Tax Education Series - Episode 2

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Classification of Taxes: Direct vs Indirect Tax


Written by Richard Okunola

Did you know that practically everyone pays tax?

Both the young and old.... Tax remains a major source of income to the government, so tax is imposed on almost all the products that we consume (excluding essential goods - explained in the last paragraph) and services that we render. Therefore, we may not be aware, but we all pay taxes directly or indirectly.

Generally, taxes can be classified in various ways, depending on the perspective through which the taxes are being received or paid. However,  let's focus on the perspective of Tax Subject. There are two classes of tax:

a. Direct Tax:  

This is a tax levied on the income or profits of the person who pays it, rather than on goods or services. This is termed direct tax because the taxpayer suffers the tax alone and may not be able to transfer the tax burden to others. 

Example of direct taxes are Personal Income Tax (PIT), Companies Income Tax (CIT), Capital Gains Tax (CGT), Petroleum Profit Tax (PPT) etc.

b. Indirect tax: 

This is a tax levied on goods and services, rather than on profits or income. Indirect tax could be specific (like VAT at the new rate of 7.5%), or it could be ad-valorem (in proportion to the estimated value of the goods or transaction concerned.) i.e a percentage of the goods sold/bought.

Examples of indirect taxes are Import and Export Duties, Excise Duties, Value Added Tax. etc.

Summary:

- Taxes according to tax subject are classified into direct tax and indirect tax

- Direct taxes are taken from individual earnings or profit

- Indirect taxes are imposed on goods that consumers buy. This is the tax you may not be aware of, because it looks so insignificant when you purchase an item.

- You cannot completely escape from paying tax.

Note: Essential goods exempted from tax (VAT) includes: book and educational materials, basic food items, medical and pharmaceutical products, baby products, etc.

#Tax #TaxEducation #TaxInsight #TaxSeries

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