Importance and differences between direct and indirect taxes?

Taxes are enforced by the governments on their citizens, it is an involuntary fee levied on corporations or individuals by a government entity, whether national, regional or local in order to back government activities with finances.
Taxes are a monetary burden laid upon individuals or property owners to lend their support to the government. The taxes are not a voluntary payment rather they are an enforced contribution towards the government.

Taxes collected are utilized by the government for various expenses such as defense, healthcare, education and different infrastructure facilities such as roads, dams, highways and so on.

The Two forms of taxes:
Basically, there are two forms of taxes namely Direct and Indirect taxes. Indirect taxes actually have the ability to shift the burden to the end taxpayer. Direct taxes, on the other hand, allow the government to collect the taxes directly from the consumers. Indirect taxes allow the government to bring in stable and assured returns via the society.

Difference between Direct Tax and Indirect Tax:
There are different implications of direct and indirect taxes on the country. However, both types of taxes are important for the government as taxes include the major part of revenue for the government.

Key differences between Direct and Indirect Tax are:

A direct tax is levied and paid by the individuals, firms, Hindu Undivided Families (HUF), companies etc. whereas the indirect tax is finally paid for by the end-consumer of goods and services.
In case of direct taxes, the burden of tax cannot be shifted while burden can be shifted as far as the indirect taxes are concerned.

  • Tax evasion is possible in the collection of direct taxes while tax evasion is not possible as far as the indirect taxes are concerned as the taxes are charged on goods and services.
  • A direct tax is instrumental in reducing inflation, whereas indirect tax may increase inflation
  • Direct taxes have better allocative effects when compared with indirect taxes as direct taxes put much lesser burden over the collection of indirect taxes. This is where the collection is scattered across the various parties and consumers’ preferences of goods are distorted because of the price variations because of indirect taxes.
  • Direct taxes helps in reducing inequalities and are far more progressive than indirect taxes which enhance inequalities and are hence considered to be regressive.
  • Indirect taxes involve far lesser administrative costs owing to the stable and convenient collections, while direct taxes include a number of exemptions and also incur higher administrative costs.
  • Indirect taxes are veer towards growth and progress as they discourage consumption and help increase savings. Direct taxes, on the other hand, reduce savings and also discourage investments.
  • Indirect taxes have a larger coverage as different members of the society are taxed on the sale of goods and services, whereas direct taxes are collected only from specific people in respective tax brackets.
  • Additional indirect taxes are levied on detrimental-to-health commodities such as cigarettes, alcohol and so on. This dissuades over-consumption and thereby helps the country in a social context.
  • Both the direct and indirect taxes are important for the country as they impact the overall economy.  Direct tax includes income tax, wealth tax, corporation tax etc. Indirect taxes, on the other hand, are applied to the sale and manufacture of goods and services. Both direct taxes and indirect taxes are collected by the central and respective state governments and it depends on the kind of taxes to be levied.


1 comment:

Why is Outsource Accounting Required in Business to get Benefits?

The long-term success of your business will be based on how well you maintain your finances today, and how do you plan for the future. This ...