Difference Between Direct and Indirect Tax

Direct Tax vs Indirect Tax

 

Refer to the table given below to distinguish between direct and indirect tax.

Point of Difference

Direct Tax

Indirect Tax

Definition

Individuals pay this amount directly to the Government, and others cannot transfer it. There are different acts that monitor this amount.

End-use consumers of products, goods and services are liable to pay indirect tax. This variant is applicable for manufacturers and suppliers for the sale, import and purchase of goods. However, the accountability to pay this type of tax is passed on to consumers.

Benefits

The collection of direct tax occurs annually and is mostly deducted at the source, which makes it more cost-effective and reduces administrative costs. The tax amount is certain, which allows the Government to estimate revenue accurately. The collection of such taxes helps in controlling inflation and reduces inequalities.

Consumers have to pay indirect tax only at the time of purchase. As such, tax collection is easy and convenient. Indirect tax payments ensure equitable contribution as taxpayers bear lower tax rates on basic items and higher rates on luxury goods.

Imposition of Tax

As the name suggests, this amount is imposed directly on the income of a taxpayer.

The Government imposes this on taxpayers for the goods and services purchased or availed.

Course of Payment

Individuals can pay this directly to the Government.

Individuals can pay this to the Government via an intermediary.

Paying Entity

Businesses and individuals pay such taxes.

End-use consumers pay such taxes.

Rate of Payment

The Government decides the rate on the basis of income and profit.

Rate is equal for all individuals

Transferability of Payment

Non-transferrable

Transferrable

Nature of Tax

This type is progressive, meaning the rate increases with an individual’s income and profit.

This type is regressive, meaning the rate remains the same, irrespective of an individual's income.

The table mentioned above covers key differentiating points between Direct and Indirect taxes. Read the pointers attentively to understand the difference between direct and indirect taxes.

Frequently Asked Questions