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What is Direct and Indirect Tax

28 Jan 2022 0 COMMENT

Introduction:

At some point, every earning individual might have been frustrated with paying taxes or confused about how much of their income is going towards it. However, an earning individual paying tax (known as income tax) is not the only type of tax the individual has to pay. In their lifetime, they might not even be aware of the hidden taxes paid by them here and there. If you resonate with this, it is not too late to learn about the instances where you get charged for tax and the types of tax levied by the government – mainly direct and indirect tax. 

What is a direct tax? 

You pay Direct tax to the government. It is a type of tax that is non-transferable – which means that if you are under the liability to pay a particular sum towards tax, you cannot transfer this liability to another person. There are various categories of direct tax: 

1. Income tax

Income tax is a tax many are familiar with. It is tax payable by a salaried or self-employed individual to the government. The percentage of tax owed depends on the income group the person falls under and as per the designated tax slabs fixed by the income tax department and the government.

2. Corporate tax

Corporate tax is tax paid by corporations and businesses located in India or whose income is generated from India from the profits and revenue they earn in a year.

3. Capital gains tax

Individuals pay capital gains taxes on specific investments or assets. It is split into long-term capital gains tax (LTCG) and short-term capital gains tax (STCG).

What is an indirect tax? 

Indirect tax is tax paid by the end consumer to purchase or use specific goods and services. It is imposed by the central and state governments and is often hidden or included in the total price of goods and services. One entity can shift the burden of paying tax to another in indirect tax. For instance, if a shopkeeper sells a product, it is liable to pay tax to the government. But the shopkeeper generally shifts this liability on to the customer as it is the person consuming the product. Indirect tax can be tricky unless you learn how to identify the types: 

1. GST

The government introduced the Goods and Services Tax (GST) in 2017. Before GST, indirect taxes were all over the place. GST clubbed several indirect tax types like excise duty, sales tax, value-added tax, and more. GST applies to almost all products and services used. 

2. Stamp duty

Stamp duty is a tax charged on property sales in India and its documentation. 

3. Entertainment tax

Entertainment tax is a tax charged for access to products or services related to the purpose of entertainment. These include movie theatres, parks, arcades, and the like.

What are the differences between direct and indirect tax?

Direct tax

Indirect tax

Direct tax is non-transferable.

Indirect tax is transferable – usually to the end consumer.

Direct tax ensures equity as individual taxpayers pay according to their income.

Indirect tax ensures equality as tax rates are pre-decided and have to be paid by anyone who purchases the product or uses the service regardless of their earning capacity.

Direct tax involves paperwork before collection.

The indirect tax requires no paperwork and is easier to be collected.

There is more awareness about direct tax due to the designated tax slabs/ brackets.

There is less awareness about indirect tax charges as they get hidden in the total cost.

Conclusion:

Paying your taxes due to the government is a duty, and knowing how much you are liable to pay can make the process easier. Direct and indirect taxes benefit the government at first glance, but they also benefit society and maintain equality and equity wherever possible.

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