A. Direct Tax

Taxes are actually legal extortion of money by the Govt or relevant authority under the
prevailing acts or laws of the land.Taxes are of 2 types i.e. Direct Taxes & Indirect Taxes.
A. Direct Tax
Direct tax is paid directly by an individual or organization to an imposing entity like

government
Direct Taxes are based on the ability-to-pay principle, which means that if you earn more,
your rate of tax is also more.
The purpose of Direct Tax is to redistribute the wealth of a nation (taking from rich, thus
making them poorer)
Direct taxes cannot be passed on to a different person or entity;
The individual or organization upon which the tax is levied is responsible for the fulfilment
of the full tax payment.
It is considered to be progressive tax since you tax depending upon the ability of the taxpayer
to pay
B: Indirect Tax
An indirect tax is a tax that is shifted from one taxpayer to another i.e. collected by one
person but actually born by another person
An indirect tax is levied on goods or services, which increases the price of a good or services
The tax is actually paid by the end consumer, by way of a higher retail price.
Indirect taxes are levied equally upon all taxpayers irrespective of their income.
Indirect taxes are passed on, as the price of the tax is compensated for by simply increasing
the overall price of the good or service.
It is considered to be a regressive tax since all taxpayers whether rich of poor have to bear the
same burden.
.
Direct Taxes are the taxes that are levied on the income of individuals or organisations. They
include Income tax, corporate tax, wealth tax and inheritance tax.
Indirect taxes are those paid by consumers when they buy goods and services. These include
excise, service tax (or GST) and customs duties.
Main Differences Between Direct and Indirect Taxes
1. The tax, which is paid by the person on whom it is levied is known as the Direct tax
while the tax, which is paid by the taxpayer indirectly is known as the Indirect tax.
The direct tax is levied on persons income and wealth whereas the indirect tax is
levied on a person who consumes the goods and services.
2. The main difference between the direct and indirect tax is that the burden of direct
tax cannot be shifted whereas the burden of indirect tax can be shifted.
3. The evasion of tax is possible in case of a direct tax if the proper administration of
the collection is not done, but in the case of indirect tax, the evasion of tax is not
possible since the amount of tax is charged on the goods and services.
4. The direct tax is levied on Persons, i.e. Individual, HUF (Hindu Undivided Family),
Company, Firm, etc. On the other hand, the indirect tax is levied on the consumer
of goods and services.
5. The nature of a direct tax is progressive, but the nature of the indirect tax is
regressive.
6. Direct tax helps in reducing the inflation, but the indirect tax sometimes helps in
promoting the inflation.
Customs duty is a tax levied by the sovereign / government on goods that cross the borders
of its territory. This must be one of the oldest forms of taxation, and is not only a form of
collecting revenue for the sovereign but is also an expression of sovereignty in that territory.
(Perhaps for this reason the courts are far more stringent in their approach towards evasion of
customs duties than of other taxes.
An Excise or Excise tax and also called special excise duty is an inland tax on the sale, or
production for sale, of specific goods or a tax on a good produced for sale, or sold, within a
country or licenses for specific activities. Excises are distinguished from custom duties,
which are taxes on importation.
-Excises are inland taxes, whereas customs duties are border taxes.
In three ways an excise is distinguished from a sales tax or VAT:-
1. An excise typically applies to a narrower range of products.

2. An excise is typically heavier, accounting for a higher fraction of the retail price of
the targeted products.
3. an excise is typically a per unit tax, costing a specific amount for a volume or unit
of the item purchased, whereas a sales tax or VAT is an ad valorem tax and
proportional to the price of the good.
And excise registration is done by many online portal.
Excise duty is a form of indirect tax levied by the government. It is a duty which a
manufacturers need to pay at the time of the clearance of goods from their factory.The duty
levied is passed to the end user that's the reason it is called indirect tax.eg
We buy a soap from the market it's mrp is set keeping in account the excise duty levied on
it..as the consumers are paying tax at the time of purchasing so it is called indirect tax.
The VAT is a consumption tax that taxes the value added by businesses at each point in the
production chain. It applies to both manufactured goods. A business pays VAT on its
purchase of inputs and collects it on its sales, whether those sales are to another business or
the final consumer. VAT is also applicable on resale of goods.
It is also known as consumption tax. It is a multi point sales tax with set off for tax paid on
purchases.
It is basically a tax on the value addition on the product. It is not charge on companies. It is
charged as a percentage of its price.
Direct and Indirect Tax: Merits and Demerits | Economics

In this article we will discuss the merits and demerits of direct and indirect taxes on an
economy.
Taxes may be classified as direct and indirect. Direct taxes are levied on a persons or a
firms income or wealth and indirect taxes on spending on goods and services. Thus, direct
taxes are paid directly by the person or firm on whom the assessment is made, while indirect
taxes are paid indirectly by consumers in the form of higher prices. Direct taxes cannot be
legally evaded but in direct taxes can be avoided because people can reduce their purchases
of the taxed goods and services.
Direct Taxes:
Examples of direct taxation include income tax, corporation tax (on companies profits),
capital gains tax (a tax on the profits of sales of certain assets), wealth tax (which is a tax on
ownership of property or wealth) and a capital transfer tax (a tax on gifts to replace death
duties). Direct taxes are mainly collected by the central government.
Advantages:
(i) It is easy to determine the incidence of the tax a person or institution who actually pays
and suffers the burden of tax.
(ii) Direct taxes tend to be progressive people in the higher income group pay a greater
percentage than poorer people, e.g., income tax is graduated so that high income earners pay
a larger percentage; also a selective wealth tax would only apply to those owning more than a
certain level of wealth.
(iii) Direct taxes are easy to collect. Consider, for example, the PAYE system which is used
to collect income tax from most wage and salary earners.
(iv) Direct taxes are important to the governments economic policy. If the government is
fighting inflation it can impose, for example, high levels of income tax to restrict consumer
demand. If the government is concerned about unemployment it can reduce the levels of
income tax to increase consumer demand and increase production.
Disadvantages:
(i) Direct taxation may be a disincentive to hard work. High rates of income tax, for example,
may discourage people from working overtime or trying to gain promotion at work. Some
economists blame the brain drain (i.e., the emigration of highly qualified persons, such as
scientists and doctors) on Indias high levels of taxation.
(ii) Direct taxation discourage savings because, after paying tax, individuals and companies
have less income available to save. This means that investment, which relies on the level of
savings, is low and this could cause less production and employment.
ADVERTISEMENTS:
(iii) This type of taxation encourages tax evasion to avoid paying so much tax.
(iv) There is no element of choice about paying the tax it is unavoidable.
Indirect taxes:
Examples of indirect taxation include customs duties, motor vehicles tax, excise duty, octroi
and sales tax. Indirect taxes are collected both by the central and state governments but
mainly by the central government.
Advantages:
(i) Indirect tax is fairly easy to collect.
ADVERTISEMENTS:
(ii) It is easy to determine the incidence of an indirect tax.
(iii) The government can use it to discourage certain types of consumption. A high rate of tax
on tobacco can, for example, affect smoking habits.
(iv) Indirect taxation is a good way of raising revenue when levied on goods with an inelastic
demand, such as necessities.
(v) Tourists do not pay income tax. But they spend money on goods and services. This adds
to the tax revenue of the government.
(vi) Consumers have a choice as to whether they pay the tax. They can avoid paying the tax
by not consuming the goods which are being taxed.
(vii) Indirect taxes do not have a discentive effect on work.
Disadvantages:
(i) Indirect taxes are regressive. A regressive tax is one which causes a poor person to pay a
higher percentage of his or her income as tax than a rich person. For instance, the tax
ingredient of the price of a new television set would be the same for the poor and the rich
person, but as a percentage of the poor persons income, it is far greater.
(ii) These taxes are not impartial. In recent years, certain groups of consumers have
complained that they are being heavily penalised by taxation, e.g., drinkers, smokers and
drivers.
(iii) Indirect taxes may contribute to inflation. The imposition of an indirect tax on an item
like petrol will increase its price. Since petrol is an essential input in a large number of
industries, this may set off an inflationary spiral. Moreover, trade unions demand higher
wages to maintain the real incomes of workers
1. The duty that is levied for goods manufactured inside the state is called excise duty.
The duty that is levied on goods imported from a foreign country is the customs duty.
2. Excise duty is imposed along with VAT and sales tax. When looking at the price of
goods, excise duty forms its major portion.
3. Excise duty is valued ad valoreum, which means that the duty is calculated taking into
account the number of goods or the volume of the goods.
4. The customs duty of any goods is valued by its assessable value. Each product has
been given a value or code, which is four to ten digits.
5. When talking of both duties, most of the administrative procedures, valuation,
confiscation, refund, appeal and settlement are the same in both excise and customs
duty.

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Taxes are actually legal extortion of money by the Govt or relevant authority under the

Direct tax is paid directly by an individual or organization to an imposing entity like

Main Differences Between Direct and Indirect Taxes

In three ways an excise is distinguished from a sales tax or VAT:-

1. An excise typically applies to a narrower range of products.

Direct and Indirect Tax: Merits and Demerits | Economics

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