Question

Explain the difference between direct and indirect taxes.

Answer 1

Instructions: Explain the differences in terms of their meaning, impact and examples.

Solution:

Direct tax	Indirect tax
Direct taxes are those that the taxpayer directly pays to the tax-imposing authority (mostly the government), and hence the name direct tax. They are levied on the taxpayer’s income (like income tax) or profits (like capital gains tax).	The taxpayer pays the tax indirectly through an intermediary. Indirect taxes are charged on the consumption of goods and services. The consumer is ultimately paying the tax by paying more for the product.
The tax liability cannot be transferred to another entity. They are non-transferable.	The tax liability can be transferred to the consumers.
Example: Income tax and Capital gains tax	Example: Goods and Services Tax (GST)