Direct Tax

It is paid by the user of the Good or Service to the entity which levies the tax. The underlying logic is that the consumer is the one who enjoys all the benefits of the said Service or Good and as such shall pay the tax on the same.

This approach although ensuing for quite some time now is somewhat flawed since apart from the end consumer, the manufacturers, sellers, retailer and distributer also draw benefits from the Good or Service.

The benefit of a Direct Tax is that the amount to be paid is usually proportional to the income of the tax-payer. E.g. – Income Tax.

Indirect Tax

The Indirect Tax can be best understood through an example of Import duties. These are paid by the importing entity to the government of the country where the goods enter. As the importer goes on the resell the goods in the country, the cost of the import duties is essentially added to the price at which the consumer buys the good.

Where there are middlemen involved in the distribution of the goods to the final consumer, each entity pays the cost of import duties to the entity which sold the goods to it. Hence the end user is burdened with the total cost of import duties, even though the entities which route the goods to the consumer draw significant benefits at every level of sale.

A grey area of Indirect Taxes is that the same is levied as per the value of the Good in a uniform manner. As such, two consumers with significant income difference pay the same tax on the acquisition of a good or service.