Understanding The Difference Between Direct Taxes vs Indirect Taxes
Direct taxes are non-transferable taxes paid to the government by the taxpayer, whereas indirect taxes are transferable taxes in which the tax responsibility can be moved to others.
Both direct and indirect taxes have different implications for the country, however, both direct and indirect taxes are significant to the government because taxes include the major part of the government's revenue.
Direct taxes are paid entirely by the taxpayer straight to the government. It is also characterized as a tax in which the individual bears both the duty and the burden of payment. According to the type of tax levied, direct taxes are collected by the central government as well as state governments.
The government demands a larger percentage from higher-income taxpayers and a lower percentage from lower-income taxpayers. There's nothing else that they have to do to trigger the taxation and they can't avoid it or pass it on to someone else.
Major Types of Direct Taxes
Income taxes are a great example of direct tax. A worker earns income and is required to pay a portion of it directly to the government. The amount of tax you pay is determined by how much money you earn in a given year.
If most investments are kept for at least one year, capital gains taxes are owed on the profits from their sale. You must pay capital gains tax in the year in which you had realized the gain. For example, if you make a total profit of $140 by selling your shares in 2022, you must record that $140 as a capital gain tax on your tax return for that year.
A wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities. A wealth tax applies to the net fair market value of all or some of a variety of asset types held by a taxpayer, including cash, bank deposits, shares, fixed assets, personal cars, real property, money funds, trusts, and pension plans, and owner-occupied housing. Colombia, France, Norway, Spain, and Switzerland all have wealth taxes.
An estate tax is a levy on estates whose value exceeds an exclusion limit set by law. Only the amount that exceeds that minimum threshold is subject to tax. Nearly one in four states have their estate taxes, with lower limits.
Fringe benefits tax is paid by an employer that provides fringe benefits to employees and is collected by the state government. They can be made in the form of property, services, cash, or cash equivalents. Savings bonds, for example, are cash equivalents since they may be converted into cash quickly.
Indirect taxes are never progressive. People who earn so little money that they might not pay any income tax at all are going to pay the exact same sales tax as a millionaire every time they purchase a chocolate bar or a set of boxing gear. Indirect taxes, therefore, are regressive rather than progressive. They take a higher percentage from low-income earners than they do from high-income earners.
Major Types of Indirect Taxes
Sales tax is an indirect tax levied at the moment of purchase or exchange of certain taxable goods, charged as a percentage of the value of the product, and is paid to the government. The sales tax is based on the government in power and the policies enforced by it.
Entertainment tax is levied by the government on commercial shows, movie tickets, sporting events, music festivals, amusement parks, exhibitions, theatre shows, and other private festivals. The entertainment tax varies from one state to the next.
Service tax is a tax levied by the government on service providers on certain service transactions. It is charged to the individual service providers on a cash basis, and to companies on an accrual basis. Service tax was paid to the government in exchange for different services received from service providers.
Resolve Your Tax Bills
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