Direct And Indirect Taxes

All the taxes imposed by the government come under indirect and direct tax and individual and organization need to pay as per their income and authorities policies. Tax that individual pay directly to government and it will not be possible to transfer this tax to other person. So it can be said if are in criteria of tax pay then you have to deal with this burden of tax payment.

In case of direct tax, it is east to transfer this tax to other person. One of the best examples of this tax is value added tax (VAT) which includes all sales and goods related tax in single tax. Firstly this tax is imposed on service provider or manufacturer of that product then these persons transfer taxes in customers along with maximum amount so when they will buy or use that service will pay that amount decided by the service provider.

Direct and indirect taxes are equally responsible and help in revenue generation for central and state government and allow them to launch policy that will make economy of our country much stronger and capable. After implementation of goods and sales tax (GST) economy will be much capable and risk free.

Indirect Vs. Direct Tax

All eligible tax payers pay their tax directly to government without any excuses. Only tax payer will be responsible and eligible to pay this tax because it is not possible to transfer this burden to other person. Both sate and central government collect tax from all tax payers as per their policy and criteria. Direct tax is combination of following taxes:

1. Fringe Benefit Tax: Paid by an employer or company that provides fringe benefits to employees, and is collected by the state government. Indirect tax, as we all know that include those taxes where the responsibility to pay the tax depends on a person who then shifts the tax burden to another individual.
2. Estate Duty: Paid by an individual in case of interstate transactions.
3. Income Tax: Imposed on and paid by the same person according to tax brackets as defined by the income tax department.
4. Wealth Tax: Levied on the value of property that a person holds.
5. Gift Tax: An individual receiving the gift worth more than INR 50,000 comes under taxable gift and pays tax to the government.

Major types of direct tax are specified below:

1. Service Tax: Charged on services rendered to consumers, such as food bill in a restaurant.
2. Excise Duty: Paid by the manufacturer who shifts the tax amount or charges to retailers and wholesalers.
3. Entertainment Tax: Liability is on the cinema owners, who transfer the burden to cinemagoers.
4. Sales Tax: Paid by a retailer or shopkeeper, who then shifts the tax amount to customers by charging sales tax on goods and services.
5. Custom Duty: Import duties imposed on goods from outside the country ultimately paid for by users and retailers.

One of the major factors that differentiate these two taxes is facility to transfer tax towards other person. There are several direct and indirect tax that government imposes on various products and persons.

Major Difference between Indirect and Direct Tax

1. Direct taxes are collected only from people in respective tax brackets while Indirect taxes have a wider coverage as all members of the society are taxed through the sale of goods and services.
2. Indirect tax is ultimately paid for by the end consumer of goods and services whereas Direct tax is levied and paid for by individuals, Hindu undivided Families (HUF), firms, companies etc.
3. Direct taxes, on the other hand, reduce savings and discourage investments. Indirect taxes are oriented more towards growth as they discourage consumption and help enhance savings.
4. The burden of tax can be shifted in case of indirect taxes while burden cannot be shifted for direct taxes.
5. Direct taxes have many exemptions and involve higher administrative costs while Indirect taxes involve lesser administrative costs due to convenient and stable collections.
6. Indirect taxes cannot be evaded as the taxes are charged on goods and services while Lack of administration in collection of direct taxes can make tax evasion possible.
7. Indirect taxes enhance inequalities and are considered to be regressive while Direct taxes help in reducing inequalities and are considered to be progressive.
8. With intention of helping the country in social context additional indirect taxes imposed on harmful commodities such as cigarettes, alcohol etc. dissuades over-consumption.
9. Collection is scattered across parties and consumers preferences of goods is distorted from the price variations due to indirect taxes, where Direct taxes have better distribution effects than indirect taxes as direct taxes put lesser burden over the collection of amount than indirect taxes.
10. Indirect tax may enhance inflation, whereas direct tax can help in reducing inflation.

Criteria of direct tax approved and finalized by the government as per the income of taxpaying person. Government holds the right to collect tax from all paying individuals to boost the economy and bring down inflation rate. On the other hand indirect tax brings stability collection of government and allows taking effective financial decision. Both indirect and direct are quite important for the economy of the country. Above describe taxes collected by the state and central government and quite integral part of revenue of country.