However, both types of taxes are important for the government as taxes include the major part of revenue for the government. Key differences between Direct Tax & Indirect Tax are: The burden of tax cannot be shifted in case of direct taxes while burden can be shifted for indirect taxes. They surveyed and studied many taxpayers.
Direct Tax is a very straightforward method of taxation. Direct taxes have the following characteristics which distinguish them from indirect methods of taxation.
- It is imposed upon eitheran individual (which can include a person, or even an individual organization or company) or else upon some sort of property (this can include land, or even income such as wages).
- These taxes are paid to the government directly by the person who is bearing their burden. For example, property tax is paid by the owner of the property.
- The burden of direct taxes cannot be shifted. This is an important feature of all direct taxes, because it means that the taxpayer cannot shift the burden onto anyone else. Hence if a person has to pay income tax on the income they have earned, then they must pay this amount out of their own pocket. There is no way of shifting the burden onto anyone else. No third person can be asked to pay the tax or bear the burden of the tax. The person earning the income is the only person who can be asked to bear the burden of the income tax. Hence a direct tax is often defined as one whose burden cannot be shifted to anyone other than the taxpayer.
- Direct taxation applies to all individuals. There is no way in which one can actively avoid direct taxes, or consciously make decisions so as not to pay such taxes. Direct taxes are mostly unconditional.
- Direct taxes are mostly progressive, meaning that they are levied according to the financial status of a person. In Income tax, people with higher incomes are charged higher percentages of tax while those with extremely low incomes are often exempted from tax altogether.
Indirect Taxes are not as straightforward as direct taxes. They have the following characteristics which can distinguish them from direct taxation.
- Indirect taxes are not imposed upon individuals or property, but rather upon the transactions between these entities. For example, a sale made between two companies is a transaction which can attract indirect taxes. But this is not the same as the companies themselves paying direct taxes.
- Indirect taxes are not paid by the person who is bearing the burden. For example, VAT is paid by the manufacturer but the actual burden is on the final consumer who buys the product.
- The burden of indirect taxes can be shifted away from the taxpayer. For example, even though the manufacturer is liable to pay VAT whenever they sell a product, they need not pay this amount out of their own profits. Rather, the manufacturer will collect the VAT amount from the consumer by adding it to the price of the goods. He will then pay the same to the government. Hence even though the manufacturer is essentially the taxpayer, he is not bearing the burden and is shifting it to the consumer.
- Indirect taxation does not apply to all individuals. Since it is a tax on transactions, the tax will not arise unless the transaction takes place. Hence if one does not participate in these transactions then they will never have to pay indirect taxes.
- Indirect taxes are not progressive. For example, the amount of VAT charged from a consumer will always be the same irrespective of the financial situation and earnings of the consumer himself. A poor man pays the same amount of VAT as a rich man.
The biggest source of Direct Taxes in India is Income Tax. This is a tax charged from individuals, on the amount of income that they earn. The percentage of income taxed depends upon the level of income of the person; people who earn more have to pay a larger portion of their earnings as income tax. Income Tax is also a central tax and hence is paid to the central government of India. Corporate Sector tax is also an important source of direct taxes since huge corporations make large profits and are an important source of taxation income for the government. The taxes levied on companies are also direct taxes.
The major source of Indirect taxes in India is VAT or Sales Tax. These are taxes levied on specific transactions and the rates of the same are fixed by the government. They are State taxes and hence are paid to the respective state where the transaction takes place.
Author: This blog is written by Ms. Sweta Pochiraju a passionate blogger & intern at Aapka Consultant.
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