What is the Difference Between Direct Tax and Indirect Tax?

The main difference between direct tax and indirect tax lies in the way they are paid and who ultimately bears the burden of the tax.

Direct Tax:

• Paid directly by the taxpayer to the government.
• These taxes cannot be shifted to others.
• Examples of direct taxes include income tax, property tax, and inheritance tax.

Indirect Tax:

• Can be passed on or shifted to another person or group by the person or business that owes it.
• Ultimately, individuals pay almost all taxes, but businesses and corporations can use a tax shift to pass taxes on to their customers, clients, patients, employees, and stockholders.
• Indirect taxes are often regressive, meaning those with lower incomes end up paying higher taxes proportionally, as they are typically applied at a fixed rate regardless of the taxpayer's income level.
• Examples of indirect taxes include sales tax, value-added tax (VAT), and excise tax.

In summary, direct taxes are levied on individuals or entities directly by the government and cannot be shifted, while indirect taxes are collected by an intermediary (e.g., marketplaces, manufacturers, platform owners, vendors) from the end consumer and can be passed on to others.

Comparative Table: Direct Tax vs Indirect Tax

Here is a table illustrating the differences between direct tax and indirect tax:

Direct taxes are levied on taxpayers' income and profits, while indirect taxes are charged on goods and services. Direct taxes cannot be shifted to other individuals or groups, whereas indirect taxes can be passed on to end-consumers. Direct taxes are generally considered progressive, as they are based on income and profits, while indirect taxes are considered regressive, as they affect everyone equally, regardless of their income.