Direct Tax vs. Indirect Tax-What You Need to Know

Difference between Direct Tax and Indirect Tax

Taxation is an important source of revenue for any government in the world. Every government in the world imposes tax as its own requirement. There are two types of tax; one is a direct tax and the other is an indirect tax. Although the two have the same purpose, there are many differences between the two.

First of all, we know what direct tax is? And what’s the indirect tax?

Direct tax: a tax that has to be paid directly to the government and cannot be transferred to anyone else is called a direct tax. Example: Income Tax.

Indirect tax: a tax imposed on all goods and services, and not on income and profits, is referred to as indirect tax. Example: Sales Tax.

Direct Tax vs. Indirect Tax

The differences between direct tax and indirect tax are given below:

SL NoDirect TaxIndirect Tax
1The direct tax imposed on profits.The indirect tax imposed on goods and services.
2Direct taxpayers are individuals, businesses, and companies.The indirect Taxpayers are the end consumers of goods and services.
3A direct tax applies by itself to the taxpayer.The indirect tax is applicable to each stage of the production chain.
4In the case of direct taxes, the tax burden falls directly on the individual or taxpayer.In the case of indirect taxes, the product manufacturer or service provider can easily transfer the tax burden to the consumer of the product or service.
5Direct taxes cannot be shifted, that is, it has to be paid to the person on whom the direct tax is levied.Indirect taxes can be easily shifted from one taxpayer to another.
6Direct tax applied to an entity or individual taxpayer.Indirect tax has wide coverage because all the members of the society are taxed.
7The direct tax has higher operating costs and a variety of exemptions.Indirect Tax has lower administrative costs due to safe, easy collections.
8Tax avoidance is possible for direct tax purposes.Tax avoidance is not possible for indirect tax purposes.
9The direct tax has positive allocative effects as it puts less burden on the collection.Allocative effects of indirect taxes are not as good as those of direct taxes.
10Direct taxes help to reduce inflation.Indirect taxes may help to arise inflation.
11Direct tax discourages investments, decreases savings.Indirect tax is growth-oriented, promotes savings.
12Direct tax is fair, it reduces inequality.Indirect tax is regressive, rising inequality.
13Few examples of direct taxes are income tax, wealth tax, etc.Few examples of indirect tax are sales tax, customs duty, excise duty, etc.          

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