Define Direct tax and Indirect tax | Direct tax and Indirect tax difference

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Taxation is the biggest resource of public revenue of the modern government. Tax is a kind of money of which it is the legal duty of every citizen of a country to pay honestly. In today’s article we are going to know about direct tax and indirect tax. So let’s discuss this.

What is direct Tax?

Direct tax is an important type of taxation. In case of direct tax the impact (money burden of the tax) and incidence (Ultimate money burden of the tax) is bear by the same person. As for example of direct tax– Income tax, wealth tax and property tax, etc.

Merits of direct Tax

The merits of direct taxes are mentioned below-

• Direct taxes are economical because the cost of collection is very low.

• Direct taxes follow the canon of equity.

• Direct taxes create civic consciousness among the common people.

• Direct taxes are certain

• Direct taxes always satisfy the canon of elasticity.

Demerits of direct tax

The demerits of direct taxes are mentioned below-

• The main draw back of the direct tax is inconvenience. This is because it is very difficult to understand.

• The coverage of the direct taxes is very limited.

• Direct tax is not much suitable for the UDCs (Under develop countries) as the most of the people are illiterate and do not understand the spirit of such of tax.

• If the rate of direct tax is very high than it negatively influence the investment capacity of the people.

• A direct tax is calculated on the basis of income. Hence it encourages tax evasion.

What is Indirect tax?

Indirect tax is another form of taxation. In case of indirect tax, the impact and incidence is bears by the different persons. As for example of Indirect tax – are Sale tax, VAT, excise duty, custom duty etc.

Merits of Indirect tax

The merits of indirect taxes are given below-

• Indirect taxes are highly elastic in nature.

• It is not possible to avoided the indirect tax payment. This is because it is already included in the price level.

• Heavy indirect taxation on articles like wine, cigarate, opium, tabaco, etc serve a grate social purpose by cutting down the consumption of such harmful commodity.

• Indirect taxes have wider coverage as every member of the society is taxed.

• Indirect taxes are easy to collect from every member of the community.

Demerits of Indirect tax

Following are the demerits of Indirect taxes-

• Indirect tax are regressive in nature because they fall on all person indiscriminately.

• Indirect tax do not follow the principle of equality.

• Heavy indirect taxes on the commodity increases the price level. Hence it is inflation sensitive.

• The indirect taxes do not create civic consciousness.

• Indirect taxes decrease savings, because those taxes are included in price and therefore, people have to spend more on the purchase of goods.

Distinguish between direct tax and indirect tax?

The major difference between direct tax and indirect tax are mentioned below-

Direct Tax Indirect Tax
1. Direct taxes are progressive in nature. 1. Indirect taxes are regressive in nature.
2. It is very easy to evade the payment of direct tax. 2. It is not possible to evade the payment of indirect tax.
3. The coverage of direct tax is very limited. 3. The coverage of the indirect taxes is very wide. It is imposed on every members of the society.
4. Direct tax create civic consciousness among the people. 4. Indirect tax does not creates any civic consciousness.
5. The direct tax is certain. 5. Indirect taxes are uncertain.
6. The cost of collection of direct tax is very low. 6. The cost of collection is very high in case of indirect tax.

Explain the role of Indirect tax in the UDCs?

Indirect taxes play a significant role in the socio-economic development of UDCs (Under Develop Countries) like India. The important roles of indirect taxes are mention below-

Collection of resources- Most of the people in the UDCs are living below poverty line. The per capita income of the people in these countries is very low. Thus through the direct taxes we can not collect adequate funds. In order to collect resources the govt depends on indirect taxes.

Collection of revenue- It is impossible for an individual to evade the payment of indirect taxes because they are already included in the price of the commodity. Thus there is very little possibility for the tax evasion. Hence govt may collect huge amount of revenue.

Social Justice- The indirect taxes may be used for an instrument of social justice. Heavy indirect taxation in luxurious commodities help to attain this objective.

Curtailing the consumption of harmful products- Heavy indirect taxation on goods like wine, harmful chemical etc. Serve a great social purpose by  curtailing the consumption of such harmful commodities which is in the interest of the community as a whole.

Protection- Through indirect taxation, the govt protects the domestic industries from the harmful foreign competition. In this case tariff plays a significant role in the UDCs.

More Flexible- Indirect taxes are considered more flexible . So, that their rates can be change according to the changes in economic conditions in developing countries.


What is capital gain taxes?

Capital gains tax refers to the tax levied on appreciated value of capital assets.

What is specific tax?

Taxes which are based on specific qualities or attributes of goods are called specific tax. This tax imposed on the commodity according to its weight, size or volume. As for example- Specific excise duty may be levied on the cloth in the length units and tax on the sugar is based according to the unit of weight. The tax on T.V picture tube is based on the size.

what is ad valorem tax?

Ad- Valorem tax is the tax imposed on a commodity according to its value. It is called ad valorem tax. This kind of tax is received after assessing the value of the taxable possession of a person. Several imposed articles are taxed in firms of value and they are nothing to do with the size, length and weight of the commodity. For example- an import or import duty is levied at the rate of 5 paisa per rupee or 5 percent of the value of the goods.

What is double tax?

If a person pays taxes two times for the same service, it is called as double tax.


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