Direct Tax and Indirect Tax
If you want to become a responsible citizen of a nation, you must fulfil several responsibilities of the country. Paying taxes is among the responsibilities you must complete to become a responsible citizen. Regarding paying taxes to the government, people are often confused about the difference between direct and indirect taxes. Are you also looking for a guide to clarify your confusion between indirect and direct tax? In that case, you should read this article as we will compare and differentiate both types of taxes. In short, we will clear all your doubts about direct tax vs indirect tax.
The Basic comparison between direct and indirect taxes
You should understand the basic difference between direct and indirect taxes because they have different economic impacts and affect individuals in different methods. We have outlined the overview of both types of taxes below to let you have a glance at both taxes:
Direct Tax - overview
You might know that direct tax is a tax levelled on companies and people. You can’t pass these taxes to another taxpayer. It is the tax authority's job to manage everything related to these taxes. As a taxpayer, you are liable for the tax payment collected by the government.
You might be shocked to know that these taxes are progressive as the burden increases with your income. These taxes use a system where the more you earn, the higher the percentage of your income you must pay in taxes. If you make a high income, you need to pay an excessive share of the tax burden. On the other hand, you must face a relatively small tax burden if you earn a lower income.
You must determine the taxable amount for the direct taxes. Once you have determined the tax amount, you must pay the tax owed to the country’s government. You can pay these direct taxes with countless methods, like credit cards, checks, and electronic transfers. If you fail to pay the tax owed, you must face penalties, interest charges, and other legal consequences.
Corporate Taxes, income taxes, property taxes, wealth taxes, toll taxes, and more are common direct tax examples in different countries. These taxes cover a range of things, from what you have and what you make money.
Indirect tax - overview
As discussed before, direct taxes are levelled on your profit and income. In contrast, indirect taxes are not directly imposed on your income. However, you must pay these indirect taxes with the cost of products and services you have bought from the seller. For example, you purchase a candy bar from the store and pay the price including indirect taxes like a sale tax. Here, the store collects the indirect tax from you and sends it to the government.
Similar to direct tax, there are various forms of indirect taxes. Sales Taxes, Value Added Taxes, Carbon Taxes, and more are a few common indirect taxes examples in different countries. In short, indirect taxes are linked to things you purchase or do, instead of how much you earn.
Direct Tax vs Indirect Tax
As we discussed above, indirect taxes and direct taxes differ based on how they are levelled and who bears the economic burden of the tax. We have created a table to let you understand the difference between direct tax and indirect tax in the UAE more effectively:
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Direct Tax |
Indirect Tax |
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If you are a taxpayer, you must pay the direct tax directly to the government. As a result, direct tax impact on the taxpayer. Direct taxes are limited and mainly target certain sectors, like oil companies and foreign banks. |
The indirect tax burden directly falls on the customers, as they must pay the indirect tax through the increased price of goods and services. |
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Corporate Tax rates can significantly affect some sectors, like 55% of oil companies. However, these taxes are not widespread. |
VAT at 5% and excise taxes on certain products are more effective as these taxes impact a significant portion of the UAE’s economy and affect daily purchases. |
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Direct taxes impact the moderate to high-income people and businesses. |
Indirect taxes impact individuals with low income, instead of high-earning people. |
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Direct Tax helps boost the country’s economy but control inflation. |
Indirect taxes also lead to boosting the economy but might increase inflation. |
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Direct taxes decrease the socioeconomic gap in the country by funding societal welfare that benefits all people, regardless the income. |
Indirect taxes broaden the wealth gap between the poor and the rich. Due to these taxes, rich people can afford high-taxes products while poor people avoid purchasing high-taxes goods. |
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Corporate tax is an example of direct taxes in the UAE. |
VAT, excise tax, and more are some examples of indirect taxes in the UAE. |
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Collecting direct tax is a little complex, as tax avoidance is common for businesses. |
You cannot avoid indirect taxes as the taxes on products and services are included in the product price. |
Direct and Indirect Taxes in the UAE
You might know the United Arab Emirates has countless direct and indirect taxes. The following is a glance at the indirect and direct tax in UAE:
Corporate Tax: You must pay a corporate 9 per cent if you are a business owner and earn above AED 375,000*.
VAT: You must also pay 5% tax as a VAT for most products and services.
Excise Tax: You must pay a 50 per cent excise tax on tobacco and energy drinks. Moreover, you must also pay a 100% excise tax on alcohol and carbonated beverages.
Custom Duties: You must also pay customs duties for certain imported products. Nonetheless, there are a few items that are not liable for these duties.
How can Flyingcolour Tax Consultants help you?
From corporate tax to customs duties, there are numerous types of direct and indirect taxes in the UAE. We have only outlined the direct tax vs indirect tax in this article. However, you must understand all indirect and direct taxes. Flyingcolour Tax Consultants can clear all your doubts about all taxes in this nation. Our experts can also help you pay these taxes.
To learn more about What is the Difference Between Direct Tax and Indirect Tax?, book a free consultation with one of the Flyingcolour team advisors.
Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.