direct tax and indirect tax

1. DIRECT TAXES
&
INDIRECT TAXES
BY: NITIN YADAV
22385
BFIA 2B

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’.

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