Direct Tax vs. Indirect Tax: What's the Difference?

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Key Difference

Taxes are imposed by the government to generate revenues; in exchange for these taxes, the government offers different services to the citizen of the country without any discrimination. In other words, we can say that the tax money collected boosts the national economy, and further, they are utilized for the benefit of all the people. The tax imposed by the government can mainly be divided into two types on the basis of the implication with the people. One is called the direct tax, and the other one is called the indirect tax. The tax imposed on the earnings and profits of the people is called the direct tax, whereas the tax levied on the goods, services, and products are known as the indirect tax. The direct tax is levied to those who earn or manage to have more profits than the specified value; it is never applicable to the poor people or those unemployed. On the other hand, the indirect tax is levied on every of the buyer or purchaser in the situation as it is imposed on the goods, services, and products by the government.

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Comparison Chart

Direct TaxIndirect Tax
DefinitionThe tax imposed on the earnings and profits of the people is called the direct tax.The tax levied on the goods, services, and products are known as the indirect tax.
Specific GroupIt is levied on the specific group, high earners not on the low earners.To be paid by everyone who buys that product or service.
TypesWealth Tax, Income Tax, Property Tax, Corporate Tax, Import, and Export Duties are some of the types of direct tax.Central Sales Tax, VAT (Value Added Tax), Service Tax, STT (Security Transaction Tax), Excise Duty, Customs Duty.
Tax EvasionPossible, if one hides his/her earnings or profits from the administration.Not possible as one has to pay at the time of buying directly.
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What is Direct Tax?

The direct tax is levied on those who earn or manage to have more profit than the minimum specified value. It only classifies the specific group which manages to have an annual income or profit more than the minimum value defined. It should be kept mentioned that these taxes aren’t applicable on the low-income earners and those unemployed. Every of the country predefines the volume of taxes in correspondence with the earning and profits. The tax volume is directly dependent on the earning; as the earning increase, the tax ratio directly increases. The value of minimum earning upon which tax will be levied is decided by the country’s policy and demand of generating the revenue through it to meet the public expenditures. At the same time, the unemployment rates, inflation, poverty rates are closely examined before coming up with the minimum earning on which tax will be levied. Those who are on government jobs get the automatic tax deduction from their salaries, although those doing jobs or others are asked by the tax organizations to pay the taxes as it is an obligation to make your nation stand high.

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What is Indirect Tax?

The indirect tax is levied on the people regardless of their earnings or income; as in this tax is imposed on the goods, services, and products. The buyer has low income, or high income would have to pay the same amount for that product or service. The best part of this type of tax is that it is in the general population, not on the specific group. The other thing which makes it more important is that in this case tax evasion is not possible as you have to pay for the service or goods as the tax is already levied on it. The government imposes tax after evaluating the usage of that product, the commodities which are necessities have the minimum tax on it, and on the other hand, products belonging to the luxuries of life have more tax imposed on them. For instance, the telecommunication services we are offered have more tax levied on them as compared to the daily life eatables. Central Sales Tax, VAT (Value Added Tax), Service Tax, STT (Security Transaction Tax), Excise Duty, Customs Duty are some of the indirect taxes that are levied on the different products and services by the government.

Direct Tax vs. Indirect Tax

  • The tax imposed on the earnings and profits of the people is called the direct tax, whereas the tax levied on the goods, services, and products are known as the indirect tax.
  • The direct tax is levied on the specific group which manages to have an annual income or profit more than the minimum value defined. On the other hand, the buyer having low income or high income would have to pay the same amount of tax for that specific service or product.
  • Wealth Tax, Income Tax, Property Tax, Corporate Tax, Import, and Export Duties are some of the types of direct tax. On the other hand, Central Sales tax, VAT (Value Added Tax), Service Tax, STT (Security Transaction Tax), Excise Duty, Customs Duty are some of the types of the indirect tax.
  • Tax evasion is possible indirect tax after one successfully hides his/her earning and profits. Contrary to this,  tax evasion can’t be done in the case of indirect tax as one have to pay for the service or goods as the tax is already levied on them.

Explanatory Video