What is Direct and Indirect Tax | Goods Service Tax

The goods service tax is a type of indirect tax that has been incorporated recently with an objective to merge the varied modes into a single taxation system. Before we define goods service tax in detail, let us start with the types of taxes – There are various kinds of taxes is found in India. The taxes collected in India are either direct tax or indirect tax. However, the types of taxes also depend on whether a particular tax is being charged by the central or the state government or any other body.

Direct Tax

A direct tax is one imposed upon an individual person (juristic or natural) or property (i.e. real and personal property, livestock, crops, wages, etc.) as distinct from a tax imposed upon a transaction. In this sense, indirect taxes such as a sales tax or a value added tax (VAT) are imposed only if and when a taxable transaction occurs. People have the freedom to engage in or refrain from such transactions; whereas a direct tax (in the general sense) is imposed upon a person, typically in an unconditional manner, such as a poll-tax or head-tax, which is imposed on the basis of the person’s very life or existence, or a property tax which is imposed upon the owner by virtue of ownership, rather than commercial use. Some commentators have argued that “a direct tax is one that cannot be shifted by the taxpayer to someone else, whereas an indirect tax can be.”

Indirect Tax

Indirect taxation is policy commonly used to generate tax revenue. Indirect tax is so called as it is paid indirectly by the final consumer of goods and services while paying for purchase of goods or for enjoying services. It is broadly based since it is applied to everyone in the society whether rich or poor. Since the cost of the tax does not vary according to income, indirect taxation includes Ad Valorem tax and Specific tax, of which Ad Valorem(VAT, GST) is proportional and Specific tax is fixed. However, indirect taxation can be viewed as having the effect of a regressive tax as it imposes a greater burden (relative to resources) on the poor than on the rich, as both rich and poor pay the same tax amount for consumption of a certain quantity of a specific good. The taxpayer who pays the tax does not bear the burden of tax; the burden is shifted to the ultimate consumers. In the case of a direct tax, the taxpayer has to bear the burden of tax personally; in case of indirect tax the taxpayer and the tax bearer are not the same person.

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