Tax is one of the primary sources of income for the government of any country. That is how the government funds infrastructure, education, and other social services. Paying taxes on time is every citizen’s duty.
Broadly, taxes can be divided into two types - direct and indirect. So if you want to know ‘what is direct and indirect tax’, read on. You will also find some examples of direct and indirect tax, which will help you understand them in greater detail.
As the name suggests, direct taxes are paid directly to the government by the public.
It is governed by the Central Board of Direct Taxes (CBDT)
They cannot be transferred to another entity or person
It depends on one’s income: if someone earns a low amount (as defined by the government), the tax imposed will be low or even nil
It helps reduce inequalities, as the taxes paid by the rich are used to create opportunities for people with lower income
There are certain disadvantages to direct tax. These are -
By using various fraudulent means, individuals may evade direct taxes
Most people consider this to be a burden as it has to be paid in lump sum each year
The paperwork involved in calculating the tax is difficult to understand for many taxpayers
Indirect taxes are levied on goods and services availed by consumers.
It is governed by the Central Board of Indirect Taxes and Custom (CBIC)
Amount collected through indirect tax will also reach the government but through an indirect path via multiple middlemen
They are collected by an intermediary from the end customer
It is then the responsibility of the intermediary to pass it on to the government
It is the same for everyone and does not depend on one’s income
Everyone pays it, even people who have low income and are exempt from paying direct taxes
It is easier to pay, as it is often included in the prices of commodities
No documentation or paperwork is required for its payment, as it doesn’t need to be paid separately
Just like direct tax, indirect taxes too have some disadvantages. They are-
These are considered to be regressive, as everyone, belonging to each and every income strata, needs to pay them at the equal rate
Indirect taxes increase the cost of living, as it leads to a rise in the price of goods, commodities, and services
Taxpayers are unaware that they are paying taxes as it is included in the price of commodities and services they avail
Now that it is clear what each type of tax means, let’s take a look at some examples of direct and indirect tax.
The following are the examples of direct taxes -
Income Tax - It is paid on income generated by an individual or a business
Property Tax - It is paid on property or land owned by an individual or a corporation
Capital Gains Tax - It is paid on capital gains made on sale of investments or property
On the contrary, the following are some indirect taxes in India-
Goods and Services Tax (GST) - This has encompassed several other taxes (like VAT, excise duty, etc.), and is the single indirect tax levied on goods and services
Customs Duty - It is levied on products purchased from foreign land that are being brought into India
It is the responsibility and duty of every citizen of the country to pay taxes. Taxes are immensely important for the economy and nation building. The government uses the tax money eventually to invest in defense, healthcare, and education to make the country prosperous.
So, never forget to pay your taxes in full!
Both VAT and GST are indirect taxes. Nowadays, GST has completely eliminated VAT, and it is only levied on some products containing alcohol.
TDS stands for Tax Deducted at Source and it is an indirect type of tax.
Both direct and indirect taxes need to be paid by everyone residing in a country. It is everyone’s responsibility and duty to pay their taxes on time.
The main difference between the direct and indirect tax is the way in which they are paid. Direct tax is paid once a year by the taxpayer, after calculating it, and submitting the paperwork. Whereas indirect tax is paid at the time of buying any product or services.
Indirect taxes are paid by every individual regardless of their income strata. But direct taxes are paid only by people whose income is above a specific slab, as mentioned by the IT department.
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