Types of Taxes and Distinction between Direct and Indirect Taxes

Taxes are classified into two broad categories based on how they are levied and paid: Direct Taxes and Indirect Taxes. Each type has distinct characteristics, purposes, and impacts on individuals and organizations.

1. Direct Taxes

• Definition:
  Direct taxes are taxes that are paid directly to the government by the taxpayer. The burden of these taxes cannot be shifted to another person, meaning the individual or entity liable to pay the tax is also responsible for bearing its cost.

• Examples of Direct Taxes:

  • Income Tax: Levied on the income of individuals, companies, and other entities. The rate varies based on income levels, and the tax is paid directly by the person earning the income.
  • Corporate Tax: A tax imposed on the profits of corporations. It is directly paid by companies based on their earnings.
  • Capital Gains Tax: Tax on the profit from the sale of assets or investments like property, stocks, or bonds. The seller of the asset is liable to pay the tax.
  • Wealth Tax (in some countries): Tax on the net wealth or assets owned by individuals, such as property, cars, jewelry, etc.
  • Estate Duty/Inheritance Tax: Tax on the transfer of assets upon the death of the owner.

• Key Features of Direct Taxes:

  • Non-transferable: The taxpayer must directly bear the cost of the tax.
  • Progressive in Nature: