Direct Tax and Indirect Tax

Tax is nothing but a percentage of income, profit or expenditure asked by the government from the individuals or businesses. The concept of tax is generally divided into two major parts – direct tax and indirect tax.

The revenues earned from taxation are used to serve a number of purposes in the economy. A major portion of the government’s earning depends on the revenue earned by the government from individuals, corporations and companies through the process of taxation.

Apart from the direct tax and indirect tax, the concept of tax can also be divided into various other parts like – progressive tax, regressive tax, local tax, federal tax and others.

Direct Tax
Direct taxes are those taxes that cannot be shifted on others. Direct tax can also be referred to as the tax that is directly paid to the government by the individual or business. The examples of direct tax are income tax, estate tax, inheritance tax, some corporate tax and gift tax.

In other words it can also be said that the direct taxes are paid to government by the individuals and businesses on which the tax was levied and no intermediate party remains in-between the government and tax payer. The constitutional law of the US says that the direct tax is nothing but the tax that is imposed on a property and should be paid by the property owner. The US court of Appeal says that real property tax, capitation and personal property tax are the types of direct tax.

Indirect Tax The indirect taxes are the taxes that are not directly paid by the taxpayer. It is rather included in the expenses of the taxpayer. For example, sales tax is an indirect tax. The tax that is paid by the seller on his or her sale is actually collected from the buyers in the form of higher price of the product. In other words it can also be said that the indirect taxes actually increase the prices of products and the consumers indirectly pay the tax through higher product price. Fuel, cigarette and liquor taxes are some of the examples of indirect tax.

But the definition given by the constitution of the USA has something else to say. According to them the indirect tax is actually a type of event tax. Hence the excise is considered to be a type of indirect tax.

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Last Updated on : 1st July 2013

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