It’s the foremost responsibility of every citizen to pay taxes as per the country’s tax regulations and understand the different types of taxes applicable to him/her. There are primarily two types of taxes i.e., direct and indirect taxes. Direct taxes are applicable on citizens and businesses and are directly collected by the government whereas indirect taxes are implemented through the goods and services availed. The taxes are not meant to exploit the citizens, rather they positively influence a country’s economy. Revenue collection through a country’s tax system determines the government’s fiscal policy, influencing how much a government spends on initiatives that boost the economy such as investing in healthcare, education, and industrialization.
The United Arab Emirates has its tax regulations and a range of direct and indirect taxes that are to be paid by citizens and businesses operating in Dubai. The current article will help the readers differentiate between the direct and indirect types of taxes and gain knowledge regarding the tax system in the UAE.
What are direct taxes?
Direct taxes are paid directly by an individual to the government without any involvement of a third party. In many countries, a tax authority is responsible for tax collection from the taxpayers. In UAE, federal taxes are administered, collected and reinforced by the Federal Tax Authority (FTA).
Direct taxes are calculated based on an individual’s income and are also applicable on the person’s property and assets. A person who possesses a certain amount of wealth and property is liable to pay tax as per the UAE’s tax system. The amount of direct tax applicable is calculated using the progressive tax system which means that higher income individuals will pay higher tax amount as compared to lower income individuals. Common types of direct taxes include income tax, corporate tax and property tax.
What are indirect taxes?
Indirect taxes are applied through the goods purchased and services availed. Unlike direct taxes, indirect taxes are not levied on the person’s wealth or income. Rather, the taxpayer pays tax without realizing it because it is embedded in the price of goods purchased. For example, when a buyer purchases a chocolate bar, the price of bar includes an indirect tax called sales tax. Common examples of indirect taxes include Sales tax, Value-added tax (VAT), Goods and Services Tax (GST) and excise duties.
Impact of direct and indirect taxes on economy:
Both the direct and indirect taxes have a distinct economic impact on the taxpayers and the society at large. Revenue collection through direct taxes enables the government to take useful initiatives regarding public safety, education, healthcare, and infrastructure. Like direct taxes, indirect taxes also play a useful role in a country’s economy but can lead to inflation as well due to increased costs of goods and services. Similarly, direct taxes reduce the socioeconomic disparity whereas indirect taxes further increase the inequality between rich and poor by rendering certain necessities to be affordable by only the elite of the society. A noticeable benefit of indirect tax is that government can use indirect taxation to control the consumption of certain harmful products like alcohol and tobacco by imposing higher excise taxes on such products.
Difference between direct and indirect taxes:
There are clear differences between the two types of taxes in terms of their enforcement method, purpose and economic impact on the taxpayers. The main differences between the two types of taxes are listed below:
| S.no | Direct tax | Indirect tax |
| 1 | The taxpayer is obliged to pay direct tax to the government. Thus, the tax burden falls directly on the taxpayer. | In indirect taxes, the tax burden is indirectly shifted to the consumer as they have to pay tax through the higher cost of goods and services availed. |
| 2 | Examples are income tax, wealth tax (applicable on inherited assets), property tax (applicable on real estate), and corporate tax. Corporate taxes are levied on a company’s taxable income. | Examples are Goods and Services Tax, Sales tax, central excise duty and Value-added tax. VAT is applicable on the price of goods whereas central excise tax is levied on the manufacture and retail of products. |
| 3 | Tax collection is difficult, and businesses often find ways to avoid taxes. However, this is not the case for salaried individuals who receive their salaries after tax deduction. | Tax avoidance is not possible because the price of goods purchased includes the indirect tax. |
| 4 | Direct taxes mainly influence moderate to high-earning individuals and businesses. | Indirect taxes have a greater impact on low-income individuals. |
| 5 | Direct taxes boost the economy and effectively regulate inflation. They shrink the economic gap between the rich and poor. | Indirect taxes boost the economy but also lead to increased inflation. They further aggravate the socioeconomic inequality between the rich and poor because only the rich are able to afford certain high-quality products. |
Direct and indirect tax in the UAE:
The types of direct and indirect taxes applicable in the UAE include:
- Corporate income tax: According to the UAE’s tax system, businesses are bound to pay corporate tax from the very start of their first financial year which begins from or after 1 June 2023.
- Excise duty tax: UAE levies excise tax on products that are detrimental to one’s health. Therefore, 50% excise tax is levied on tobacco and energy drinks whereas a 100% excise tax is applicable on alcohol.
- Value-added tax: UAE levies 5% VAT on the consumption of most products and services. The 5% value added tax policy was introduced from 1 January 2018.
- Custom duties: Custom duties are applicable on imported products. However, there are certain imported goods that are exempted from customs duties.
Conclusion:
direct and indirect taxes both play a vital role in a country’s economy and have distinct economic repercussions and methods of enforcement. If you are a business owner in Dubai, availing the services of a qualified tax consultant can greatly help in navigating the UAE’s tax policies, and ensuring compliance with the country’s tax system.
