Distinguish between a direct and indirect tax.

  • A direct tax is one whose impact as well as incidence falls on one and the same person while an indirect tax has its impact on one person and incidence is partly or wholly on another person.
  • Examples of a direct tax include income tax, wealth tax, gift tax, inheritance tax and corporation tax. Examples of indirect tax include Value Added Tax (VAT), Sales tax, Customs and excise duties.
  • Note that impact of tax in the case of direct tax is on the person on whom it is legally imposed and the same person pays the tax. In indirect taxation, however, the tax is legally imposed on one person and through tax shifting, it is paid by another person.
  • Direct tax has income as the base while indirect tax is based on expenditure/consumption
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