Direct Taxes & Indirect Taxes – Definition, Types, Advantages

The timely payment of taxes is a crucial component of being a responsible and useful citizen. Taxes are essentially the contribution you give to the expansion and improvement of your nation. Corporations and individuals at all levels, from local to multinational, who come under the tax bracket are required to pay tax.

In India, a large portion of a person’s income is taken out to pay taxes. They may also be included in some product bills, transactions, and services. Every tax imposed is supported by a law passed by the State legislature or the Parliament.

We pay taxes in many ways, and the types of tax in India vary depending on how they are implemented and paid to the authorities. Direct tax and indirect tax are the two main forms of taxes. These different categories of income taxes are separated further.

Direct Taxes

Direct taxes, such as income tax, poll tax, land tax, and personal property tax, are one kind of taxes that people pay directly to the government. These direct taxes are calculated based on the taxpayer’s capacity to pay, so the greater their capacity to pay, the higher their taxes are.

For instance, in the case of income taxation, a person with higher income pays more in taxes. It is calculated as a proportion of gross income. Additionally, paying direct taxes is the individual’s responsibility and should be handled by him alone.

Types of Direct Taxes

Income tax

It depends on a person ‘s income. Depending on how much a worker makes, a set proportion of his or her pay is withheld. The government is anxious to include credits and deductions that assist people reduce their tax obligations, which is a good thing.

Transfer taxes

The estate tax is the most typical type of transfer tax. This kind of tax is imposed on the taxable portion of a decedent’s assets, such as trusts and bank accounts. Another way to collect money from persons who are passing their property to another person is through a gift tax.

Entitlement tax

People benefit from social programs like Medicare, Medicaid, and Social Security because of this kind of direct tax. The Federal Insurance Contributions Act, which collects the entitlement tax through payroll deductions, is the umbrella name for this legislation.

Property tax

In order to sustain public services like the police and fire departments, schools and libraries, as well as roads, property tax is levied on assets like land and buildings.

Capital gains tax

When a person sells assets like stocks, property, or a company, this tax is levied. By calculating the difference between the acquisition amount and the selling amount, the tax is calculated.

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Advantages of Direct Taxes

1. Direct taxes encourage equality among payers and citizens because they are based on a person’s capacity to pay. Each person is assessed a different fee based on their income.
2. Direct taxes have the advantage of being decided and made final before they are ever paid. As long as the wage does not change, the annual tax in the case of income tax is the same every year.
3. Taxes are the government’s source of income, and as they vary, so do the government’s revenues. They can move up or down.
4. Since taxes are already collected at the point of revenue, the government does not need to spend money on their collection. Some businesses use time and money-saving automatic payroll deduction systems.

Indirect Taxes

Taxes that can be transferred to another company or person are known as indirect taxes. They are typically levied against a producer or supplier, who subsequently passes the tax on to the buyer. The excise tax on alcohol and cigarettes is the most typical example of an indirect tax. VATs (Value Added Taxes) are another type of indirect tax.

Types of Indirect Taxes

Sales tax

People are already on the verge of paying indirect taxes whenever they purchase at malls or department stores. Such taxes apply to products such as clothing, home goods, and other essentials. The sales tax that the shop collects and disburses to the government is added to the total sale price after payment at the counter.

Excise tax

Excise tax is another often used tax. Indirect taxes are already due when a producer purchases the raw materials for the company’s goods, such as tobacco for cigarette makers. The manufacturer can shift the cost to the customers through a routine aspect of business by charging more for the smokes.

Customs tax

Ever wonder why imported goods are so expensive? The reason is customs tax. A tax (customs tax) is paid by the importer of a container of bananas from another nation when it enters the US. This tax is then passed on to consumers.

Gas tax

An indirect tax is applied when purchasing gasoline for vehicles.

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Advantages of Indirect Taxes

1. Contrary to direct taxes, which typically exempt the poor, indirect taxes enable them to actively participate in the process of raising money for a nation or state.
2. As they are included in an item’s retail price, indirect taxes are not always apparent. Simply because the tax is levied in little amounts, people don’t feel like they are paying taxes. Add to that the fact that they are only visible on the transaction receipt and are not mentioned on the price tag. They can also be avoided by not purchasing the products.
3. Indirect taxes are paid at the time a customer purchases a product, unlike direct taxes, which require completion of paperwork and filing. The provider is responsible for collecting the tax and paying the government.
4. Taxes on alcohol and cigarettes are high. By taxing these goods, consumers are deterred from buying them due to their high cost, preventing them from consuming hazardous substances.

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Differences Between Direct Taxes and Indirect Taxes

1. The term “direct tax” describes a tax that is paid directly to the government by the individual it is levied against. The amount of indirect tax, on the other hand, is recouped from the final consumer, who receives the benefits, after the taxpayer has already paid it to the government.
2. In India, direct taxes are handled by the Central Board of Direct Taxes (CBDT), a division of the Department of Revenue. The organization in charge of administering indirect taxes, on the other hand, is the Central Board of Indirect Taxes and Customs (CBIC).
3. While indirect tax is paid by the final consumer, direct tax is placed on the assessee, who may be an individual, HUF, company, AOP, BOI, etc.
4. Given that it is founded on the notion of ability to pay, direct tax is progressive in nature. As a result, the wealthiest are subject to the tax more so than the poor. Indirect tax, on the other hand, is regressive in nature because everyone pays the same amount of taxes.
5. Indirect taxes are those in which the incidence and impact of the tax fall on various people as opposed to direct taxes, where both occur on the same person. In this context, incidence denotes the obligation to pay tax, whereas effect denotes the actual payment of tax.
6. The burden of a direct tax cannot be transferred to or recovered from a third party; rather, it must be borne by the taxpayer. Indirect taxes, on the other hand, allow the tax burden to be transferred to another party.
7. When a tax is placed directly on an assessee, that person is also responsible for paying the tax. Indirect taxes, on the other hand, are levied when the party receiving the benefit is responsible for its payment rather than the party upon whom it is levied.
8. In contrast to direct taxes, which reduce inflation by removing excess market liquidity, indirect taxes cause either inflation or deflation.

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Conclusion

We can all agree that indirect taxes, as well as direct taxes, are essential to the growth of our economy.

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