DIFFERENCE BETWEEN DIRECT AND INDIRECT TAX   | TYPES OF TAXES

What are the basic types of taxes? Taxes are a type of tribute that is used to address, from the Public Administration, the collective needs of society. Therefore, we must pay them in a mandatory way, without there being a specific benefit in exchange for the money we contribute for the tax in question. In general, taxes are applied to the economic capacity of citizens, and depending on how this capacity is expressed; let’s discuss in detail the difference between direct and indirect tax.

DIFFERENCE BETWEEN DIRECT AND INDIRECT TAX  

Direct taxes would be those that apply to an immediate manifestation that you have money. In other words, possession of assets or obtaining income is taxed. For example, having a house or collecting a payroll for work. Issues that demonstrate that a person or company has the economic capacity, without the need to “spend” money.

Indirect taxes would be those tax supposed economic capacity, derived from the acquisition of products, the transmission of goods and, ultimately, activities related to consumption.

 The tax over the value-added

To better understand both concepts we are going to use the tax most known by citizens, VAT. The Value Added Tax applies to all purchases of products or services we make. That is, they tax the economic capacity of a person, based on the purchase of products and perform a consumer activity. Therefore, it would be an indirect tax. This indirect tax levies all products or services that are delivered in Spain in exchange for money, through the preparation of an invoice that includes the value of the operation, the good or product that generates the payment obligation, the amount to be paid before taxes, and the final amount to be paid after adding VAT. Products or services sold in Spain must include an additional cost of 21%, which is attributed to VAT; but there are items that do not have that tax burden, but belong to other families that have a lower VAT tax burden. The type of VAT varies depending on whether it is reduced VAT (10%, instead of 21%), and super-reduced VAT (4%). The examples are found in deliveries, intra-community acquisitions or imports of goods, which are currently taxed at 10% VAT, with the exception of tobacco and alcoholic beverages registered at 21%. Operations related to homes and garages have a 10% VAT, however, business premises are taxed at 21%. It is important, therefore, to take into account the current legislation and the type of product that we are going to sell or buy, in order to confirm that the appropriate amount is being applied to us in the total invoice. The super-reduced VAT includes natural products, which are included in the Food Code, such as milk, eggs, bread, etc. Books and newspapers are also in this category, however, school material is taxed at 21%. In general, all essential products have this 4% VAT characteristic, so that medicines, prostheses, and wheelchairs are also included, for example. Serve all the previous examples to understand that we are facing an indirect tax because it applies to products that are bought or purchased. That is, the economic capacity of a person is measured based on the purchase options he executes.

What other types of indirect taxes are there?

It may cost you to find more indirect taxes. However, and although VAT is the best known, there are other modalities, such as the Tax on Patrimonial Transmissions and Documented Legal Acts. It applies to transfers of goods and rights, and therefore, there is an expense that demonstrates an economic capacity, hence we frame it as indirect tax. Customs Income or Special Taxes applied to alcohol, hydrocarbons, tobacco and the registration of means of transport are also included in this group.

Best known Direct Taxes

The most common would be the Individuals Income Tax (Personal Income Tax), which is applied to income earned by an individual. Therefore, it fits like a glove within the definition of direct tax. Taxes income, considered this as indicative of the degree of well-being that a person enjoys, which in turn determines what their contribution should be to sustain the public system of social services and benefits. The salary, in the case of an employee, or the remuneration received in the case of a self-employed person, the interests of a bank account or the dividends obtained from the possession of business shares, would be subject to this type of direct tax. This tax takes into account the personal and family circumstances of citizens, to know their true economic capacity, and is progressive, since the percentage that is applied to determine what amount each must pay varies proportionally to the income that is taxed ( tax base). A personal and family minimum is established in order to adapt the tax to the taxpayer’s circumstances. This is carried out taking into account the investment in habitual housing, maternity, and donations made by the taxpayer, to give some examples.

Other Direct Taxes

In addition to personal income tax, there are other direct taxes in Spain, such as the Non-Resident Income Tax, which falls on income earned by people who do not actually live here. Also applicable to this typology is the Corporation Tax, which taxes the benefits that companies obtain for their business activity, and which specifically applies to the net benefit (the difference between income and expenses). The Inheritance and Donations Tax would also be direct because those people who receive money or other goods for free must face it. There is no work involved, but it is about inheritances or legacies that are left to other people, either in life or when a person dies.