Tax is what people call a financial obligation. It is a fee that is charged by the government and is applicable on income, goods, services, and other activity. The reason tax is charged is because it is the main source of revenue for the government. They are broadly categorized into two main forms: direct taxes and indirect taxes. Direct taxes are directly charged on the wealth of an individual or on his income and indirect taxes are applicable on goods or services. When it comes to direct taxes, the taxpayer directly bears the burden. However, in the case of indirect taxes, this burden is shifted directly to the consumer of certain goods and services. The differences from direct vs indirect tax and their effect on the taxpayer are based on parameters such as Nature of the tax Direct taxes are progressive in nature. This means that the rich have to pay a higher amount of tax as compared to someone who does not earn as much or makes minimum wage. Therefore, the rich finance the welfare measures of the country and the income inequalities are brought down to ensure an equitable and just society. On the other hand, indirect taxes are applied uniformly irrespective of socio-economic factors as the charge is inbuilt in the price of the goods. Therefore, it is a regressive tax because the poorer sections of society have to pay a greater amount in relation to their mean income or salary. Types Direct taxes and indirect taxes are further divided into different types. Let us look at some of the types of direct taxes. These include wealth tax, income tax, property tax, export, and import duties, and corporate tax. Let us look at some of the indirect tax forms. These include value-added tax (VAT), service tax, security transaction tax (STT), and customs or excise duties. Evasion of taxes When it comes to direct taxes, there is a possibility of tax evasion. People often store their ill-gotten wealth in various asset forms or perhaps stash it in tax havens abroad. This results in grievous losses to the coffers of the country as taxes that could have been collected are now lost. In direct contrast, indirect taxes cannot be evaded because they are built into the price of the goods or services consumed. Therefore, a person cannot evade the tax unless he chooses to utterly forego the goods or services in question. When it comes to direct vs indirect tax, direct taxes are more equitable because the burden of paying falls on the rich as compared to the poor. This leads to a more just and equitable society. However, indirect taxes can be strategically used to dissuade people from certain harmful practices. We see this in the form of high taxes on harmful products like cigarettes and alcohol.
