25/06/2017 Difference Between Direct Tax and Indirect Tax (with Similarities and Comparison Chart) - Key Differences

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Di erence Between Direct Tax and Indirect Tax

November 27, 2014 By Surbhi S 5 Comments

Tax is defined as a financial obligation, it is a fee levied by the government of the

respective country on income, goods, and activity. The main reason for imposing
taxes is that they are the main source of revenue to the government. Taxes are
broadly classified as a direct tax and indirect tax, wherein the former is charged
directly on the income or wealth of the person, while the latter is imposed on the
price of goods and services.

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In the case of a direct tax, the taxpayer is the person who bears the burden of it.
Conversely, in the case of an indirect tax, the taxpayer, shifts the burden on the
consumer of goods and services and that is why the incidence falls on different
persons. Come, lets take a read of the article, which gives you a clear
understanding of the difference between a direct tax and indirect tax.

Content: Direct tax Vs Indirect Tax

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

Comparison Chart

BASIS FOR
DIRECT TAX INDIRECT TAX
COMPARISON

Meaning Direct tax is referred to as Indirect Tax is referred to as the

the tax, levied on person's tax, levied on a person who
income and wealth and is consumes the goods and services
paid directly to the and is paid indirectly to the
government. government.

Nature Progressive Regressive

Incidence and Falls on the same person. Falls on different person.

Impact

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BASIS FOR
DIRECT TAX INDIRECT TAX
COMPARISON

Types Wealth Tax, Income Tax, Central Sales tax, VAT (Value
Property Tax, Corporate Added Tax), Service Tax, STT
Tax, Import and Export (Security Transaction Tax),
Duties. Excise Duty, Custom Duty.

Evasion Tax evasion is possible. Tax evasion is hardly possible

because it is included in the
price of the goods and services.

Inflation Direct tax helps in Indirect taxes promotes the

reducing the inflation. inflation.

Imposition and Imposed on and collected Imposed on and collected from

collection from assessees, i.e. consumers of goods and services
Individual, HUF (Hindu but paid and deposited by the
Undivided Family), assessee.
Company, Firm etc.

Burden Cannot be shifted. Can be shifted

Event Taxable income or wealth Purchase/sale/manufacture of

of the assessee goods and provision of services

De nition of Direct Tax

A direct tax is referred to as a tax levied on persons income and wealth and is paid
directly to the government, the burden of such tax cannot be shifted. The tax is
progressive in nature i.e. it increases with an increase in the income or wealth and
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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 people. The tax is levied and
collected either by the Central government or State government or the 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, such as:

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

De nition of Indirect Tax

Indirect Tax is referred to as a tax charged on a person who consumes the goods
and services and is paid indirectly to the government. The burden of tax can be
easily shifted to the 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 the State
government.

There are several types of Indirect Taxes, such as:

Central Sales Tax

VAT (Value Added Tax)
Service Tax
STT (Security Transaction Tax)
Excise Duty
Custom Duty
Agricultural Income Tax

Key Di erences Between Direct and Indirect Taxes

1. The tax, which is paid by the person on whom it is levied is known as
the Direct tax while the tax, which is paid by the taxpayer indirectly is
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known as the Indirect tax. The direct tax is levied on persons income
and wealth whereas the indirect tax is levied on a person who
consumes the goods and services.

2. The burden of the direct tax is transferable while that of indirect tax is
non-transferable.

3. the incidence and impact of direct tax falls on the same person, but in
the case of indirect tax, the incidence and impact falls on different
[persons.

4. The evasion of tax is possible in case of a direct tax if the proper

administration of the collection is not done, but in the case of indirect
tax, the evasion of tax is not possible since the amount of tax is charged
on the goods and services.

5. 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.

6. The nature of a direct tax is progressive, but the nature of the indirect
tax is regressive.

7. Direct tax helps in reducing the inflation, but the indirect tax
sometimes helps in promoting the inflation.

8. Direct tax is collected when the income for the financial year is earned
or the assets are valued at the date of valuation. As against this, the
indirect taxes are collected, when the purchase or sale of goods or
services are rendered.

9. Direct tax is imposed on and collected from the assessee. Unlike

indirect tax is imposed on and collected from consumer but deposited
to the exchequer by the dealer of goods or provider of services.

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

Conclusion

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Both the direct and indirect tax has its own merits and demerits. If we talk about
the direct taxes they are equitable because they are charged on person, according to
their paying ability. The direct tax is economical because its cost of collection is less
but however, it doesnt cover every section of the society.

On the other hand, if we talk about the indirect tax, they are easy to realize as they
are included in the price of the product and services, and along with that, it has an
excellent coverage of every section of the society. One of the best advantages of the
indirect tax is, the rate of tax is high for harmful products as compared to the other
goods which are necessary for life.

You Might Also Like:

Difference Between Tax Difference Between VAT Difference Between

and Duty and Service Tax Central Sales Tax (CST)
and VAT

Difference Between Difference Between Difference Between

Progressive and Income and Wealth Direct Cost and Indirect
Regressive Tax Cost

Filed Under: General

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Comments

DEBYENDU PANJA says

December 13, 2015 at 8:40 pm

It is very useful to us.. and please provide me difference between

agricultural income and non agricultural income.

Reply

Surbhi S says
December 14, 2015 at 4:13 am

Thanks for your appreciation and we will consider your suggestion.

Reply

rajesh says
May 29, 2016 at 12:03 am

good comparision but can you proved how direct is progressinve and
reduce inflation and similarly for indirect taxes being regressinve and
promotes inflation

Reply

Surbhi S says
May 30, 2016 at 9:59 am

The progressive tax is a tax wherein the tax rate increases as the
income of the taxpayer increases while the regressive tax is a system
of taxation where the rate of tax decreases with the increase of taxable

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amount. In this way, direct tax cub inflation but indirect tax promotes
the same.

Reply

kuldeep says
May 17, 2017 at 5:17 pm

Great Article! i visit the page and i find this article much valuable and
useful. Thank you for sharing.

Reply

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