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Difference Between Direct Tax and Indirect Tax
Direct tax refers to all those taxes the person directly bears, and the incidence of such tax does not pass to the other person. In contrast, indirect tax refers to all those taxes not directly borne by the person, and the incidence of such tax passes to the other person, i.e., to the end consumer.
Taxes are sources of revenue for the government, which the government charges on individuals or corporations. When a corporation makes a profit or an individual earns money over a limit, they need to pay taxes to the government. Taxes can broadly divide into two types; they are direct and indirect tax.
What Is Direct Tax?
The government directly collects direct taxes from individuals or companies. A direct tax is imposed on individuals, and the liability to pay that tax is on that individual; the individual cannot pass on that tax to any other individual. In a way, the direct tax is relatively less of a burden on an individual as the quantum of the payment is decided by the income level of that individual.
If an individual has less income, the direct tax paid is also less and vice versa. One problem with direct tax in India from the government's standpoint, is that there are chances of direct tax evasion by individuals or organizations. The reason behind that is that the administrative cost to collect direct tax is comparatively higher, resulting in an inability to map every individual effectively. The different types of popular direct taxes are income tax, wealth tax, corporation tax, property tax, gift tax, and inheritance tax.
What is Indirect Tax?
Indirect taxes, on the other hand, are taxes collected by the manufacturers or sellers of goods or services and paid to the government. The various intermediaries pass that tax to the consumers, which is paid to the government first. The chances of evading indirect taxes are lesser than direct taxes, as, in the case of indirect taxes, the taxes are already embedded in the prices of goods and services sold.
The different types of indirect taxes are central excise, central sales tax (CST), service tax, customs duty, octroi, value-added tax (VAT), and securities transaction tax (STT).
Direct Tax vs. Indirect Tax Infographics
Key Differences
The key differences are as follows –
- Direct tax is that tax that is imposed on an individual and paid by an individual, whereas the taxes the taxpayers indirectly pay are known as Indirect tax. An individual pays a direct tax on his wealth and income, but the consumers pay indirect tax to the government.
- Direct tax liability is solely on the individual, and it cannot be passed on to any other entity. In contrast, indirect taxes are passed on to the consumers by the manufacturers.
- The direct tax creates fewer burdens on an individual since the deciding factor is the individual's income. But indirect taxes create more burden as it is not related to income but depends on purchasing goods and services.
- A direct tax can be evaded if there is a lack of proper administration of the collection procedure, but indirect tax cannot be avoided.
- Direct tax is very much progressive, but indirect tax is regressive.
Direct Tax vs. Indirect Tax Comparative Table
| Basis | Direct Tax | Indirect Tax |
|---|---|---|
| 1. Definition | They are the kind of taxes directly collected by the government from individuals or companies. A direct tax is imposed on individuals, and the liability to pay that tax is on that individual; the individual cannot pass on that tax to anyone else. | They are the kind of taxes directly collected by the government from individuals or companies. A direct tax is imposed on individuals, and the liability to pay that tax is on that individual; the individual cannot pass on that tax to anyone else. |
| 2. Nature | Direct taxes are the liabilities of the individual or companies and cannot be passed on to other entities. | Direct taxes are the liabilities of the individual or companies and cannot be passed on to other entities. |
| 3. Cost Involved | The administrative cost of collecting direct taxes is relatively higher. | The administrative cost of collecting direct taxes is relatively higher. |
| 4. Burden | Direct taxes relatively put fewer burdens on an individual as the quantum of the payment is decided by the income level of that individual. If an individual has less income, the direct tax paid is also less and vice versa. | Direct taxes relatively put fewer burdens on an individual as the quantum of the payment is decided by the income level of that individual. If an individual has less income, the direct tax paid is also less and vice versa. |
| 5. Chances of Evasion | Since the cost involved in collecting direct taxes is higher, it becomes difficult for the government to bring everyone under the purview of tax. Hence, a lot of individuals and businesses end up evading direct taxes. | Since the cost involved in collecting direct taxes is higher, it becomes difficult for the government to bring everyone under the purview of tax. Hence, a lot of individuals and businesses end up evading direct taxes. |
| 6. Types of Taxes | The different types of popular direct taxes are income tax, wealth tax, corporation tax, property tax, gift tax, and inheritance tax. | The different types of popular direct taxes are income tax, wealth tax, corporation tax, property tax, gift tax, and inheritance tax. |
Final Thought
If we compare the taxes, both have their own sets of positives and negatives. Indirect taxes are easily collected since the manufacturers or sellers pass them on to the consumers, who have to pay these taxes if they purchase goods and services essentially.
Direct taxes are relatively harder to collect if there is no proper collection process and are entirely dependent on the individual's income level.
