Difference Between Direct tax and Indirect Tax

Introduction

In India, the Constitution grants the government the right to impose taxes, dividing this power between the state and central governments. The Parliament or the State Legislature must issue a law to accompany all taxes charged in India. The two most common types of taxes are indirect and direct taxes. Furthermore, all taxes in India must be preceded by legislation passed by both the Parliament and State Legislatures.

What is a Direct tax?

Individuals or legal entities pay direct taxes directly to the government. The CBDT (Central Board of Direct Taxes) oversees these taxes. No one can transfer direct taxes to another individual or company.

Advantages of Direct tax

• Equitable – Indirect tax the individual who earns less income will pay less, while the one who is earning higher income will pay higher tax which will bring equality and relief to the less earner.
• Reduces inequalities – The government collects tax from higher earners to help those in need, which will reduce inequalities.
• Curbs inflation – With the increase and decrease in the direct tax rate government controls the inflation in the nation. If there is inflation then the increase in the direct tax rate will affect the buyer’s purchasing power which will help in controlling inflation.

Disadvantages of Direct tax

• Restrain investment – Many people avoid investing because of direct taxes such as capital gain tax and security transaction tax. Direct taxes, in a sense, stifle investment.
• Considered a burden – Many consider taxpayers a burden because they must pay direct taxes, like income tax, in a single lump sum each year. Furthermore, the documentation procedure is inherently difficult and time-consuming.

What is an Indirect Tax?

Indirect taxes are the tax which is paid to the government at the time of purchasing any product or any services. unlike direct taxes, indirect taxes are not imposed on the income and profit of an individual or a company. In basic terms, when a buyer purchases a product or service, the excess amount levied by the supplier to the buyer is referred to as indirect tax. Initially, there are 7 types of indirect taxes in India that are excise duty, VAT (Value Added Tax), Service Tax, Entertainment Tax, Custom duty, and others, which are now collectively termed as Goods and Service Tax (GST) which is imposed by the government.

Advantages of Indirect tax

• The collection is easy – Unlike direct taxes, you do not need to complete any paperwork or complicated procedures to pay indirect taxes. When you purchase goods or services, you pay the tax immediately
• Convenience – In contrast to direct taxes, which you usually pay in a single payment, you pay indirect taxes, such as GST, in smaller amounts. When you buy goods or services, the price includes a small amount of GST, making it more convenient for taxpayers to pay

Disadvantages of Indirect tax

• More expensive – Individual needs to pay an excessive amount at the time of buying products and services, which makes the product and services more expensive.
• Regressive –  Indirect taxes are well-known for being regressive. They are not equitable, even though they ensure that everyone pays taxes regardless of their income. Indirect taxes are levied at the same rate on people of all income levels.

Difference Between Direct tax and Indirect Tax

Conclusion

Both direct and indirect taxes serve different purposes. Differences in direct and indirect taxes are equitable since they are imposed on individuals based on their ability to pay. They are also cost-effective because of lower collection costs.