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What are direct and indirect taxes?
February, 01st 2018

While there are different types of taxes, they are broadly classified into two categories, i.e. direct taxes and indirect taxes.

The concept of taxation is an important notion that plays a key role in sustaining economies and countries. It is considered that every citizen of a nation has the obligation to pay his taxes that are levied by the country. While there are different types of taxes, they are broadly classified into two categories, i.e. direct taxes and indirect taxes.

Direct Taxes

Direct taxes can be defined in simple words as those taxes that are levied directly on the income and wealth of an individual or organisation. The liability of direct taxes cannot be transferred to a third party and the payment should be made directly to the government authority. The main types of direct taxes imposed in India are the Income Tax and the Corporation Tax.

Income tax is that tax which is levied on an individual for the income he gained from various sources including salary and investment among others. Similarly, Corporation tax is levied on firms on the income they earned.

On the other hand, indirect taxes can be defined as those taxes that are collected by an intermediary mainly during the purchase of goods and services.

As the name suggests, it is not a direct transaction between the individual and the authority. Instead, the institution or individual responsible for paying the tax transfers the responsibility to others.

This is best observed in the market supply chain where the tax is passed on to consumers who are on the lower rung of the chain. Excise duties and Customs duties are among the most known forms of indirect taxes.

Excise duty is a levy paid by the manufacturer on items manufactured within the country, whereas Customs duty is the charge levied when goods are imported into the country, and is paid by the importer or exporter.

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