Question

Analyse the following situation and select the suitable option.

A earns an income.
B spends the income.

• A. A pays direct tax and B pays indirect tax.
• B. A pays indirect tax and B pays direct tax.
• C. A does not pay any tax and B pays direct tax.
• D. B does not pay any tax and A pays indirect tax.

Answer 1

The correct option is A A pays direct tax and B pays indirect tax.

There are various taxes that an individual pays. Taxes imposed on the income of individuals are called income tax. Since the tax burden cannot be transferred from one person to another, it is known as direct taxes. On the other hand, when we buy certain goods and services, we pay a tax on them as customers. It is imposed on the trader but the trader includes the tax in the final price of the item, and the customer pays the tax. Since the tax burden can be shifted from one person to another, it is an indirect tax.