What are taxes?

A charge which is mandatory imposed by the Government on income earned by individual or corporate, goods , services or any activity in order to raise revenue. It is considered as the penalty to live in this world. Taxes are charged to raise fund for various public expenditure. In terms of law failure to pay tax is a punishable act. There are various types of taxes , such as  income tax, property tax, capital gain tax, service tax, value added tax, excise duty tax, GST etc.

Taxes are divided into two parts:

·         Direct Tax

·         Indirect Tax

Direct Tax

Taxes which are paid directly to the government are known as direct tax. It cannot be transferred to another person. Income tax, Corporate Tax, Capital Gain tax, Property tax etc are considered as direct tax. Direct taxes may be adjusted to the individual characteristics of the taxpayer. Under this system government collects the tax from the person on whom tax it is imposed. Under direct tax system, the taxpayer and tax bearer are the same person. Direct tax is progressive in nature which means that if the income increases, percentage of tax charged  will also increase. i.e. tax payers in the higher tax bracket have to pay higher rate of tax.

Indirect Tax

A tax which is collected by the intermediary from the person who bears the burden of tax and then pays the taxes to the government is known is indirect tax. It can be transferred to another person. Sales tax, value added tax (VAT), excise tax, GST are the few types of indirect taxes. Indirect taxes are collected by supplier of goods and services and are paid by the consumer of goods and services. Thus, the burden of tax is shifted to the final consumer. Hence, indirect tax is regressive in nature i.e. all the consumers have to bear the burden of tax irrespective of their capacity to bear tax. Under indirect tax system, tax payer and tax bearer are two different persons.

Dr. Himani Gupta

Associate Professor

Department of Management Studies