direct tax and indirect tax

Difference between direct tax and indirect tax and their types

Tax

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Every day, you use services and products that are subject to some form of taxation. Whether it be getting to work by paying a toll fee, purchasing groceries for the week, buying clothes for the new season, or dining out with friends, you pay different types of taxes in some form.

Taxes are the backbone of any economy, ensuring infrastructure, national security, and social services can be funded. Being a responsible citizen of the country, it is essential to not just pay taxes but to understand the different types of taxes. These types can be broadly classified into two categories, direct and indirect tax. Here is a detailed look at both types of taxes.

Explaining direct tax 

A direct tax is a tax that is levied directly on individuals or businesses. The taxpayer is responsible for calculating, reporting, and paying the tax directly to the government& use can go for ELSS to save your tax. This type of tax is non-transferable because it cannot be passed on to someone else. Direct taxes are usually progressive in nature, which means that they increase with rising incomes or assets.

Explaining indirect tax 

An indirect tax is a tax that is imposed on goods or services rather than individuals or businesses directly. Indirect taxes do not depend on the current income tax slab of an individual and the tax rate is the same for everyone.

 Major types of direct taxes

Examples of direct taxes include but are not limited to:

  • Wealth tax – Levied on the total/market value of owned assets
  • Property tax – Levied on real estate
  • Income tax – Levied on individuals’ annual income in a financial year. Different income tax deduction exist to cover the taxes levied on individuals’ income in a financial year
  • Corporate tax – Levied on corporates, businesses
  • Capital gains tax – Applied to profits generated from the sale of assets such as stocks, mutual fund investment, or property

Major types of indirect taxes

Examples of indirect taxes include but are not limited to:

  • Value Added Tax (VAT) – Imposed on products at each stage, from manufacturing to distribution
  • Goods and Services Tax(GST)– Levied on goods and services across India
  • Customs duty – An indirect tax that governments charge on imported goods entering their country
  • Excise duty – Levied by the government for the production, sale, or licence of specific goods

Direct tax advantages

  • Helps establish social and economic balance – Direct tax allows the government to ensure that those with higher incomes contribute their fair share to public services without putting too much strain on others who may not be able to pay as much.
  • Development – The tax collected can be used to improve public transportation, infrastructure, access to education, and more, which all contribute to a stronger overall economy.
  • Certainty –Direct tax provides a sense of certainty in terms of the amount of tax to be paid to both the taxpayer and the government.

Indirect tax advantages 

  • Equal contribution– Indirect tax can be applied uniformly across all goods and services— providing a relatively equitable form of taxation for everyone involved in buying and selling goods or services.
  • Unavoidable tax – Indirect taxes are generally charged on the goods and services consumed, which makes them an easy way for governments to collect revenue. This type of tax is also difficult to evade.
  • Convenience – Because they are paid in small amounts, indirect tax is conveniently collected making the tax paying and collecting processes easier.

Closing thoughts

While direct and indirect taxes are quite different, they both serve an important purpose: contributing to the development of the nation. So, while you should make use of the various deductions under 80C whenever possible, do remember to pay your taxes on time each year.

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