Classification of tax

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Classification of tax

Classification of tax 

Modern tax system comprises of different types of taxes. Proper classification of the taxes is essential to understand the nature and significance of different taxes. Usually, taxes are classified on the basis of form, nature, aim and methods of taxation. A commonly applied classification of taxes is into direct and indirect taxes. This classification is based on the shifting of the burden of tax. 
a. Direct tax 
a direct tax is a form of tax paid by a person on whom it is legally imposed. It is collected directly by the government from the person who bears the tax burden. Taxpayers need to file tax returns directly to the government. Therefore, direct tax cannot be shifted. The impact or the money burden and the incidence are on the one and the same person. In other words, the same person pays and bears the tax burden. It is the tax on income and property. Examples includes income tax, property tax, vehicle tax, interest tax, expenditure tax, death tax, gift tax, etc. 
the following are the advantages of direct tax: 
  • equitable: it is equitable as it is imposed on person as per the size of property or income. 
  • Certainty: time, procedure and amount of tax to be paid is known with certainty. 
  • Economical: the cost of collecting direct taxes is low as they are mostly collected “at the sources”. 
  • Elastic: if the government suddenly needs more funds in an emergency, direct taxes can well serve the purpose. The yield from income tax can be easily increased by raising tax rate. 
  • Productive: as a community grows in numbers and prosperity, the return from direct taxes expands automatically. The direct taxes yield large revenue to the government. 
  • Raising civic consciousness: a person knows that he is paying a tax; he feels conscious of his rights. He claims the right to know how the government uses his money and approves or criticizes it. Civic sense is thus developed. He behaves as a responsible citizen. 
The following are the disadvantages of direct tax: 
  • Inconvenient: the great disadvantage of a direct tax is that it gives mental pinch to the taxpayers as they have to pay taxes out of their pocket. 
  • Evadable: the taxpayer can submit a false return of income and thus evade the tax. That is why a direct tax is “a tax on honesty”. 
  • Arbitrary: if taxes are progressive, the rate of progression has to be fixed arbitrarily; and if proportional, they fall more heavily on the poor. Thus, both are bad. The rate of taxes depends upon the whim of the finance minister. 
  • Uneconomical: it is uneconomical as the government has to collect tax individually. 
  • Discourage Savings and Investment: if the taxes are too heavy, they discourage saving and investment. In that, case the country will suffer economically. 

b. Indirect Tax 

an indirect tax is a form of tax imposed on one person but partly or wholly paid by another. It is collected by mediators who transfer the taxes to the government and also perform functions associated with filing tax returns. Hence, indirect tax can be shifted. In indirect tax, the impact and incidence of tax are on different persons. In other words, the person paying and bearing the tax is different. It is the tax on consumption or expenditure. Examples include VAT, excise duty, import and export duty, etc. 
the following are the advantages of indirect tax: 
  • convenient: indirect tax is more convenient as the taxpayer does not have to pay a lump sum amount for tax. It is paid in small amounts and only when making purchases. 
  • Mass Participation: there is mass participation as each and every person getting goods or services has to pay tax. Indirect tax is also the means of reaching the poor as they are generally exempted from paying direct taxes. 
  • Less tax evasion: there is a less chance of tax evasion as the taxpayers pay the tax collected from consumers. The collection of tax takes automatically when goods are bought and sold. 
  • Regulate Consumption: the government can check on the consumption of harmful goods by imposing higher taxes. 
  • Powerful tools for regulating economy: indirect taxation serves as a powerful tool in controlling the production and investment activities in an economy. The government can discourage the industries, involved in producing goods of low priority i.e. luxurious goods or health hazard products by imposing higher rate of indirect taxation, such as excise duty. 
The following are the disadvantages of indirect tax: 
  • Uncertain: it is uncertain. With the fluctuation in demand, the tax amount can also fluctuate. 
  • Regressive: indirect taxes are regressive as the tax burden to the rich and the poor is same. 
  • Unproductive: indirect tax can be unproductive if imposed unnecessarily, for example imposing raw materials. It could have bad effect on consumption, production and employment. Higher taxes reduce all of them. 
  • Less civic consciousness: most of the taxes are included in the price of goods or services. As a result, taxpayers do not know how much tax they are paying to the government. 
  • Uneconomical: they are uneconomical as the cost of collection is quite heavy. Every source of production has to be checked. Large administrative staff is required to administer such taxes. This turns out to be a costly affair. 

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