Answers:
Direct Taxes
A direct tax is paid by the person on whom it is levied. In this case the impact and the incidence fall on the same person. For example, an individual assessed to income tax or wealth tax, has to pay the taxes cannot shift the burden to another person. Direct taxes exist when there is a direct relationship between the tax payer and the revenue authorities. They strike the income at the moment of its production or earnings. Imposition of direct taxes does not create imbalance in use of productive resources. A simple direct tax structure aims at effective administration and increased revenue collection. In the case of direct tax, it is possible to trace the effects easily and the adverse effects can be minimised.
Indirect Taxes
As the name implies, in this type of tax the impact and incidence fall on different persons. i.e., the tax is imposed on one person but partly or wholly paid by another. So the tax payer and the tax bearer are different persons. In the case of indirect tax there is no direct relationship between the tax payers and the revenue authorities. These taxes strike the private consumption of citizens and also transfer of property. They strike the income at the moment when the citizen spends it to acquire other goods.
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BASIS
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DIRECT TAX
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INDIRECT TAX
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Incidence of tax
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Incidence of tax falls on the tax payer.
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Incidence is on traders and manufacturers but shifted to consumers upon purchase.
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Nature
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Progressive in nature
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Proportional in nature
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Principle of equity
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Ability to pay tax is taken into account and hence satisfies the principle.
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It does not satisfy the principle as the tax payers are not distinguished.
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Shifting of tax
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Tax cannot be shifted.
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Tax can be shifted.
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Point of levy
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Tax is levied on persons possessing property or income.
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Levy is on people who spend their income or incur expenditure.
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Burden of tax
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The rich usually bears the burden.
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Burden is proportionate but relatively more on the poor.
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Impact on cost and prices
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Commodity prices are not affected.
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Increases costs and prices on commodities.
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Tax evasion
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Scope is more as falsification is possible.
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Scope is low as tax is part of goods or services.
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Impact on savings
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Savings is less due to the ability to pay.
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Saving is more as the consumer will buy essentials.
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Civic consciousness
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Tax payers are civic consciousness.
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Tax payers may not be aware of the tax.
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Examples
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Income tax, wealth tax, estate duty.
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Sales tax, excise duty, customs duty, etc.
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