The taxes are the major source of income for any government. The governments broadly levy two different types of taxes on the citizens. This classification of taxes is based on who is the final bearer of the burden of tax. That is the classification is based on incidence and the status of taxpayer.
- Direct taxes
- Indirect taxes
Direct taxes: Direct taxes are those which are directly paid by the tax payer to the government. This tax liability cannot be transferred to any other entity for payment that is the incidence of tax is on the taxpayer himself. For Example: Income tax, wealth tax etc.
Indirect taxes: Indirect taxes are those which are not directly paid by the taxpayer to the government but paid indirectly through the intermediary such as the manufacturer or retailer. The eventual burden of the tax falls on to consumers who buy goods and services from the intermediary. This means that the burden of such taxes is transferable and in most of the cases are payable by the end-user himself as it is included in the final price only. Examples are – Service tax, trade tax, value added tax, excise duty, customs duty etc.