Explain the basis of classifying taxes into direct and indirect tax. Give two examples of each.
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A tax is a legally compulsory payment imposed by the government. The main differences between direct tax and indirect tax are as follows:
(i) Final Burden: Direct taxes are those taxes the final burden of which falls on that very person who makes the payment to the government. On the other hand, indirect taxes are those which are paid to the government by one Person but their burden is borne by another Person.
(ii) Shifting of Tax: Direct taxes cannot be shifted to other persons whereas the indirect taxes can be shifted.
(iii) Progressiveness: Direct taxes are generally progressive. Their real burden is more on the rich.
On the other hand, indirect taxes are generally regressive. Their real burden is more on the poor.
Example: A shopkeeper pays sales tax to the government but usually recovers it from the customers as a part of price of the commodity sold. So, impact of sales tax (an indirect tax) is ultimately shifted to the consumers. But the impact of income tax is to be finally borne by the tax payer himself. He cannot shift its burden onto others.
Direct Tax: Income Tax, Corporation Tax.
Indirect Tax: Service Tax, Excise Duty.
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