What Is Direct and Indirect Taxes

Generally, a direct tax is a tax imposed on a single person (legal or natural) or property (i.e. real and personal property, livestock, grain, wages, etc.) as opposed to a tax levied on a transaction. In this sense, indirect taxes such as a value added tax or a value added tax (VAT) are only levied when a taxable transaction takes place. People have the freedom to participate in or refrain from such transactions; while a direct tax (in the general sense) is imposed on a person, usually unconditionally, such as a voting tax or a voting tax levied on the basis of the life or existence of the person, or a wealth tax imposed on the owner on the basis of ownership and not commercial use. Some commentators have argued that “a direct tax is a tax that cannot be transferred from the taxpayer to someone else, while an indirect tax can be.” [1] Direct taxes are a general term that includes various types of taxes paid directly to the government, including: Direct taxes are a form of tax collection that apply to the general public using their personal income and wealth generated and collected through formal channels and valid government references such as permanent account number and bank account details. In addition, direct taxes are transfers that may have a redistributive concern (combined with the desire to increase tax revenues). [6] In fact, taxation is a major instrument of the redistributive function of government, identified by Richard Musgrave in his Theory of Public Finances (1959). Progressive direct taxation could help reduce inequalities and correct the different living standards of the population. [6] The modern distinction between direct and indirect taxes emerged with the ratification of the 16th Amendment to the United States Constitution in 1913. Prior to the 16th Amendment, U.S. tax law was drafted in such a way that direct taxes had to be allocated directly to the population of a state.

For example, a state whose population is 75% the size of another state would only have to pay direct taxes equivalent to 75% of the larger state`s tax bill. Unlike indirect taxes such as VAT, direct taxes can be adjusted to the solvency of the taxpayer according to his status (income, age, etc.). Thus, direct taxes can be progressive (the tax rate increases with the increase in the tax base), proportional (the tax rate is fixed, it does not change when the tax base increases or decreases) or regressive (the tax rate decreases with the increase in the tax base) depending on their structure. [1] It is different from indirect taxes, which are generally regressive because everyone pays the same amount, regardless of their ability to pay (meaning that the tax burden is greater for the poorest than for the richest). Direct taxes are quite simple: the federal, state, or local government levies a tax on a person or company, which then pays the tax directly to the government. Guide students to the student`s lesson: Direct and indirect taxes. A direct tax is a tax that a person or organization pays directly to the company that imposed it. For example, a single taxpayer pays direct taxes to the government for a variety of purposes, including income tax, property tax, personal wealth tax, or asset tax. Activity 2: Business Start-up – Find out how the company`s location affects profits and taxes. Direct taxes are a type of tax that a person pays and that is paid directly or directly to the government, such as income tax .B. Income tax payable is a term given to the tax liability of a commercial organization to the government in which it operates.

The amount of the liability depends on the profitability over a certain period of time and the applicable tax rates. The tax payable is not considered a long-term liability, but a current liability, a voting tax, a property tax and a personal wealth tax. These direct taxes are calculated on the basis of the taxpayer`s solvency, which means that the higher the taxpayer`s ability to pay, the higher his ability to pay. The government does not have to spend to collect taxes, as they are already collected directly from the source of income. Some companies use automatic billing systems that save time and money. Direct taxes must be paid by the person or organization that collected them, as opposed to indirect taxes that can be passed on to others. The most common form of land transfer tax is inheritance tax. Such a tax is levied on the taxable portion of a deceased person`s assets, including trusts and financial accounts.

A gift tax is also another form in which a certain amount is levied on people who transfer real estate to another person. Section 2(c) of the Central Income Boards of India Act, 1963 defines “direct taxes” as follows: Have students examine the factors that determine the price of a product. Let us take the example of milk. In addition to supply and demand, the price of milk reflects the costs of the trader, dairy and farmer. All three must pay for the lease or purchase of a facility, equipment, maintenance, employee salaries and taxes. But many view them as regressive taxes because they can bear a heavy burden for low-income people who end up paying the same amount of tax as those earning higher incomes. In the United States, direct taxes are largely based on the principle of solvency. This economic principle states that those with more resources or earn a higher income should bear a heavier tax burden. Some critics see this as a deterrent for individuals to work hard and earn more money, because the more a person earns, the more taxes they pay.

In the end, individuals pay almost all taxes. Businesses and corporations use tax transfer to pass on taxes to their customers, patients, employees and shareholders. The most common example of indirect taxation is that of import duties. Customs are paid by the importer of the goods at the time of entry into the country. If the importer resells the goods to a consumer, the cost of customs is actually hidden in the price the consumer pays. .