Direct Tax Vs Indirect Tax

Direct Tax Vs Indirect Tax:

Direct taxes are paid in entirety by a taxpayer directly to the government. It is also defined as the tax where the liability as well as the burden to pay it resides on the same individual. Direct taxes are collected by the central government as well as state governments according to the type of tax levied. Major types of direct tax include:

• Income Tax: Levied on and paid by the same person according to tax brackets as defined by the income tax department.
• Corporate Tax: Paid by companies and corporations on their profits.
• Wealth Tax: Levied on the value of property that a person holds.
• Estate Duty: Paid by an individual in case of inheritance.
• Gift Tax: An individual receiving the taxable gift pays tax to the government.
• Fringe Benefit Tax: Paid by an employer that provides fringe benefits to employees, and is collected by the state government.

Indirect tax, as mentioned above, include those taxes where the liability to pay the tax lies on a person who then shifts the tax burden to another individual.

Some types of indirect taxes are:

• Excise Duty: Payable by the manufacturer who shifts the tax burden to retailers and wholesalers.
• Sales Tax: Paid by a shopkeeper or retailer, who then shifts the tax burden to customers by charging sales tax on goods and services.
• Custom Duty: Import duties levied on goods from outside the country, ultimately paid for by consumers and retailers.
• Entertainment Tax: Liability is on the cinema owners, who transfer the burden to cinemagoers.
• Service Tax: Charged on services rendered to consumers, such as food bill in a restaurant.

Therefore, the prime difference between direct tax and indirect tax is the ability of the taxpayer to shift the burden of tax to others. Direct taxes include tax varieties such as income tax, corporate tax, wealth tax, gift tax, expenditure tax etc. Some examples of indirect taxes are sales tax, excise duty, VAT, service tax, entertainment tax, custom duty etc. However, this is not an exhaustive list of taxes and more types of taxes are levied by the government on specific cases.

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