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Difference between direct and indirect tax
February, 12th 2013

With the budget session around the corner, there is lot of noise about taxes. Taxes don’t just mean your income-tax; there are many other forms of tax that an individual pays without directly seeing the hit. While income-tax is a direct tax, the latter are called indirect taxes. Here’s a look at what the two categories cover and how they impact you.

Direct tax

This kind of levy is payable directly by the individual or company, whose obligation it is to pay. It can’t be transferred to anyone else. The most common form of direct tax is income-tax, which has to be paid by individuals, hindu undivided families (HUFs), cooperative societies and trusts on the total income they earn. This can include income from salary, income from house property, business and professional income, capital gains and income from other sources such as interest. The tax liability depends on the residential status and gender of the person being taxed.
Companies are also taxed on the income they earn. For Indian companies, tax is obligatory on income earned in India and overseas, whereas in case of non-resident companies tax has to be paid on money earned in India.
A house owner has to pay property tax, which is applied as per state rules. Lastly, if you receive a gift in excess of Rs.50,000 per year, you will have to pay gift tax.
The onus of declaring income for the purpose of calculating direct tax liability is on you. Non-payment or tax evasion can incur heavy penalty.

Indirect tax

Indirect tax is levied by the government and collected by an intermediary from the person who bears the ultimate economic burden of the tax. What this means is that if you are purchasing goods or services from anywhere and you are the final consumer, then the tax levied on the manufacturer will ultimately get passed on to you. This kind of tax increases the total amount you pay for something. Sometimes it may be represented separately from the price of the item or may be shown together with the cost of the product itself. For example, the service tax paid on a food bill is shown separately, but tax paid on fuel is included in the product price.

There are many forms of indirect taxes. Customs duty is a tax levied on items imported (and exported out of) into India. The central government also charges an excise duty or a tax payable on goods manufactured in India for domestic consumption. Service tax is a charge applied on services such as food and beverage, travel and recreation by the provider, while value-added tax is applied at each stage of sale of a product and the final tax is borne by the last consumer. Lastly, there is securities transaction tax levied on all transactions done on a stock exchange.
The reason why these are called indirect taxes is because unlike direct taxes, the person paying the tax to the government can pass it on to another person. They are charged first at the manufacturers’ level, but ultimately get passed on to the consumer, which is you.

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