BREAKING DOWN DIRECT AND INDIRECT TAXES
by CCH Online CCH Tax OnlineWhat
is tax?
TAX is a mandatory financial charge levied
upon a by a governmental organization in order to fund various public
expenditures.
Why are taxes levied?
The basic reason for levying of tax is
that they are the primary source of revenue to the government, utilized for the
welfare of the general public via a variety of expenditures - defence,
healthcare, education, different infrastructure facilities like roads, dams,
highways etc. The government now allows the public to file taxes online as well as offline.
Type of taxes
Taxes can be divided into Direct Tax and
Indirect Tax.
DIRECT TAX
Taxes levied on a person’s income and
wealth and which are paid directly to the government by the tax bearer. It is
applied to individuals and organizations directly e.g. income tax, corporation
tax etc. The burden of direct tax falls flat on the individual who earns the
taxable income and cannot be shifted to others.
INDIRECT TAX
Taxes levied on a person who consumes the
goods and services, and taxes that are paid indirectly to the government such
as GST are known as Indirect. These taxes cannot be shifted to another person,
unlike direct tax.
A summary of the differences between Direct
and Indirect Taxes:
S.no |
Basis for comparison |
Direct
Tax |
Indirect
Tax |
1 |
Nature
of tax |
Progressive |
Regressive |
2 |
Incidence
& Impact |
Falls on the same person |
Falls on a different person |
3 |
Tax
Evasion |
Possible |
Not possible as it is included in the
cost |
4 |
Tax
Burden |
Transferable |
Non-transferable |
5 |
Focus |
Discourages investment |
Discourage consumption |
6 |
Impact
on pricing of goods & services |
Zero impact |
Increase or decrease in tax rates affect
the pricing |
7 |
Share
Contribution |
Comparatively lower share of revenue |
Major source of revenue generation for
govt. |
8 |
Principle
of Equity |
Confirms to the standard equity
principle, with different tax base |
Goes contrary to the principle of
equity and is applicable likewise on both rich and poor |
9 |
Taxable
Event |
Taxable income earned |
Supply of goods or rendering of
services |
10 |
Tax
collection |
Annually on income earned in a
particular financial year |
Immediately at the time of supply of
goods and services. |
11 |
Exemptions/Deductions |
Available |
Not available |
12 |
Examples |
Gift tax, Capital gain tax |
Custom Duty |
Direct taxes are equitable as they are
charged on the person, according to their paying ability. Its collection cost
is also less but, it doesn’t cover every section of the society. Indirect Tax,
on the other hand, is easy to realize as it is included in the price of the
goods and services and significantly covers a large section of the society,
providing a huge tax base for filing tax online.
Collected by the central and state governments,
both have their own significance. Both taxes are important for a country as
they are linked with the overall economy and growth of the country.
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Created on Aug 21st 2018 01:08. Viewed 427 times.