A direct tax, as opposed to a transaction tax, is one placed on an individual person (juristic or natural) or property (i.e. real and personal property, animals, crops, wages, etc.).
In this respect, indirect taxes like sales taxes and value-added taxes (VAT) are only applied if and when a taxable transaction takes place.
People have the freedom to engage in or refrain from such transactions, whereas a direct tax (in the broad sense) is imposed on a person, usually unconditionally, such as a poll tax or head tax, which is imposed on the basis of the person’s very existence, or a property tax, which is imposed on the owner by virtue of ownership, rather than commercial use.
“A direct tax cannot be moved by the taxpayer to someone else, whereas an indirect tax can,” according to some observers.
The person who bears and pays direct tax is expected to be the same person.
The person who pays the direct tax does not get a refund of all or part of the tax.
In this sense, direct taxes are the polar opposite of indirect taxation.
The concept of fiscal incidence allows for an examination of who, in the end, weighs the weight of a tax, determining whether it is direct or indirect.
Declarative taxes are the most common type of direct taxation (established either by the person concerned or by a third party).
The unconditional, inexorable nature of the direct tax was a major concern of those wanting to avoid despotic forms of government and preserve individual liberty in the 18th century.
Adam Smith originally discussed the contrast between direct and indirect taxation in his Wealth of Nations, as shown in the following passage:
As a result, a tax on necessities of life works in the same way as a direct tax on labor salaries…if he is a manufacturer.
He will charge this rise in wages, together with a profit, on the price of his goods, so that the final payment of the tax, along with this overcharge, will fall on the consumer.
About Faculty – ( CA Kedar Junnarkar ) CA Final Direct Tax
An Associate Member of ICAI. Also passed Company Secretary Examination.
Based in Pune and have teaching experience of 10 years in Direct and Indirect Taxes.
Diploma Holder in IFR ( Diploma in International Financial Reporting – ACCA UK) and DISA (Diploma in Information Systems Audit – ICAI, New Delhi)