Difference between Direct and Indirect Tax: Find Out How They Differ?

Satish Jalan | Last updated: 16 March 2021

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Quick Summary

Direct taxes are paid straight to the government based on income, aiming to reduce wealth disparities. Indirect taxes are levied on goods and services, collected by intermediaries, and ultimately paid by consumers, often encouraging savings. While direct taxes are progressive and fall on individuals or entities, indirect taxes are regressive and have a wider scope, affecting all members of society.

The central and state Government imposes direct and indirect taxes on individuals, consumers, firms, and companies. Every good taxpayer has to pay direct or indirect tax to the Government. Let’s understand the two kinds of taxes and find out the major differences between the two.

Definition

Direct Tax

Direct tax is a progressive tax that is paid directly to the government. The amount of tax to be paid by the taxpayer is calculated on the basis of her/his income and revenues in a financial year.

Indirect Tax

Indirect tax is a regressive tax that is charged on all goods and services. It is collected by an intermediary or service provider who bears the actual burden of the levy. The consumer usually bears the burden of indirect tax and pays it to the manufacturer or service provider.

Types

The different types of direct tax include Income tax, Corporate tax, Wealth tax, Gift tax, Estate duty, Expenditure tax, and Fringe benefits tax.

On the other hand, some types of indirect tax comprise Central Excise Duty, Sales tax, Customs duty, Securities transaction tax, Entertainment tax, Goods and services tax (GST), and others.

Advantages

Direct tax reduces inflation and disparities in wealth and income.
Indirect tax encourages savings and investments.

Mode of progress

Direct tax is progressive and ensures equal distribution of income and wealth among the different strata of society.
Indirect tax is regressive and gives rise to inequalities.

Burden

Direct Tax is imposed on income or profits.
Indirect Tax is charged on goods and services

Coverage

The Direct Tax covers an entity or individual.
The Indirect Tax is wider in scope. All the members of the society are liable to pay Indirect Tax.

Taxpayer

The burden of the Direct Tax falls on individuals, HUFs, firms, and companies.
Indirect Tax is charged on consumers using a particular product or service. It is included directly in the price of the commodity.

Applicability

Direct tax is pertinent to a taxpayer only based on her/his income or earnings.
Indirect tax is relevant to every phase of the production-distribution chain.

Transferability

When it comes to Direct Tax, it can only be paid by the taxpayer only and cannot be transferred to anyone else.
On the other hand, Indirect Tax can be transferred from one taxpayer to another.

Administrative Cost

The Direct Tax has higher administrative costs and many exemptions.
Indirect Tax has lesser administrative costs due to stable and convenient collections.
Both Direct and Indirect Tax are vital for our nation and its overall economy.

Hopefully, the blog will help you understand the basic differences between the two kinds of taxes.

FAQ :

Direct tax is a progressive tax paid directly to the government, calculated based on an individual's or entity's income and revenues in a financial year.

Indirect tax is a regressive tax charged on goods and services. It's collected by an intermediary or service provider, with the consumer usually bearing the actual burden.

Examples of direct taxes include Income tax, Corporate tax, Wealth tax, Gift tax, and Estate duty.

Examples of indirect taxes include Central Excise Duty, Sales tax, Customs duty, GST, and Entertainment tax.

No, direct tax can only be paid by the taxpayer and cannot be transferred to anyone else.

The consumer usually bears the burden of indirect tax, paying it to the manufacturer or service provider.