What are direct and indirect taxes ?

In tax terminology, direct tax and indirect tax refer to two main types of taxes based on how they are levied and collected:

Direct Tax

A direct tax is one that is directly paid by individuals or organizations to the government. It is typically levied on income, wealth, or property. Direct taxes cannot be transferred to others, meaning the taxpayer is responsible for paying the tax directly. Common examples include:

Income Tax: Paid by individuals and corporations based on their earnings.

Property Tax: Levied on the ownership of property, such as real estate.

Wealth Tax: Applied on the total net worth of an individual or company.

Direct taxes are often progressive, meaning they increase with the level of income or wealth, aiming to distribute the tax burden more equitably.

Indirect Tax

An indirect tax, on the other hand, is collected by an intermediary (like a retailer or service provider) who passes the tax on to the government. The tax burden is indirectly transferred to the end consumer, as it is included in the price of goods and services. Examples include:

Sales Tax: Applied on goods and services at the point of sale.

Value-Added Tax (VAT): Levied on each stage of production and distribution, ultimately passed to consumers.

Excise Tax: Applied to specific goods, like alcohol, tobacco, or fuel, often to discourage their consumption.

Indirect taxes are usually regressive, meaning they impact lower-income individuals proportionally more than higher-income ones, as they apply the same rate regardless of the consumer's income level.