Difference between Direct and Indirect Tax

There is famous saying that in a life of human being only two things are certain that is death and income tax and those who pay it knows that how true that saying is. Income tax can be classified as direct and indirect, given below are some of the differences between direct and indirect tax

  1. Direct taxes are those which are levied on the individual or taxpayer directly while indirect taxes are those which are levied on the individual indirectly which imply that they are raised from intermediary and not directly from individuals.
  2.  Direct taxes are raised in the form of income tax while indirect taxes are raised in the form on excise duty, sales and service tax.
  3. While direct tax results in lower disposable income which in turn affect the saving and investment of an individual whereas indirect taxes leads to rise in price of products and services which in turn affects the consumption pattern of consumers across the country.
  4. While direct taxes are easily identifiable and higher income groups are taxed at higher rate which is justifiable as you pay according to your means and thus they tend to reduce inequality of income while indirect taxes are uniform for all individuals and it does no separate rich from poor which makes those unjustifiable for poor people.
  5. While an individual can adjust his or her income tax by investing into various tax exempt investments and therefore it results in reduced direct taxes whereas indirect taxes have to be paid and there quantum cannot be reduced.
  6. Chances of tax evasion are more under direct taxes than it is under indirect tax structure.
  7. Direct tax does not lead to higher inflation but since indirect tax results in higher price for products it leads to higher inflation and therefore they put inflationary pressure on the economy of a country.

Governments across the world seldom use any of them rather they use a mix which can result in proper redistribution of income without affecting the growth and inflation of a country too much.

1 comment… add one
  • Vijayranga

    This is very useful information. According to my view the direct tax structure is also not clear and genuine. Need to increase the tax exemption.

    Vijay

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