What Is the Difference between Indirect Tax and Direct Tax?

Posted by: Syed Shah Post Date: 12th December 2017

Direct and indirect taxes are the main types of taxes levied by the government in the UK. The former includes taxes that cannot be transferred to other people. An example of such is when you pay taxes directly to your government.

With direct taxes, it is the individual that is responsible for paying tax on their income. For instance, the self-assessment that needs to be done every year.

Difference between direct and indirect tax

In the case of indirect taxes, the taxes are transferable to other people. A good example of indirect taxes can be seen in the form of VAT (value added tax) that you pay when you buy products and services from others.

Important source of revenue

Direct and indirect taxes are a very important source of revenue for the UK government as they have an impact on the economy. Direct taxes are paid entirely by individuals; this tax type is one in which the liability and burden rests solely on the shoulders of the individual. Some examples of direct taxes include income tax, corporate tax, wealth tax, estate duty, gift tax and fringe benefit tax.

Examples of indirect taxes

Excise duty, sales tax, customs duty and entertainment along with service tax are all examples of indirect taxes. The major difference between these two types of tax is that in one case the individual must pay the taxes, and in the other case the tax can be paid by anyone buying goods and services. Let’s take a brief look at some differences between direct and indirect taxes.

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Who pays direct taxes?

Direct taxes are levied and paid by individuals. The burden of tax is not transferable to anyone else and while direct taxes help to cut inflation, indirect taxes may lead to more inflation. The allocative effects of direct taxes are better than indirect. The reason for this is that the burden of paying direct taxes falls entirely on the individual’s shoulders, while in the case of indirect taxes the burden is spread to different parties.

How do direct taxes help the government?

Direct taxes also help to reduce inequalities and are therefore considered to be more progressive. Indirect taxes on the other hand have several exceptions and levying them leads to lower costs of administration. Indirect taxes are easy to collect and do not incur much administrative cost.

Who do indirect taxes affect?

Indirect taxes also cover a greater number of people who need to pay tax whenever they buy goods and services. In contrast, direct taxes are collected from only those individuals that fall in the tax paying brackets. In the case of harmful products such as cigarettes, the level of indirect taxes levied is higher, so this dissuades consumers from buying such products. This therefore is beneficial to society.

The bottom line is that direct and indirect taxes are defined by keeping in mind the individual who pays the tax. In the case of direct taxes, the government collects the tax from individuals directly. In the case of indirect taxes, the government collects taxes from various people; and this affects almost every person in the British society.

Direct and indirect taxes are both important for the UK as they have a major connection with the country’s economy. The more taxes collected by the UK governments, the better the country will be. Both types of taxes are collected by the central and state governments via the HMRC (Her Majesty’s Revenue & Customs).

How can you become a VAT expert or tax consultant?

In the AAT level 3 syllabus, the Indirect tax is a separate unit, which looks deeper into the subject content of VAT.
On the other hand, the Personal tax and Business tax units look at the Direct taxation subjects under the AAT level 4 syllabus.

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