its mere an additional charge over the consumer goods and services, therefore, making them costlier than their actual price. On the other hand, the direct tax may result in reducing inflation as it is paid annually and does not cause any price hike for availing any kind of goods and services.

For e.g.- buying a pizza from Domino’s costing Rs. 99 in the TV commercial but the franchise is charging Rs. 130 for the same as they are including the amount of GST for both state and central government, making pizza expensive than its actual cost.

3. Fixation of the tax to be charged

The direct tax is determined on the basis of a person’s or organization’s ability to pay it according to the revenue they’ve earned during a financial year. For instance, the income tax paid by a person will be based on his actual income during an accounting year as guided within the parameters of the tax department guidelines. There’s no such thing in the indirect tax, they are simply charged on the MRP of the goods purchased and services availed.

4. Time of payment

The direct tax is paid at the end of the financial year after ascertaining the assets and liabilities of a person or organization, whereas indirect taxes are collected immediately at the time of purchasing goods and rendering of any of the services like educational, health, etc.

5. Nature of tax

The direct tax is progressive in nature as the income of a person tends to rise after a few years and therefore the tax charge on that will also be likely to rise with that. The nature of an indirect tax, on the other hand, is regressive as the fixed amount of goods and services have a certain % of the tax to be paid on it, therefore there are no chances of it getting a rise.

Conclusion

Both direct and indirect taxes are important for the economy to grow and also for the government as taxes are the major source of their revenue out of which it formulates the budgets and policies for different taxes of an economy.

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