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Direct vs Indirect Tax

  • 17th Jan 2020
  • 126
Direct vs Indirect Tax

Most know about taxes as it gets deducted regularly from their salary and is charged while buying or consuming something. But have you tried to differentiate GST from corporate tax? Though not many are gleeful about the income tax deductions, they keep going on without knowing about taxes. Today let’s look at the types of taxes and understand the difference between direct and indirect tax.

What Is Direct Tax?

Direct tax is a type of tax that is paid by an individual to the government. This individual can be a person or an organization. As this type of tax is directly imposed by the government, hence, it cannot be transferred to another entity. Some advantages of direct tax are that it aids in curbing inflation and also distributing wealth equally in the society.

Types of Direct Tax

1. Income Tax

Income tax is a common tax paid by most salaried and self-employed person. This tax varies from person to person as one pays income tax according to the tax bracket their income falls in and is directly levied on the salary.

2. Wealth Tax

Wealth tax is levied on the value of certain assets in the market for that particular financial year. This asset can be held by an individual, HUFs (Hindu Undivided Family) or companies. Though wealth tax was widely used before, now it has been abolished and is not in use anymore.

3. Corporate Tax

Corporate tax is levied on the profits of companies and businesses in India. This tax is also applicable to foreign companies where the income is arising from India.

4. Capital Gains Tax

Capital Gains tax is taxed on the income arising out of the sale of investments. The tax is levied based on how long you hold the asset. Capital gains are of two types, Long Term
Capital Gains (LTCG) and Short Term Capital Gains (STCG) according to which the tax rates differ.

What Is Indirect Tax?

Indirect tax is a type of tax imposed by the government on the supply of goods and services and can be transferred from one entity to another. Recently, Goods and Services Tax (GST) was introduced by the government on 1 July 2017 which subsumed all the other kinds of indirect taxes. Some of the benefits of GST as indirect tax are the elimination of multiplicity of taxes and an eventual decrease in the cost of goods due to the reduction in the cascading effect of taxes.

Types of Indirect Tax

1. Goods and Services Tax (GST)

GST is charged twice where the Central Government will levy Central GST (CGST) and the State Government will levy State GST (SGST) on intra-state supply of goods or services. The Centre will also levy Integrated GST (IGST) on inter-state supply of goods or services.

2. Tax on Liquor and Petrol Products

Taxes on liquor and petrol products do not come under GST and are taxed separately.

Difference between Direct and Indirect Tax:

When looking at both these types of taxes, there are various differences that you need to know. Here are some of the key differences:

1.Taxpayer of the particular type of tax: Direct taxes are levied on every individual, HUFs, and companies. For indirect taxes, the end-consumer becomes the taxpayer.

2.Applicability of the tax: Direct taxes are applicable only to the taxpayer whereas indirect taxes are levied on every single stage of production-distribution stage of the goods.

3.Transferability of the taxes: Direct taxes cannot be transferred as compared to indirect taxes which can be transferred.

4.Evasion from paying tax: Direct tax can be evaded by investing in tax-savings instruments whereas indirect tax cannot be evaded.

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