Direct tax is a tax levied by the central and state governments in addition to some municipalities imposing some minor amount of tax on individuals and corporations as corporate tax or income tax or property tax.
The direct tax is a mandatory tax payable by individuals on income or profits that cannot be avoided and is not passed on to other individual or entity. The direct tax thereby emerges as a lesser burden on individuals .
Further, from the administration stand-point, the proper management of the direct tax involves comparably higher costs. And the lack of proper administration, results in tax-avoidance as well as tax-evasion from the side of the prospective tax-payer.
However, the proper governance of the direct tax could aid in equity of income and wealth distribution.
Different types of taxes that fall in the direct tax category include income tax; corporation tax; property or house tax; and gift tax.
In contrast, indirect tax is levied on executing some taxable transaction such as the purchase of goods and service, which could though be avoided by not entering into such a transaction.
Ergo, indirect tax is transferable to other individuals, for instance, a tax levied on sellers is in turn passed on to the buyers of the goods and service who pay it in the form of a sales tax.
Also, due to the nature of the indirect tax it is also referred to as regressive tax as an increase in the scale of indirect taxation eventually decreases consumers appetite for goods and services.
Further, as the burden of indirect tax befalls all individuals irrespective of their economic strata, the tax results in wide disparity in wealth and income distribution.
Nevertheless, the imposition of indirect tax on expensive and luxury items and withdrawal of the same in case of necessary goods and services, could reduce this disparity considerably.
Also, as the amount of indirect tax that is to be levied is perhaps incorporated into the cost of goods and services, the administration is easy as well as cheaper.
Several taxes come within the ambit of indirect taxation; including central excise, customs duty, sales tax, service tax, value added tax (VAT) and professional tax.
In a way, the levy of both the modes of taxes is indispensable and in the interest of the economy as a whole.