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Direct & Indirect Taxes

Taxes are classified into direct and indirect categories based on who bears the burden of the tax and how it is collected.

1. Direct Taxes
Definition:

Direct taxes are levied directly on individuals, organizations, or entities, and the burden of payment cannot be shifted to others.

Key Characteristics:
  • Paid directly by the taxpayer to the government.
  • Based on income, wealth, or property.
  • Progressive in nature: Higher income leads to a higher tax rate.
Examples:
  • Income Tax: Tax on individual or corporate income.
  • Corporate Tax: Charged on company profits.
  • Wealth Tax: Based on the value of owned assets (now abolished in many countries).
  • Capital Gains Tax: Levied on profits from the sale of assets like property or shares.
  • Estate/Inheritance Tax: Charged on the transfer of wealth upon death.
Advantages:
  • Promotes equity by taxing individuals based on their ability to pay.
  • Generates stable revenue for governments.
Disadvantages:
  • High rates can discourage income generation or lead to tax evasion.
  • Complex filing procedures may burden taxpayers.
2. Indirect Taxes
Definition:

Indirect taxes are levied on goods and services and are paid by consumers indirectly through businesses. The burden of tax can be shifted from one entity to another.

Key Characteristics:
  • Collected by intermediaries (e.g., manufacturers, retailers).
  • Regressive in nature: Same tax rate applies regardless of income level.
  • Included in the price of goods or services.
Examples:
  • Goods and Services Tax (GST): A comprehensive tax on the supply of goods and services.
  • Customs Duty: Levied on imports and exports.
  • Excise Duty: Charged on the production of certain goods (e.g., alcohol, tobacco).
  • Sales Tax: Imposed on the sale of goods (replaced by GST in many regions).
  • Value Added Tax (VAT): A multi-stage tax on goods and services.
Advantages:
  • Simpler to collect and administer.
  • Widens the tax base as all consumers contribute.
Disadvantages:
  • Can disproportionately affect low-income groups.
  • Increases the price of goods and services, leading to inflationary pressures.
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