Direct and indirect taxes are levied by the central and state government. Tax is an involuntary fee imposed and collected by the government to pay for the goods and services it provides including schools, infrastructure, law enforcement and military production. The tax comes into picture where there is a sale of product or service, ownership of assets or where profits are earned. The amount of tax paid by an entity or an individual depends fairly upon its earnings and spending.
Taxes are broadly classified into two categories: Direct and Indirect Taxes
Direct taxes are directly imposed on the tax payer. They depend on the income and wealth of an individual or entity.
The indirect taxes are included in the prices of the commodities purchased and the services rendered. Indirect taxes are applied to the manufacture or sale of goods and services. Both direct and indirect taxes are eventually collected by the government.
The collection of taxes depends on the nature of taxes. Direct taxes which include the income tax, wealth tax and corporation tax are levied and collected by the central government. The Department of Income Tax is responsible for monitoring the payments of income tax. Therefore, when the liability to pay the tax and the burden of the tax falls on the same person, it is called a direct tax. Individuals pay indirect taxes when they purchase goods or use services. Indirect taxes are collected by intermediaries from the person who bears the ultimate economic burden of the tax.
Progressive tax liability increases as the income of the individual or entity increases. Progressive taxation depends on the ‘ability to pay’ of the payer. Under this system, higher the income higher is the tax liability whereas the lowest income group people are exempted from paying taxes. Direct taxes are progressive in nature. Regressive taxation does not consider the ability to pay. It levies the same liability on people belonging to different income groups. VAT and Service Taxes were of regressive nature. Now GST has come into the picture and is of a progressive nature.
Direct taxes cover the following:
Indirect taxes cover the following
Direct and Indirect taxes differ on various parameters
|Nature||Direct Tax||Indirect Tax|
|Payment and Bearing of Taxes||The payment of direct taxes is to be made by the tax payer himself and borne by him only.||The seller or the service provider has to make the payment of indirect taxes and the same is transferred to the ultimate consumer|
|Tax Liability||The amount of tax liability in direct taxes depends on the income group of the individuals||Indirect taxes are levied equally on the tax payers irrespective of their income|
|Nature of Taxes||As the taxes are directly related to the tax payers’ income, it is progressive in nature||Earlier the indirect taxes were regressive in nature, but now with the implementation of GST, it has become progressive in nature too.|
|Tax Evasion||Due to the lack of administration, tax evasion is possible under direct taxes||As the tax is levied on the goods and services, the indirect tax cannot be evaded|
|Savings and Investments||Direct taxes can reduce savings and investments as a portion of an individual’s income is to be given to the government||Indirect taxes are more growth-oriented as they discourage consumptions and enhance savings.
|Coverage of Society||Direct taxes only cover those falling in respective tax brackets||Indirect taxes have a wider coverage as they are charged to every individual who buys a product or service|
Taxes take away the spending capacity of corporations and individuals leaving investors with less money to save and invest, and more money in the hands of the government. Taxing a product or service, thus making it expensive will lead to decrease in consumption and eventually decrease in inflation. Thus, reducing the tax rates will relatively empower the individuals to use their capacity. However, taxes are relatively inflexible and are relatively used to control inflation.
The latest tax reforms in Indian economy are taking a progressive turn. With the introduction of GST Bill and other amendments in the income tax slab, the government is attempting to liberalise the tax system to give broader paths to the global market. Such reforms have also been undertaken to close loopholes which may be used to carry out tax evasion and other such activities.
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