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Question

Differentiate between progressive and regressive taxes. Give an example of each.

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Solution

BASIS PROGRESSIVE TAX REGRESSIVE TAX
Meaning A taxing mechanism wherein, the tax rate rises with the rise in the taxable amount, is called a progressive tax. A tax system in which the tax rate falls with the increase in the amount subject to tax is known as a regressive tax.
Assessment On income or profit As a percentage of the asset purchased.
Ability to pay Matters Does not matters
Includes Direct taxes Indirect taxes
Rate The marginal tax rate exceeds the average tax rate. The average tax rate exceeds the marginal tax rate.
Example Income tax, wherein the income tax is divided into various slab rates, i.e. Whenever the income of the assessee crosses a particular slab, a higher income tax rate is imposed on his income. Value Added Tax charged fairly to all customers, but the lower section of society is highly affected by it.

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