Distinguishing between Direct and Indirect Taxes: Provide an Example of Each, Direct taxes and indirect taxes are two primary types of taxes, and they differ based on who bears the burden of the tax.
Summary of the Major Differences Between Direct and Indirect Tax Systems
Examples of Direct Tax
- Income Tax
- Corporation Tax,
- Property Tax, Inheritance Tax, and
- Gift Tax
Examples of Indirect Taxes
- Sales tax
- Excise tax
- Customs tax
- Gas tax
List of payable taxes in South Africa
A Comparison of These Two Tax Systems
- Incidence of collection: Direct taxes are usually collected directly by the government through a variety of levies such as personal income tax and corporate tax, whereas indirect taxes are collected by an intermediary, such as a retailer, a service provider, an e-commerce operator etc. and are then passed on to the government.
- Source or destination based: Direct taxes are usually source/origin based, i.e. tax is levied in the country where the income is earned, assets are located, or the subject is resident. However, indirect taxes, such as value-added tax (VAT) or goods and services tax (GST), are typically imposed in the country where the goods or services are supplied or ultimately consumed, regardless of their place of origin/production or location of the supplier.
- Regressive tax: Direct taxes tend to be progressive, i.e. those with higher incomes or assets typically pay a higher tax. Indirect taxes are often regressive, i.e. those with lower incomes end up paying higher taxes proportionally because indirect taxes such as GST, VAT and sales tax are typically applied at a fixed rate, regardless of the taxpayer’s income level.
- Transactional nature: Direct taxes are income-driven and are only imposed on individuals or entities that meet certain income thresholds or specified criteria, whereas indirect taxes are more transactional in nature, meaning they are imposed at every stage of the supply chain, from the production to the final sale of goods or services.