What is a tax? Distinguish between direct tax and indirect tax.

Question

Accepted Answer

A **tax** is a compulsory financial contribution levied by the government on individuals and organisations for public purposes, without the payer receiving a direct, specific, proportional benefit in return.

| Basis | Direct Tax | Indirect Tax |
|---|---|---|
| Impact and incidence | Fall on the **same** person | Fall on **different** persons |
| Can burden be shifted? | **No** — the taxpayer bears it themselves | **Yes** — usually shifted to the ultimate consumer via price |
| Example | Income Tax, Corporate Tax | GST, Customs Duty |
| Based on | Ability to pay (income/wealth) | Consumption/purchase of goods and services |
| Felt by taxpayer | Directly and personally | Indirectly, embedded in the price paid |
> [!ANSWER]
> A tax is a compulsory, non-quid-pro-quo contribution to government revenue. Direct tax has its impact and incidence on the same person, who cannot shift the burden (e.g. income tax); indirect tax's impact and incidence fall on different persons, since its burden can be shifted forward, typically to the final consumer (e.g. GST).

Basis	Direct Tax	Indirect Tax
Levy	Levied on the income or wealth of a person	Levied on goods and services
Shifting of burden	Burden cannot be shifted; impact and incidence fall on the same person	Burden can be shifted to the final consumer
Examples	Income tax, corporate tax, wealth tax	GST, customs duty, excise
Nature	Generally progressive (higher income, higher rate)	Generally regressive (same rate for rich and poor)
Payment awareness	Taxpayer feels the burden directly	Burden is hidden in the price of goods

Q.What is a tax? Distinguish between direct tax and indirect tax.

Concept understanding — Direct Tax — Meaning, Merits and Demerits

Basis	Direct Tax	Indirect Tax
Impact and incidence	Fall on the same person	Fall on different persons
Can burden be shifted?	No — the taxpayer bears it themselves	Yes — usually shifted to the ultimate consumer via price
Example	Income Tax, Corporate Tax	GST, Customs Duty
Based on	Ability to pay (income/wealth)	Consumption/purchase of goods and services
Felt by taxpayer	Directly and personally	Indirectly, embedded in the price paid

Q.What is a tax? Distinguish between direct tax and indirect tax.

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