In India, the government derives its right to charge taxes from the Constitution of India. It divides the power to impose taxes between the central and state governments. All the taxes levied, need to be supported by a law issued by the State Legislature or the Parliament. Direct and indirect taxes are the two most common kinds of taxes in our country. However, there are certain differences between them, along with their advantages and disadvantages. Here’s a look at these taxes in detail.
What is Direct tax?
A legal entity or individual must pay this tax directly to the government. It cannot be transferred to another company or individual. The Central Board of Direct Taxes oversees these taxes.
The different types of direct taxes in India are income tax, wealth tax, estate tax, corporate tax, and capital gains tax. Amongst these, before you pay income tax, you can get the figure right by checking it on the income tax calculator.
Benefits of Direct tax
- Equitable: The one who earns less shall pay a lower direct tax, whereas the one with a higher income shall pay a higher tax. This establishes equality and relieves the one who is earning less. Before filing returns, consider educating yourself about different types of ITR (income tax returns) just to know the category under which you can file the ITR.
- Helps reduce inequalities: The tax that the government collects from the ones earning more will be used to help people in need. This can help bring down inequalities.
- Curbs inflation: The government controls inflation in the country by increasing and decreasing the rate of direct taxes. When there is inflation, the rise in the tax rate will impact the purchasing power of buyers. This will help control inflation.
Disadvantages of Direct tax
- Stifles investment: Several people hesitate to invest due to direct taxes like security transaction tax and capital gain tax. Thus, in a way, these taxes restrain people from investing.
- Regarded as a burden: Taxpayers think of direct taxes as a burden, since the process of documentation is time-consuming and difficult, and they need to pay these taxes annually as a lumpsum payment. However, you can reduce some of the hassles, at least while estimating how much tax you need to pay, by using the income tax calculator.
What is Indirect Tax?
You pay this tax to the government when you purchase any services/products. Unlike direct taxes, indirect taxes are not levied on an individual’s income or a company’s profit.
Simply speaking, when one buys a product/service, the excess amount that the supplier charges the buyer with is called indirect tax.
Indirect taxes are classified into custom duty, entertainment tax, service tax, value-added tax (VAT), excise duty, and others that are together called Goods and Service Tax (GST).
Benefits of Indirect Tax
- Easy collection: Unlike direct taxes, you need not go through any complicated process or paperwork to pay indirect taxes. When you purchase services/goods, you must pay the tax right away.
- Convenience: Unlike direct taxes generally paid in a lumpsum, indirect taxes like GST are paid in small amounts. For instance, a certain amount of GST is included in the prices of the services/goods you purchase. This makes the tax payment more convenient.
A lump-sum payment works exactly opposite to an advance tax payment. In an advance tax payment, one can break the payable amount into small instalments and pay them in advance without waiting for the end of a financial year.
Disadvantages of Indirect tax
- Costlier: You need to pay an excessive amount when you purchase services/goods. This makes these goods/services costly.
- Regressive: Indirect taxes are not equitable, although they make sure that everybody pays taxes irrespective of his/her income. These taxes are charged at the same rate on individuals of various income levels.
Differences between Indirect and Direct taxes
- Direct taxes are levied on income and profit. But indirect tax is levied on the services and products.
- There is a mediator between the government and the end consumer in the case of indirect taxes. However, you need to pay direct taxes directly to the government.
- The rate of direct tax differs for a person, company, and other legal authorities. But indirect tax is the same for any company or individual.
- Unlike direct tax, indirect tax does not depend on a person’s income.
- Unlike indirect taxes, direct taxes can not be passed or shifted to another person.
Indirect and direct taxes have different purposes. Differences in them are equitable because they are levied on people as per their capacity to pay. These taxes are even cost-effective due to lower collection costs.
