The Comparisons that are made between Direct and Indirect Taxes are mentioned below:
1. In case of a direct tax, the initial money burden (impact) and the ultimate money burden (incidence) of a tax fall on the same person. In case of indirect tax, the impact and incidence usually fall on different persons.
2. Shifting of tax burden is not possible in case of a direct tax. But the tax burden is shifted partly or wholly when an indirect tax is imposed.
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3. Direct taxes affect the richer section of the society. But indirect taxes affect both rich and poor.
4. Direct taxes are based on the principle of ‘ability to pay’. So direct taxes are considered progressive. Indirect taxes are imposed on both essential and non-essential commodities. Poor people use necessaries (necessary for life). Demand for essential commodities is highly inelastic.
Consumption of such commodities does not fall even if there is a rise in prices of such commodities. So indirect taxes are highly regressive in character as they adversely affect the poor people.
5. Direct taxes are imposed on wealth, income, property etc. Rich people enjoy more of wealth, income, property, assets etc. So, they pay more tax to the government while poor people are exempted from the direct tax net.
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Therefore, direct taxes help reduce inequalities in the distribution of wealth, income, property etc. On the other hand, indirect taxes are usually taxes on commodities. It is highly regressive and inequitable, it widens economic inequality.
6. Direct taxes are lump sum and paid at regular interval of time. But indirect taxes are paid along with the prices. So tax remains concealed within the price of commodities. Therefore, in case of indirect taxes, the tax payers do not feel the pinch of payment burden while in case of direct taxes, the tax burden is felt.
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