The tax legislation in the UAE aims to achieve social justice and diversify sources of revenue, in order to achieve many development goals to redistribute them in the service of society.
There are various forms of taxes, including direct and indirect taxes, and this article will endeavor to explain the differences between them.
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The difference between direct and indirect taxes
1. THE DIFFERENCE BETWEEN DIRECT
AND INDIRECTTAXES
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2. INT.
• The tax legislation in the UAE aims to achieve social justice and diversify sources
of revenue, in order to achieve many development goals to redistribute them in
the service of society.
• There are various forms of taxes, including direct and indirect taxes, and this
article will endeavor to explain the differences between them.
3. DirectTaxes
• DirectTax is a tax imposed by persons and their direct inputs or what they own.
This tax is paid directly to the state by the taxpayer.
• Direct taxes are levied on personal ownership or personal acquisition, such as the
income of individuals, commercial and industrial profits of companies, real estate
assets, and properties.
4. Types of DirectTaxes
• IncomeTax: It is the tax that is imposed on various sources of income, such as
capital, work, industrial and commercial businesses, or liberal professions, and
each source of them leads to an income called sub-or specific income.
• CapitalTax: It is the tax imposed on the capital that constitutes the movable,
intangible, real estate, and material financial assets that a person owns.
5. Advantages of DirectTaxes
• The principles of tax justice are observed, so each taxpayer pays according to his own mandate.
• Its outcome is relatively stable because it is imposed on sources that are characterized by relative stability,
such as wealth and income.
• The ability of the tax administration to achieve an adequate payment base is greater in respect of direct
taxes.
• The collection of Direct tax is easy and relatively simple, as it includes only two parties, namely, the
individual taxpayer and the tax authority.
• It achieves social justice, as it is imposed at progressive rates according to income brackets, property
value, or profit volume.
• Direct taxes are an important tool for combatting social inequalities created by income and wealth.
• It does not cause distortion in the allocation of resources and does not affect the relative prices of goods
and services.Thus, leaving the relative profitability of different industries unchanged.
• DirectTax revenues offer a certain level of flexibility, and as national income increases, revenues from
these taxes may also rise significantly.
6. Disadvantages of direct taxes on an individual
• The individual’s feeling of state interference in his economic affairs may lead to
attempts at tax evasion.
• The collection of tax revenues is directly linked to the end of the fiscal year, which
does not necessarily correspond to the state’s expenditures.
• The tax burden imposed on those with higher income and valuable real estate is
greater.
7. DirectTaxes May Reduce Business Effort
• If its marginal rates are too high, it reduces the individual’s desire to exert greater
productive effort.Thus, excessive income tax levies may provide less labor for
productive work or reduce the size of the supply of labor performance in the
economy and thereby adversely affecting economic growth.
8. DirectTaxes Reduce Saving Incentives
• One of the major detrimental effects of direct taxes is that they reduce the
incentives to save and invest as a direct tax, like income tax, reduces the rate of
return on investment as a portion of the return is reduced by the tax.This induces
individuals to substitute current consumption for saving and investment.
9. Corporate IncomeTax Adversely Affects
Investment
• The imposition of corporate income tax reduces investable funds, delaying
investment, and growth.To overcome this deficiency in corporate income tax,
provisions have been made to exempt depreciation funds from income tax and
also to provide investment credit in budgets.
10. IndirectTaxes
• Indirect tax is that which is collected for the government through an intermediary, for
example, taxes on sales, value-added tax, taxes on imports, exports and production,
customs duties, interests of government agencies, consumption, etc.
• The most well-known example of IndirectTax is what is known asValue-AddedTax (VAT),
which is borne by the consumer in full.VAT is collected through stores and points of sale
and is calculated as a percentage of the total amount spent on the purchase.
• Some countries may exclude some basic goods and services from IndirectTax in order to
avoid increasing the burden on consumers, or they may resort to an increase in Indirect
Taxes on certain items in order to avoid consumption as such items are harmful to public
health.
12. Wide Coverage
• The main advantage of indirect tax is that it affects all income groups. Indirect
taxes, such as sales tax or consumption tax, are levied equally on all consumers or
buyers regardless of their income.
13. Consumption Control
• By imposing an IndirectTax, the consumption of items harmful to public health
can be reduced. For example, by imposing excise duties on wine and cigarettes,
the government discourages the consumption of these harmful products.
14. Popularity
• People are not always aware of indirect taxes because in most cases they are
combined with the prices of goods and the consumer does not know how much he
pays with the price and how much he pays as an indirect tax.The consumer is only
aware of the total price paid and does not really feel the effect of the indirect tax.
15. Productivity
• IndirectTax expands government revenue and through the imposition of indirect
taxes, the tax net is expanded more widely and all persons are mandated to
contribute to the National Fund.
16. Regressive Character
• A commodity tax imposed on foodstuffs affects the poorest members of society
to a much greater degree than those in a better financial position.
17. Administrative Difficulties
• The collection of indirect taxes creates various administrative problems.The
collection of indirect taxes such as customs duties often involves large
expenditures.There is also the possibility of evasion.
