Difference Between Direct and Indirect Tax

Introduction to taxation

Taxation is a major source for the government to generate revenue for expenditure and operations. Hence, taxation is a very important concept in the modern economy. It is necessary to understand the concept of taxation along with its components and implications. Taxation has been classified in different manner considering its scope and implication. Some of such classifications are:

Basis of Incidence	Direct Taxes Indirect Taxes
Basis of Collection	Central Taxes State Taxes Local Taxes
Basis of Purpose	Revenue Taxes Regulatory Taxes
Basis of Time	Annual Taxes Transactional Taxes
Basis of Progressivity	Progressive Taxes Regressive Taxes
Basis of International Transactions	Domestic Taxes International Taxes

Indirect and Direct taxes are types of taxation classified on the basis of who bears the ultimate burden or incidence of tax. It is essential to understand the difference in the taxes i.e. direct and indirect taxes. Some of the differences in these two types of taxes are presented below.

PROGRESSIVE TAXATION VS REGRESSIVE TAXATION

Difference Between Indirect Taxes and Direct Taxes

Basis	Direct Taxes	Indirect Taxes
Basis of Incidence	Direct Taxes are imposed directly to individuals or entities based on their income, profits or wealth i.e. taxes are borne by the taxpayer and cannot be shifted onto others.	Indirect taxes are levied upon production, sale, or consumption of goods and services. The burden of such indirect tax is passed on to the final consumer.
Shifting of Burden	The taxpayer is directly responsible for paying the tax Such taxes cannot	Taxes are passed on to the final consumer. The intermediaries collecting the taxes pass on the burden to the final consumer.
Progressiveness	Direct taxes are progressive in nature. This means, as income increases, tax rates also increase. The more you earn, the more you pay taxes.	Indirect taxes are often regressive in nature. The low-income individuals pay more in indirect taxes in proportionate to their income as such taxes are generally fixed.
Impact	Direct impact on the income, profit or wealth of the individual or organizations.	Indirect taxes impact the prices of the goods and services resulting in change in behavior of the consumer.
Nature	Direct taxes are more equitable. This means, high income leads to higher tax.	Indirect taxes are less equitable. Low income individuals pay proportionately higher taxes.
Compliance	Direct taxes are complex to calculate, to file tax and to assess tax.	Indirect taxes are collected at the point of sale and compliance may require regular reporting and documentation.
Inflation	Direct tax helps in reducing inflation.	Indirect taxes promote inflation. Higher the indirect taxes, higher is the price of product or cost of consumption, which is inflation.
Examples	Income Tax, Corporate Tax, Property Tax, Capital Gain Tax, Wealth Tax	Value Added Tax (VAT), Goods and Services Tax (GST), Excise tax, Custom tax, Sales Tax

Reference

1. Key Differences