Accounting & Bookkeeping

Difference between Consumption Tax and Income Tax

Consumption Tax and Income Tax

Tax is a general term used for collecting a certain amount by government bodies from individuals and corporations. Tax is an involuntary fee that individuals or corporations enforced by local pay, state or central government to finance government activities for the betterment of the public.

There are certain documents that are required to file taxes in India, which include Pan Card, Aadhaar card, details of cash deposited during the demonetization period, bank accounts details, TDS details, etc.

There are two types of taxes:

1.Direct tax:
Direct tax is the tax that is paid by an individual or an organization directly to the tax collecting authority or department. I.e. Income tax.

  • A person pays Income tax if they earn more than a specific amount stated by the government entity or department.
  • Like in India, a person whose income exceeds Rs 2,50,000 has to pay the income tax.
  • There are different slabs in income tax for different income generation. The more the income, the more tax they need to pay.
  • There are certain exemptions that the senior citizens get in terms of the minimum income necessary to file income tax. For example in India its, Rs. 3 lakh.

2.Indirect tax:
As the name suggests, indirect taxes are levied on the goods and services used by individuals for their consumption instead of their income.

  • I.e consumption taxes like VAT (Value Added Tax)
  • Sales tax
  • Excise and Customs duty, etc.
  • Manufacturers transfer the tax burden of goods and services to customers.

Pros and Cons of Direct and Indirect Taxes

The slab of tax goes higher with a higher income that helps in diminishing inequality. However, the poor have to pay for their necessity in indirect taxes. Direct taxes are also certain from the revenue point of view. The government can analyze it in advance. While, in indirect tax, the consumption in uncertain which lacks in giving an approx figure of tax collection.

Indirect Tax is convenient in terms of paying tax, as an individual has to pay tax only if he buys goods or services, where an indirect tax it’s compulsory to pay the tax depending upon the income. Indirect taxes are universal in terms of the collection, as all type of consumers pay it. However indirect tax grants exemptions granted to pay tax.

Thinking from the taxpayer’s viewpoint, they have to pay both direct and indirect taxes. This, in the end, results in the financial burden of the taxpayers.

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