Author: SNEHA DESAI

Taxation is the backbone of any economy, in which any country can function. Tax collected by the government is used in building infrastructure, for providing public services etc. There existed several different kinds of taxes in India previously making it very chaotic, luckily now they are majorly categorized into 2 categories that is Direct Tax and Indirect Tax. This difference mainly lies in who bears the final burden of payment. 

What is Direct Tax?

Direct Tax is the tax whose burden of payment can not be shifted to another person, the individual or entity on whom this tax is levied has to be the one who ultimately pays it to the government. 

*Incidence is the legal liability to pay and impact is the final monetary burden.

Here the Incidence and Impact lies on the same person.

Direct tax rate generally increases with the rise in income of the individual, which means it is progressive in nature, this is mainly to reduce income inequality.

This tax is mainly levied on Income, Wealth and Profits. 

E.G. Income tax, Corporate tax, Capital Gains Tax and Wealth Tax.

What is Indirect Tax?

Indirect Tax is a levy on goods and services where the burden can be shifted from the initial taxpayer to the final consumer. The seller or the intermediary pays the tax to the government but recovers it by including it in the price of the goods and services sold.

The Incidence and Impact fall on different people.

This tax is Regressive in nature, which means all individuals pay the same amount of tax on goods or services irrespective of their income standing. This has its own downside by disproportionately affecting the lower income people.

This is levied on sale, production or consumption of goods and services. 

E.G. Goods and service tax, Value added Tax, Sales Tax, Excise and Custom Duty.

Core difference between direct and indirect tax

● Direct Tax is paid directly to the government while Indirect tax is paid via an intermediary.

● Burden of payment in direct tax can not be shifted while it can be shifted in case of indirect tax.

● Direct Tax is progressive in nature, while Indirect Tax is regressive in nature.

● Direct tax is highly visible while Indirect tax is more over hidden.

In conclusion, both direct and indirect taxes are unavoidable components of a modern economy’s fiscal machinery. Direct taxes provide for equity and fairness, linking the tax burden to the ability to pay, while Indirect taxes ensure a broad and stable revenue flow through consumption. A well balanced economy is always the one which can maintain proper balance between the two taxes.