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Definition: When an individual or a company directly pays a tax to the government, it’s called a direct tax.
When a tax is directly paid by a payee to the government, it’s known as a direct tax. For example, income tax is directly paid by salaried individuals to the government. To understand it better, let’s discuss indirect taxes. When we buy rice, we pay the grocer. The money that we pay the grocer includes goods-and-services-tax. While we pay money to a grocer, we have indirectly paid tax to the government. For a citizen, it’s much easier to understand his direct taxes than indirect taxes. For example, we all know how much income tax we pay to the government. Compared to this, it may be tough to understand how much indirect tax we pay on goods and services. This is because indirect taxes are built into the price of those goods and services. For a government, direct taxes are a source of its income. If it is not able to generate sufficient funds through direct taxes, it may increase indirect taxes. Therefore, a taxpayer shouldn’t feel too happy with a reduction in his direct taxes. He should try and estimate how much he is paying to the government through both direct and indirect taxes.
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