CLASSES BY- Dr.

JATIN MACRO ECONOMICS XII GOVERNMENT BUDGET & THE

LAMBA ECONOMY

DIRECT AND INDIRECT TAXES

A tax is a compulsory payment to the government by the people to incur public

expenditure.

Direct Tax: -It is the tax whose burden is born by the person on whom it is imposed. In other words, its
burden cannot be shifted to others. For e.g.:-Income tax, corporate tax, wealth tax, gift tax, expenditure tax,
Interest tax, etc.

Indirect tax: -It is the tax whose burden can be shifted to the others. In other words, when liability to pay
tax is on one person and the burden of that tax falls on some other person. It is called indirect tax. For
e.g.:- Sales tax, excise duty, custom duty, entertainment tax.

Direct Taxes Indirect Taxes

1. These taxes are imposed on income and 1. These taxes are imposed on goods and
wealth of the people. services.
2. The burden cannot be shifted. 2. Tax burden can be shifted.

3. These taxes are generally progressive in
nature. The rate of tax increases as the tax
base increases
4. Examples: income tax, corporate tax,
wealth tax, gift tax etc.
DIRECT TAX
Direct tax incidence falls on person who pays
it to govt. It cannot be shifted. E.g., income
tax & wealth tax.
3. These taxes are often non-progressive.
4. Examples: service tax, VAT, excise duty,
custom duty etc.
INDIRECT TAX
Indirect tax’s incidence falls on the other
persons. Its burden can be shifted through
the change in price. E.g, sales tax, service
tax, excise duty, custom duty, VAT etc.

MERITS DEMERITS MERITS DEMERITS

Equity Arbitrary Convenience Regressive
Elasticity Discourage work Tax evasion is Uncertainty
difficult
Civic Tax evasion Elasticity Do not create social
consciousness consciousness.
Socio-based Limited coverage Large coverage Burden can be
shifted
Progressive Necessitate Social cause Tax evasion by
maintenance of smuggling
accounts
Certainty Complicated and Higher for luxury
inconvenient items and lower for
necessaries

CLASSES BY: Ph.D, M.A(ECO), MBA Dr. JATIN LAMBA Page 4.1