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Difference between Direct Tax and Indirect Tax

All of us pay the taxes in one way or the other. The people who are earning pay such taxes. There are various kinds of taxes such as estate tax, house tax, excise tax, sales tax, etc. Now, what is a tax? Well, a tax can be defined as a charge imposed by the government on various services and products. The government imposes such taxes so that the government expenditures and funds are funded. A person who doesn't pay the tax is liable for punishment. Taxes are important as the government utilizes these funds to develop the nation in certain ways. Income tax, corporate tax, and capital tax are the most important forms of taxes. The main aim of these taxes is to provide funding to the government for their projects. Various projects of the government are started and completed because of the taxes paid by us. Now, there are two significant kinds of taxes, namely the indirect tax and the direct tax. So, let us discuss them separately.

Direct Tax

Direct tax is defined as the tax paid to the government directly. Direct tax is generally imposed on a property or a person. The usual example of direct tax is income tax. Income tax is imposed on the taxpayer and is directly paid to the government. These taxes cannot be forwarded to other people. Income tax, property tax, and taxes on assets are the major kinds of direct taxes. There are many pros and cons related to direct tax. The significant benefit of the direct tax is that it is very productive. The income tax given to the government changes the national wealth heavily.

These taxes are imposed on the taxpayers based on their economic condition. This encourages social equality among people.

Indirect Tax

Indirect taxes are defined as taxes that can be transferred to other people. Indirect taxes are levied on the people who undertake certain expenses. Indirect taxes are paid by the customer buying a product. The supplier collects these taxes and pays them to the government. The most common kinds of indirect taxes are sales tax, entertainment tax, excise tax, etc. For instance, when the price of the product increases, taxes are included in it. The increased price means that the product is inclusive of taxes. There are certain advantages and disadvantages regarding indirect taxes. But before that, let us look at some of the significant contrasting points between direct and indirect taxes.

1. Direct tax is defined as the tax that is directly paid to the government. On the other hand, an indirect tax is defined as the tax paid to the intermediary rather than the government.
2. A direct tax cannot be transferred to other people. Indirect tax can be forwarded to other people.
3. Direct tax is levied on the property or the person. Indirect tax is levied on the people incurring specific products and services.
4. Direct tax is incurred on the income and profits obtained by the person. An indirect tax is imposed on all services and products.
5. The businessmen pay the direct taxes. The customers pay the indirect taxes.
6. Direct tax is based on income and profits of a person. The indirect tax is the same and is levied on everyone.
7. Tax evasion is a possibility in direct taxes. No tax evasion occurs in indirect taxes.
8. The direct tax is progressive. The indirect tax is regressive.
9. Direct tax is difficult to collect from the taxpayers. Indirect tax is easy to collect from the taxpayers.
10. Income tax, transaction tax, and corporate tax are significant kinds of direct taxes. GST, sales tax, excise tax, and entertainment tax are the major kinds of indirect tax.

So, these are the significant contrasting points between indirect and direct taxes. Both direct and indirect taxes are an essential part of the government's revenue. It is necessary to pay these taxes because, directly or indirectly, it increases the national wealth. Now, there are certain pros and cons associated with these taxes. So, let us discuss them briefly.

Advantages of Direct Taxes

  1. Inflation: Direct taxes help in curbing inflation. The demand for the products and services is reduced in this kind of tax.
  2. Equitable: The other name of direct taxes is equitable, i.e., it is directly related to the income of the person. The people with low income pay less taxes and vice-versa.
  3. Inequality: The direct tax is a method of reducing inequality among people. People with higher income pay high taxes that are used for various government projects like eradicating poverty, improving the standard of living of the poor, etc.

Disadvantages of Direct Taxes

  1. Burden: Direct tax can be considered as a burden by the taxpayers because of the income tax that has to be paid every year. The process of documentation is also difficult and time-consuming.
  2. Evasion: Tax evasion is a possibility in direct taxes. But the government has issued strict guidelines due to which it cannot take place. Still, there are certain people who undertake fraudulent practices to avoid taxes.
  3. Investment: Direct taxes can hinder the investments that a person wants to make. Direct taxes like security tax, capital tax, etc., restrain investments.

Advantages of Indirect Taxes

  1. Contribution: The national wealth of the country is made when all the people are contributing towards its development. In indirect taxes, the poor and rich both contribute to the economic welfare of the nation.
  2. Convenient: Indirect taxes are much more convenient as compared to direct taxes. Indirect taxes are imposed on people incurring any kind of expense like sales, entertainment, etc. The taxpayers do not have to pay a high amount as that in direct taxes.
  3. Easy Collection: There are no complex procedures associated with indirect taxes. Therefore, they are easy to collect and pay to the government.

Disadvantages of Indirect Taxes

  1. Regressive: Indirect taxes are of regressive nature. The indirect tax is not equitable, i.e., everybody has to pay it. Sometimes people with low income are not able to pay these taxes.
  2. Expensive: The indirect taxes imposed on goods and services are high. For instance, if a product has increased in price, then it means that the indirect tax has been included in the product.

So, these are some of the pros and cons associated with direct and indirect taxes. It is essential to note that both direct and indirect taxes must be paid by the people as it increases the nation's wealth. Moreover, the government uses these taxes to develop the economy. Thus, both direct and indirect taxes are an essential part of the government revenues.

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