Question

Two friends Ramesh (a software engineer) and Pihu (a bakery owner) are discussing their contribution to the nation's economy through tax payments. Ramesh earns 8,00,000 per year, which makes him liable to pay income tax. Pihu pays Goods and Service Tax (GST) on the sale of cakes and pastries. On the basis of the given text, identify whether Ramesh is paying a direct tax or an indirect tax. Explain valid differences between the two types of taxes.

Hint:

A key difference between direct and indirect taxes is that direct taxes are based on the income or property of the taxpayer, while indirect taxes are imposed on goods and services and are ultimately paid by the consumer.

Answer 1

Ramesh is subject to a direct tax, namely income tax. Direct taxes are imposed directly on individuals or entities based on their income, wealth, or assets. As Ramesh's income is taxed directly, it constitutes a direct tax. Pihu, conversely, is paying an indirect tax, specifically Goods and Service Tax (GST). Indirect taxes are levied on goods and services and are borne by consumers as a component of the purchase price. Businesses, such as Pihu’s bakery, collect this tax and then forward it to the government.