What Is The Difference Between Direct and Indirect Tax In UAE?

direct and indirect tax

Generally, taxes are a significant revenue source for governments worldwide. These taxes are applied in numerous contexts, such as on salaries, services, purchasing items, and paying tolls on the road.

Individuals who are required to pay taxes should do so in accordance with their country’s tax regulations. As responsible citizens, we have to fulfill our tax obligations and understand the various types of taxes that we are subject to.

Taxes are broadly categorized into two types: Direct Taxes and Indirect Taxes. Direct taxes are levied on individuals or businesses depending upon their income, profits, or assets and are paid directly to the government.

However, indirect taxes are imposed on goods and services and paid by the end consumer, unlike direct taxes. In this article, we shed light on the differences between these two categories of taxes and their significance in the UAE. If an entrepreneur faces any tax-related issue, you can get guidance from a Now Consultant in the UAE.

What Is Direct Tax?

A Direct Tax is a tax paid directly to the authority that imposes it. For example, when the government levies an income tax, you pay it directly to the government. Significantly, the direct taxes cannot be transferred to another individual or entity. The relevant tax authority is responsible for managing tax-related activities in every country.

The direct taxes depend on the taxpayer’s income or wealth. The paid amount in the form of direct tax is determined using a progressive tax system, in which individuals with higher incomes pay a larger amount of taxes.

Once the tax amount is calculated, the taxpayer is required to pay it to the government. This can be done through various methods, including electronic transfer, check, or credit card. Failure to pay the owed taxes can lead to penalties, interest charges, or other legal consequences.

What Is Indirect Tax

Indirect taxes are paid by the end consumer and are levied on consuming goods and services rather than directly on an individual’s income. The taxpayer pays the indirect taxes as part of the cost of goods and services purchased from the seller.

For example, when you buy any food item at the store, the total price of the food is the sum of the original price and indirect tax amount, such as sales tax. The store collects this tax from you and then pays it to the government. Thus, even if you are unaware, you are constantly paying indirect taxes whenever you make purchases.

Difference Between Direct and Indirect Taxes. 

Direct and indirect taxes differ in how they are imposed and how they are collected. Following is the brief table which highlights the main differences between the direct and indirect taxes:

Direct taxIndirect tax
Taxpayers pay direct taxes straight to the government, and the burden falls directly on the taxpayers.Indirect taxes are ultimately paid by consumers because they pay additional prices for goods and services.
Examples include income tax, property tax, and wealth tax (charged on inherited assets). Corporate tax is levied on businesses.Examples include Value Added Tax (VAT), GST, and central excise duty. VAT is applied to the product’s price, while central excise tax is charged on the production and sale of goods.
Collecting direct taxes can be complicated unless they are deducted at the source, such as with salaried employees. It is more challenging to collect taxes from businesses, as they often find ways to avoid paying, making it hard to identify and penalize them.Taxes on goods and services are included in the product’s price, so they can not be avoided. You can usually see these taxes listed on the packaging of consumer products.
Direct taxes help improve the economy and control inflation.Imposing indirect taxes can support the economy but may also cause inflation.
Direct taxes are applied to individuals, businesses, and enterprises with moderate to high incomes.Indirect taxes affect low-income individuals and households more than high-income ones.
Direct taxes include a part of income and can discourage saving. When people dodge taxes, it puts more pressure on a smaller part of society to pay them.When it comes to saving, indirect taxes reduce personal spending and encourage saving. For example, consumers are careful about buying heavily taxed products.
Income tax and other direct taxes help reduce socioeconomic inequality by funding public welfare programs that benefit everyone in society. Public transport is a prime example of how these taxes support services that benefit all.Indirect taxes widen the wealth gap between the rich and the poor. Wealthier people can afford higher-quality goods that everyone needs, while those with less money might struggle to afford them.

What Are The Direct and Indirect Taxes Applied in the UAE?

The UAE is the most favorable place for doing business or having temporary or permanent residency because of its tax-friendly environment. Entrepreneurs across the World are attracted to the UAE as it has reduced the tax burden of both direct and indirect taxes. The following are the direct and indirect taxes imposed in the UAE:

Corporate Income Tax:

Starting from June 1, 2023, businesses in the UAE will be required to pay a 9% corporate income tax. This means that a portion of companies’ profits will go to the government as a corporate tax.

Value-added tax (VAT): 

On January 1, 2018, a 5% Value-Added Tax (VAT) was introduced in the UAE for most goods and services. This means that when you buy something or use a service, an extra 5% of the price goes to the government as tax.

Excise tax:

Excise tax is a type of tax added to specific products like tobacco, energy drinks, carbonated beverages, and alcohol. For tobacco and energy drinks, the tax rate is 50%, while for carbonated beverages and alcohol, it’s 100%. So, if you buy these items, half or all of the price you pay extra goes to the government as tax, depending on the product.

Customs Duties: 

Customs duties are taxes charged on certain goods that are brought into the UAE from other foreign countries. However, some products might not have to pay these taxes, depending on specific exemptions. So, when you import items into the UAE, you may have to pay extra money to the government as customs duties unless the items are exempted from these charges

Our Tax Consultancy Services:

Tax consultants worldwide offer assistance regarding various types of direct and indirect taxes in the country, ensuring compliance with government regulations. If you are looking for the best tax consultants in the UAE, Now Consultant is a famous name in providing tax consultancy services at a reasonable cost.

We are experts in dealing with both direct and indirect taxes in the UAE, and we can help you with all the possible benefits of tax regulations and protect you from heavy penalties and fines.

Now Consultant, a leading firm with experienced tax consultants in the UAE, aids businesses in financial strategies and tax law compliance. Through strategic tax planning, we can lower a company’s tax burden, freeing up capital for other investments and operational needs.

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