Question

Explain the basis of classifying taxes into the direct and indirect tax. Give examples.

Answer 1

Direct taxes and indirect taxes:

Direct tax refers to those taxes which are imposed on property and income of individuals and companies and are paid directly by them to the government. For example, income tax the tax burden cannot be shifted to any other person. The person on whom the government imposes the tax must pay a part of his/her income as tax to the government. Indirect tax refers to those taxes which are imposed on an individual but are paid by another person either partly or wholly. Hence, the impact and incidence of taxes are on different persons. Customs and excise duties are examples of indirect taxes. Here the producer bears the impact and the incidence of tax on the consumer. Indirect taxes are those taxes in which the tax burden can be shifted to another person. The impact and incidence of tax fall on different persons. For example, the sales tax where the tax burden is shifted by the seller of the commodity to the buyer.

The impact of indirect taxation can be shifted on to others while the impact of direct taxation cannot be shifted. Example: Direct tax- income tax and indirect tax- sales tax