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Indirect Tax Introduction

Direct taxes are paid directly to the government by individuals and organizations. Examples include income tax and property tax. Indirect taxes are collected by intermediaries like retailers and manufacturers but are ultimately paid by consumers through higher prices. Direct taxes are based on ability to pay and promote equality, while indirect taxes have a wider base but are often regressive since rich and poor pay the same amount. Both tax types have advantages like revenue generation but also disadvantages such as higher prices and potential for evasion.

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308 views4 pages

Indirect Tax Introduction

Direct taxes are paid directly to the government by individuals and organizations. Examples include income tax and property tax. Indirect taxes are collected by intermediaries like retailers and manufacturers but are ultimately paid by consumers through higher prices. Direct taxes are based on ability to pay and promote equality, while indirect taxes have a wider base but are often regressive since rich and poor pay the same amount. Both tax types have advantages like revenue generation but also disadvantages such as higher prices and potential for evasion.

Uploaded by

Devendra raut
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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1.

INTRODUCTION

WHAT IS DIRECT TAX ?


A direct tax is a tax that a person or organization pays directly to the entity that
imposed it. Examples include income tax, real property tax, personal property
tax, and taxes on assets, all of which are paid by an individual taxpayer directly
to the government.
Examples of Direct Tax includes income, capital gains, or property tax that a
taxpayer pays to the government.

WHAT IS INDIRECT TAX ?


An indirect tax is collected by one entity in the supply chain, such as a
manufacturer or retailer, and paid to the government; however, the tax is passed
onto the consumer by the manufacturer or retailer as part of the purchase price
of a good or service. The consumer is ultimately paying the tax by paying more
for the product.
The most common example of an indirect tax is import duties. The duty is paid
by the importer of a good at the time it enters the country. If the importer goes
on to resell the good to a consumer, the cost of the duty, in effect, is hidden in
the price that the consumer pays. The consumer is likely to be unaware of this,
but they will nonetheless be indirectly paying the import duty.

DIFFERENCE BETWEEN DIRECT AND INDIRECT TAX


Direct Taxes Indirect Taxes
Tax on Income, Wealth, Profession, Tax on consumption of goods and
etc. of persons. services.
Tax payer pays taxes directly to Tax payer pays taxes indirectly
government. through intermediaries like importers,
suppliers etc.
Direct Tax becomes payable after the Indirect taxes are payable even before
income reaches the tax payer. the goods/services reach the tax payer.
Income tax is major direct tax. GST and Customs are the major
indirect taxes in India.
Direct Tax rate is not flat. The rates Indirect tax rates are flat or fixed.
are progressive – higher the income, Hence they are called regressive – the
higher the rate. poor and the rich pay the same tax.
ADVANTAGES OF DIRECT TAX

1. PROMOTES EQUALITY

Since direct taxes are based on the ability of a person to pay, it promotes
equality among payers and citizens. Every person is charged a different amount,
depending on how much they make.

2. PROMOTES CERTAINTY

The good thing about direct taxes is that they are determined and made final
before they are even paid. In the case of income tax, the annual tax is the same
every year as long as the salary does not change.

3. PROMOTES ELASTICITY

Taxes are the earnings of the government, and when they fluctuate, the earnings
also change. They can go higher or lower.

4. SAVES TIME AND MONEY

The government does not need to spend on the collection of taxes because they
are already taken right at the source of the income. Some companies
use automatic payroll deduction systems, which help save time and money.

DISADVANTAGES OF DIRECT TAX


1. PINCHING

Since direct taxes are to be paid in a lump-sum they pinch the tax payers more.
Thus, the announcement effect of a direct tax always tends to cause resentment
among the tax payers.
2. INCONVENIENT

Direct taxes do not conform to the canon of convenience as returns of income


tax, wealth tax, etc., are to be filed in time and complete records are to be
maintained up-to-date by each individual tax payer. Moreover, it is very
inconvenient to pay these taxes as they are collected in lump-sum.
3. EVASION AND CORRUPTION
Since the assessment of direct taxes depends upon the voluntary declaration of
the tax payer about has income, wealth, etc., there is great scope for tax evasion
by concealing real income. Thus, in fact, under direct taxation, honesty is taxed
while dishonesty is rewarded. Tax evasion in effects leads to corruption also.
4. UNECONOMICAL

Direct taxes are not so economical as they are claimed to be. They are
uneconomical when the tax base is narrow. Further, elaborate machinery is
required for their collection as each and every assesse has to be contacted
individually and properly checked to prevent tax evasion.

ADVANTAGES OF INDIRECT TAX


1. GOVT. REVENUE
Indirect taxes are a major source of tax revenues for Governments worldwide
and continue to grow as more countries move to consumption oriented tax
regimes. The India, indirect taxes contribute more than 50 % of the total tax
revenues of Central and State Governments.

2. INVISIBLE BURDEN ON CONSUMER / PRODUCER


Since value of indirect taxes is generally inbuilt in the price of the commodity,
the consumer pays the same without feeling a direct pinch. The supplier has a
psychological feeling that he is only collecting the taxes from the buyer and is
not paying out of his own pocket.
3. WIDER TAX BASE
Unlike direct taxes, the indirect taxes have a wide tax base. Majority of the
products or services are subject to indirect taxes without low thresholds.
4. EASE OF COLLECTION
Indirect taxes are easier to collect as indirect taxes are mainly on goods and
services, for which record keeping, verification and control is relatively easier
( at least in organized sector .)
5. LOW COLLECTION COSTS
Collection costs of indirect taxes as percentage of tax collected are lower as
compared to direct taxes.
6. LESS EVASION
Tax evasion is comparatively less in indirect taxes in organized sector due to
convenience of control.
7. TAX ON LUXURY / HARMFUL ITEMS
Government can levy higher taxes on luxury goods, which reduces the wasteful
expenditure. High taxes are imposed on the consumption of harmful products
(also known as ‘sin goods’) such as alcoholic products, tobacco, products etc.
This not only checks their consumption but also enables the state to collect
substantial revenue.

DISADVANTAGES OF INDIRECT TAXES


1. HIGHER PRICES
Tax imposed on goods and services leads to higher prices for consumers.
Higher taxes on capital goods increase cost of machinery and technology.
2. LOWER DEMAND / GROWTH
Tax on goods and services its prices, which reduces demand of goods and
services. Lesser demand means lower growth of industrialization.
3. REGRESSIVE IN NATURE
Generally, the indirect taxes are regressive in nature. The rich and the poor have
to pay the same rate of indirect taxes on items of mass consumption. This may
further increase the income disparities between the rich and the poor. However,
it is possible to overcome this defect by levying lower taxes on goods of daily
consumption and higher tax on luxury goods.

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