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Questions
What is the difference between the impact of taxation and incidence of taxation?
In what type of tax shifting the tax burden is possible? Explain using an example.
Solution 1
When the impact of the tax falls on a person from whom the tax is first collected, but the burden of taxation may not fall on the same person and is shifted to another person, it is called the incidence of taxation. Therefore, when the government imposes a tax, a person or institution which bears the burden of tax at the first incidence is called the impact of the tax. On the other hand, when the tax burden can be shifted to another person, the final point of the tax burden is called the incidence of the tax.
Solution 2
The impact of a tax is on the person who pays it in the first place, and the incidence is on the person who actually bears it. These terms are relevant to indirect taxes, wherein the impact and incidence lie on two different persons. Therefore, the tax burden is shifted.
Example: The impact of excise duty on sugar is on the sugar manufacturer. But the duty will be added to the price of sugar, which is paid by the consumer. Therefore, the incidence of excise duty will be on the consumer of sugar.
