Question

State the basic difference between direct and indirect taxation. Give an example.

Answer 1

The key difference between direct and indirect taxation is the incidence of the burden of the tax. While the impact of indirect taxation (like sales tax) can be shifted on to others, the impact of direct taxation (like income tax) cannot be shifted.

Example: A shopkeeper pays sales tax to the government but usually recovers it from the customers as a part of the price of the commodity sold. So, the impact of sales tax (an indirect tax) is ultimately shifted to the consumers. But, the impact of income tax is to be finally borne by the taxpayer himself. He cannot shift its burden on to others.