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Difference between direct and indirect tax

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All the citizens of the country are liable to pay the tax. It can be of different types, such as direct tax or indirect tax. Both have their peculiar characteristics and features. Likewise, there are pros and cons of both of these.

Direct Tax VS Indirect Tax

Advantages

Advantages of Direct Taxation

Direct tax is such a kind of tax that comes up with various advantages. It is pretty easy to collect the direct tax and is found to be relatively cheap. It is applied to those who can pay it. Hence, it does not burden the masses at all. Indirect taxation, the government gets direct control over the spending and expenditure of the masses.

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Advantages of Indirect Taxation

The primary and most fabulous advantage of indirect taxation is that it does not discourage efforts. It is a highly valued one and helps much with specific social policies. It can be applied to gambling or smoking for bringing the reduction to such notorious activities. It’s applied to the masses as per the degree of choice. They are the sole decision either to be a part of it or not. For instance, if anyone buys a cigarette, then he is liable to pay it. Similarly, it is paid by the people when they consider playing gambling.

Disadvantages

The disadvantage of Direct Taxation: Difference between direct and indirect tax

It is the type of taxation that discourages enterprises. Moreover, it also discourages hard work. Indeed, it enhances the resources spent and time taken on tax avoidance. In such a kind of taxation, the profit of the company or taxation amount leads to the reduction of investment. 

The disadvantage of Indirect Taxation: Difference between direct and indirect tax

Indirect taxation falls as a burden on the poor and is found to be regressive. It is implied on the proportion of income and hence affects the poor to the most. It is complicated to collect and is found to be much costly too. Indirect taxation is not easy to predict and can easily be enhanced by the excise duty.

Tax Payment and Examples

As the name indicates, a direct tax is the one that is directly paid to the government by the taxpayer. There are no middlemen, and it is not paid to any third party. The taxpayer is responsible for paying the tax to the government. However, the taxpayer pays the amount in indirect tax, but it gets shifted from one person to another.

There are different channels or phases involved in it, and hence it is called an indirect tax. Direct tax is paid by the individual from his pocket, while indirect tax is the tax collected from the customer by the tax collector. The tax collector pays this tax to the customer. One can better understand the difference between direct tax and indirect tax through the use of examples. Income tax and wealth tax is the direct tax, while indirect tax can be the customs, excise, service tax or VAT, etc.

Also read: Difference between cheetah and leopard

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