Question

classify d following as direct and indirect taxes - sales tax , custom duties, property tax , death duties , vat and income tax

Answer 1

Difference between Direct and Indirect Taxes

Direct taxes are non-transferable taxes paid by the tax payer to the government and indirect taxes are transferable taxes where the liability to pay can be shifted to others. Income Tax is a direct tax while Value Added Tax (VAT) is an indirect tax.



Direct and indirect taxes include all the different types of taxes levied by the government. Direct taxes include the taxes that cannot be transferred or shifted to another person, for instance the income tax an individual pays directly to the government. In this case, the burden of the tax falls flatly on the individual who earns a taxable income and cannot shift the tax to others.

Indirect taxes, on the other hand, are taxes which can be shifted to another person. An example would be the Value Added Tax (VAT) that is included in the bill of goods and services that you procure from others. The initial tax is levied on the manufacturer or service provider, who then shifts this tax burden to the consumers by charging higher prices for the commodity by including taxes in the final price.

Both direct and indirect taxes are critical components of governmental revenue and consequently the economy. The variations in the indirect taxes may come down in the future once the Goods and Services Tax bill is passed by the parliament, probably by next year.

Direct Tax Vs Indirect Tax:

Direct taxes are paid in entirety by a taxpayer directly to the government. It is also defined as the tax where the liability as well as the burden to pay it resides on the same individual. Direct taxes are collected by the central government as well as state governments according to the type of tax levied. Major types of direct tax include:

Income Tax: Levied on and paid by the same person according to tax brackets as defined by the income tax department.

Corporate Tax: Paid by companies and corporations on their profits.

Wealth Tax: Levied on the value of property that a person holds.

Estate Duty: Paid by an individual in case of inheritance.

Gift Tax: An individual receiving the taxable gift pays tax to the government.

Fringe Benefit Tax: Paid by an employer that provides fringe benefits to employees, and is collected by the state government.

Indirect tax, as mentioned above, include those taxes where the liability to pay the tax lies on a person who then shifts the tax burden to another individual.

Some types of indirect taxes are:

Excise Duty: Payable by the manufacturer who shifts the tax burden to retailers and wholesalers.

Sales Tax: Paid by a shopkeeper or retailer, who then shifts the tax burden to customers by charging sales tax on goods and services.

Custom Duty: Import duties levied on goods from outside the country, ultimately paid for by consumers and retailers.

Entertainment Tax: Liability is on the cinema owners, who transfer the burden to cinemagoers.

Service Tax: Charged on services rendered to consumers, such as food bill in a restaurant.