Differences between Direct Taxes and Indirect Taxes

Differences between Direct Taxes and Indirect Taxes

The main differences between direct taxes and indirect taxes are given in table.

Direct Taxes Vs Indirect Taxes

1. Meaning

Direct Taxes: If a tax levied on the income or wealth of a person is paid by that person (or his office) directly to the Government, it is called direct tax.

Indirect Taxes: If tax is levied on the goods or services of a person is collected from the buyers by another person (seller) and paid by him to the Government it is called indirect tax.

2. Incidence and Impact

Direct Taxes: Falls on the same person. Imposed on the income of a person and paid by the same person.

Indirect Taxes: Falls on different persons. Imposed on the sellers but collected from the consumers and paid by sellers.

3. Burden

Direct Taxes: More income attracts more income tax. Tax burden is progressive on people.

Indirect Taxes: Rate of tax is flat on all individuals. Therefore more income individuals pay less and lesser portion of their income as tax. Tax burden is regressive.

4. Evasion

Direct Taxes: Tax evasion is possible.

Indirect Taxes: Tax evasion is more difficult

5. Inflation

Direct Taxes: Direct tax helps in reducing the inflation.

Indirect Taxes: Indirect tax contributes to inflation.

6. Shiftability

Direct Taxes: Cannot be shifted to others

Indirect Taxes: Can be shifted to others

7. Examples

Direct Taxes: Income Tax, Wealth Tax, Capital Gains Tax, Securities Transaction Tax, Perquisites Tax.

Indirect Taxes: GST. Excise Duty.