The document summarizes the key differences between direct and indirect taxes. Direct taxes include income tax and wealth tax that individuals pay directly to the government. Indirect taxes include sales tax and excise duties that are paid to the government by one entity but ultimately borne by consumers. While direct taxes allow for more control and progressivity based on income, indirect taxes are often seen as less psychologically resisted since costs are included in prices. Both types of taxes have advantages and disadvantages for taxpayers and governments.

1. DIRECT TAXES
&
INDIRECT TAXES
BY: SONAM REHMANI

2. DIRECT TAXES INDIRECT TAXES
 Income tax, corporation tax and wealth tax are
major direct taxes.
 Central government revenue is about 56% of total
tax revenue.
 Direct taxes are paid directly to government by
the person liable to pay tax.
 Central Sales Tax, Central Excise, Service Tax and
Customs Law are major indirect taxes. Besides
these, there are some other indirect taxes, like
octroi, entry tax, luxury tax etc.
 Central government revenue is about 44% of total
tax revenue.
 Indirect taxes are paid to government by one
person, but he recovers the same from another
person.Thus, the person who actually bears the tax
burden(the ultimate ‘consumer’)
pays it indirectly to government through some
other person.

3. DIRECT TAXES INDIRECT TAXES
 Direct taxes are those which the taxpayer pays
directly from his income/wealth/estate etc.
 Broadly speaking, direct taxes are those which
are paid after the income reaches hands of
taxpayer.
 Important direct taxes are Income Tax, Gift tax
and Wealth tax, Expenditure tax etc.
 Indirect taxes are those which the taxpayer pays
indirectly i.e. while purchasing goods and commodities,
paying for services etc.
 Indirect taxes are paid before the goods/services reach
the taxpayer.
 Important indirect5 taxes are Central Excise (Duty on
manufacture), Customs (duty on imports and exports);
Sales tax; Octroi, Entry Tax, Service Tax etc.

4. Advantages of Direct taxes
 Psychological resistance-It is psychologically very difficult for a person to pay some amount after it is
received in his hands. Hence, there is psychological resistance [This is the reason why even Income tax act
is widening the scope of ‘Tax Deduction at Source(TDS) and TCS. Thus, a direct tax is converted to an
indirect tax.]
 Tax evasion is comparatively more in direct taxes where it is on unorganised sector, since control is
difficult.
 Collection cost of direct taxes as percentage of tax collected are higher in indirect taxes compared to
direct taxes.
 Direct taxes can control such wasteful expenditure only indirectly by taxing higher income group people.
 Government can judiciously use the direct taxes to support development in desirable areas, while
discouraging it in others, e.g. tax incentives for industries in backward areas , infrastructure development
etc.

5. Advantages of Indirect taxes
 Psychological advantage- Since the price of commodity or service is already inclusive of indirect taxes, the
customer i.e. the ultimate tax payer does not feel a direct pinch while paying indirect taxes and hence,
resistance to indirect taxes is much less compared to resistance to indirect taxes is much less compared to
resistance to direct taxes.
 Tax evasion is comparatively less in indirect taxes in organised sector due to convenience of control.
 Collection cost of indirect taxes as percentage of tax collected are lower in indirect taxes compared to direct
taxes.
 Government can levy higher taxes on luxury goods, which reduces the wasteful expenditure.
 Government can judiciously use the indirect taxes to support development in desirable areas, while
discouraging it in others, e.g. reducing taxes on goods manufactured in tiny or small scale units; lowering
taxes in backward areas etc.

6. Disadvantage of direct taxes
 Indirect taxes are ‘progressive’, as they depend on paying capacity. Rich person is taxed more compared
to poor person.
 Direct taxes do not affect prices of goods and services.
 High income tax rates increases tax evasion and havala transactions.
 Direct taxes do not have such effect.
 Direct taxes are not inflationary.

7. Disadvantages of indirect taxes
 Indirect taxes increase the prices of products and hence are often perceived as inflationary.
 Higher customs duty and excise duty increases cost of modern machinery and technology.
 High customs /excise duty increases smuggling, havala trade and mafia gangs,which is harmful in many
ways.Similarly, high excise duty to evasion.
 Tax on goods and services increases its prices, which reduces demand of goods and services.
Lesser demand means lower growth of industrialisation.
 Indirect taxes do not depend on paying capacity. Since the indirect tax is uniform, the tax payable on
commodity is same, whether it is purchased by a poor man or a rich person .Hence, the indirect taxes are
termed as ‘regressive’.