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Consumption Tax and Income Tax

Difference between 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 paid by individuals or corporations enforced by local, state or central government in order to finance the government activities for the betterment of public.

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

There are two types of taxes

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

  • Income tax is paid by the person who earns 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 has to be paid.
  • There are certain exemptions given to the senior citizens in terms of the minimum income required 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 Custom duty, etc.
  • The tax burden on goods and services is transferred to consumers from the manufacturer in indirect tax.

Pros and Cons of Direct and Indirect Taxes

Indirect tax, the slab of tax goes higher with a higher income that helps in diminish inequality, whereas the poor has 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 in direct tax it’s compulsory to pay the tax depending upon the income. Indirect taxes are universal in terms of collection as it’s paid by all the consumers, whereas in direct tax, there are exemptions granted to pay tax.

Thinking form the taxpayer’s’ viewpoint, he/she has to pay both direct and indirect taxes, which at the end results into the financial burden of the taxpayers.

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