Articles

BREAKING DOWN DIRECT AND INDIRECT TAXES

by CCH Online CCH Tax Online

What 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.

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