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Difference Between Direct Tax and Indirect Tax

Difference Between Direct Tax and Indirect Tax

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Difference Between Direct Tax and Indirect Tax

Everyone of us, had heard about tax, it is a compulsory financial obligation, payable to the government. But this definition is not sufficient for understanding the complete tax system. It has been mainly divided into two broad categories Direct tax and Indirect tax, which consists of different types of taxes in them. Come lets understand the meaning and the difference between Direct Tax and Indirect Tax.

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  1. Comparison Chart
  2. Definition
  3. Key Differences
  4. Similarities
  5. Conclusion

Comparison Chart

BASIS OF COMPARISONDIRECT TAXINDIRECT TAX
MeaningDirect tax is referred to as the tax, which is paid by the person to the government to whom it is levied and charged on the income and wealth of persons.Indirect Tax is referred to as the tax, which is paid by the taxpayer to the government indirectly, charged on goods and services.
BurdenThe person on whom it is levied bears its burden.The burden of tax can be shifted to another person.
TypesWealth Tax, Income Tax, Property Tax, Corporate Tax, Import and Export Duties.Central Sales tax, VAT (Value Added Tax), Service Tax, STT (Security Transaction Tax), Excise Duty, Custom Duty.
EvasionTax evasion is possible.Tax evasion is hardly possible because it is included in the price of goods and services.
InflationDirect tax helps in reducing inflation.Indirect taxes promotes inflation.
Levied onPersons, i.e. Individual, HUF (Hindu Undivided Family), Company, Firm etc.Consumers of goods and services.
NatureProgressiveRegressive

Definition of Direct Tax

A direct tax is referred to as a tax which is paid by the person to the government to whom it is levied, the burden of such tax cannot be shifted. The tax is progressive in nature i.e. it increases with an increase in income or wealth and vice versa. It levies according to the paying capacity of the person, i.e. the tax is collected more from the rich and less from the poor. The tax is levied and collected either by the Central government or State government or local bodies. The plans and policies of the Direct Taxes are being recommended by the Central Board of Direct Taxes (CBDT) which is under the Ministry of Finance, Government of India.

There are several types of Direct Taxes, they are:

  • Income Tax
  • Wealth Tax
  • Property Tax
  • Corporate Tax
  • Import and Export Duties

Definition of Indirect Tax

Indirect Tax is referred to as a tax which is paid by the taxpayer indirectly to the government, the burden of which can be easily shifted to another person. The tax is regressive in nature, i.e. as the amount of tax increases the demand for the goods and services decreases and vice versa.  It levies on every person equally whether he is rich or poor. The administration of tax is done either by the Central government or State government.

There are several types of Indirect Taxes, they are:

  • Central Sales tax
  • VAT (Value Added Tax)
  • Service Tax
  • STT (Security Transaction Tax)
  • Excise Duty
  • Custom Duty
  • Agricultural Income Tax

Key Differences Between Direct and Indirect Taxes

  1. The tax, which is paid by the person to whom it is levied is known as Direct tax while the tax, which is paid by the taxpayer indirectly is known as Indirect tax.
  2. The main difference between the direct and indirect tax is that the burden of direct tax cannot be shifted whereas the burden of indirect tax can be shifted.
  3. The evasion of tax is possible in case of direct tax, if the proper administration of the collection is not done, but the evasion of tax is not possible as the amount of tax is charged on the goods and services.
  4. The direct tax is levied on Persons, i.e. Individual, HUF (Hindu Undivided Family), Company, Firm etc. On the other hand, the indirect tax is levied on the consumer of goods and services.
  5. The nature of a direct tax is progressive, but the nature of indirect tax is regressive.
  6. Direct tax helps in reducing inflation, but the indirect tax sometimes helps in promoting inflation.

Similarities

  • Payable to government.
  • Penalty for non-payment.
  • Interest on Delayed Payment.
  • Improper administration can lead to tax avoidance or tax evasion.

Conclusion

Though both of the direct and indirect taxes has their merits and demerits. If we talk about direct taxes they are equitable because they are charged on people, according to the ability to pay and they are economical because their cost of collection is also less but it doesn’t cover every section of the society.

On the other hand, if we talk about indirect tax, they are easy to realise as they are included in the price of the product along with that it has a good coverage of every section of the society and one of the best advantages of the indirect tax is the rate of tax on harmful products is higher than the goods which are necessary for life but it frequently changes the demand of the consumer due to the changes in prices of goods and services.

Difference Between Direct Tax and Indirect Tax

IDT DR

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Difference Between Direct Tax and Indirect Tax

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