When it comes to taxation, it isn’t enough to only know how much tax you pay on your income. Taxes in India are levied either by the state governments, central government, or local government organizations. As per the central government’s taxation mandate, all the taxes are divided into two groups – direct taxes and indirect taxes.
Direct tax is levied and paid directly by a person or an organization. One cannot shift the payment of this tax to another entity. Income tax and corporate tax are two such examples. As per the Indian Income Tax Act, 1961, it is mandatory for Indian as well as foreign companies to pay direct taxes to the government.
Indirect tax is levied on end-consumers of products, services, and goods. The government levies this tax on manufacturers and suppliers for the import, sale, and also purchase of goods. But unlike a direct tax, the responsibility of paying indirect tax can be passed on to consumers. Excise duty and GST (goods and services tax) are two common examples.
The following distinction outlines the scope of direct taxes and indirect taxes in India.
Difference between direct tax and indirect tax:
- Includes but is not limited to income tax, property tax (levied on real estate), wealth tax (levied on inherited wealth) and so on. Another example of direct tax is the corporate tax that is levied on corporate businesses. Whereas, Includes Value Added Tax (VAT), GST, central excise duty, etc. GST is levied on the price of the product, right from production to sale, while central excise is imposed on the manufacture and retail of goods.
- Collection of direct tax is not easy unless it is deducted at source. This usually happens in the case of salaried individuals. But the same does not apply when it comes to collecting tax from the business classes, where many find a way to evade taxes, and it has proven difficult to identify and penalise them. Whereas, as for indirect tax, the tax amount for the goods and services are already decided and are charged along with the price of the product. And so, there is no way of getting around it. One can always find the taxes mentioned on the cover of a consumer product.
- Direct tax plays a role in boosting the economy and curbing inflation. Whereas, the imposition of more indirect taxes could enhance inflation.
- Direct taxes tend to drain a part of the income and discourage savings. Due to tax evasion by many, the burden of paying taxes falls on the shoulder of a smaller section of the society. Whereas, When it comes to savings, indirect taxes lessen personal consumption and increase savings. For example, consumers are more careful about consuming products that are taxed extensively.
- Direct taxes like income tax play a role in reducing socio-economic inequality. The money from taxpayers is used for the well-being of the entire society, and everyone stands to benefit from the same. Public transport is one such example. Whereas, Indirect taxes widen the socio-economic gap between the rich and the poor. Only the rich can afford better quality products which may be essential for all. However, the weaker sections of society may not be able to consume these goods.
As direct and indirect taxes are linked to the well-being of the economy, the collection of these taxes is important. However, there are issues like tax evasion which are being tackled by the government to ensure that burden of paying direct taxes is not handled solely by a certain section of the society.
[i] 1. Ipleader website
2.Law of Taxation by C.H. Sengupta
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