Types of direct and indirect taxes

The study of direct versus indirect tax is an extremely important part of economics. Both direct and indirect taxes have various different types under their respective classifications, and this article lists some of them. Types of direct and indirect taxes Direct taxes are paid directly to the government by an individual or an organization, and these taxes are non-transferable and progressive in nature. Here are some examples of both types to help you compare direct versus indirect taxes:

  • Income tax: This is the tax paid by an individual on their annual net income at the end of the financial year. The term “individuals” refers to people, companies, multinational corporations, co-operative societies, and such. The gross or total income earned by the individual, except deductions and exemptions like PF, bonus, and others, is the taxable income. Tax is levied on one’s net income above the minimum taxable limit. The percentage of income tax changes every financial year under the Federal government.
  • Corporation tax: This tax is paid by companies, organizations, and businesses for each financial year on their collective revenues from all of their branches, be it within the country or outside. The percentage of tax changes depending on whether the organization is located in the country or abroad.
  • Wealth tax: It is levied on individuals and organizations on the value of the non-productive assets owned by them during a financial year or at the time of the valuation of the asset. Non-productive assets include jewelry, cars, boats, planes, houses that haven’t been let out for rent, land, and cash-in-hand above $700. Many countries do not have or have abolished wealth tax.

Indirect taxes Indirect taxes are taxes that are added to the value of goods and services. These taxes can be transferred and are regressive in nature.

  • Sales tax: This is paid to the government by the retailer. The retailer then transfers the burden of this tax onto the customers by charging sales tax on products and services. This tax is levied on tangible and movable goods, and the percentage varies according to the product. Sales tax is collected by individual state governments.
  • Service tax: It is paid to the government by the service provider, who then charges the tax amount to the consumer of the service. Service tax is charged on things like services at a restaurant, spa services, beauty services, and such. This is also collected by individual state governments.
  • Excise duty: This is payable to the government by the manufacturer of the goods sold in a country. The manufacturer then transfers the burden of tax to the retailers and wholesalers, who, in turn, transfer it to the consumer. This tax is paid directly to the government.
  • Customs duty: This tax is paid on the value of goods when they are moved across international borders. It is paid on the import and export of goods, and the burden of this tax is ultimately borne by the consumer of the product.

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