Classification of Taxes
Difference between Direct and Indirect taxes
GST Law & Practice Notes
B.Com 6th Sem CBCS Pattern Notes
Classification of taxes
Different economics have classified taxes in different ways. The following classifications are commonly found in the modern tax system:
1. Direct and Indirect Taxes
2. Proportional, Progressive, Regressive and Degressive Taxes
3. Specific and Ad Valorem Duties/Taxes
4. Single and Multiple Taxes
Direct and Indirect Taxes
a) Direct taxes: Direct taxes are those which are paid directly to the government by the person to whom taxes are levied. These taxes are charged on incomes and profits. Burden of direct taxes are borne by the person to whom it is levied. He cannot transfer the burden of tax to some other parties. Example of direct taxes: income tax.
b) Indirect Taxes: Indirect taxes are those which are imposed on all the goods and services, and not on incomes and profits. Such taxes are collected by the sellers or service provider from their customers. Since consumers are not paying taxes directly to the government, that is why it is called indirect taxes. Example of indirect taxes: Goods and services tax.
Proportional, Progressive, Regressive and Degressive Taxes
The methods of taxation may be proportional, progressive, regressive and Degressive. A tax system may be composed of different kinds of taxes, such as, proportional, progressive, regressive or Degressive. They may be summarized as under:
a) Proportional Taxes: If a tax on all incomes is levied at the same rate, it is called proportional tax. A schedule of proportional tax rates is one in which the rates of taxation remain constant as the tax base changes. The amount of tax is calculated by multiplying the tax base with the tax rate. This type of taxation is quite simple and one can understand it without difficulty.
b) Progressive Tax: A tax, the rate of which increases with every increase in income is called progressive tax. A schedule of progressive tax rate is one in which the rate of taxation increases as the tax base increases. In India, we have progressive tax rate system.
c) Regressive Tax: In regressive taxation, the larger the income of tax-payer, the smaller is the proportion that he contributes. A schedule of regressive tax rate is one in which the rate of taxation decreases as the base increases.
d) Degressive Tax: A Degressive tax is one on which tax is progressive up to a certain limit, after that it is proportional, i.e., charged at flat rate.
Specific and Ad Valorem Duties/Taxes
a) Specific Tax: When a tax is imposed on a commodity according to its weight, size or measurement, it is called a specific tax. For example, when the excise duty is imposed on sugar on the basis of its weight or the cloth is taxed according to its length, it is known as a specific tax. It is easy to levy and more convenient to collect because it is collected either according to the weight of the commodity or the size of the unit of the commodity.
b) Ad Valorem Tax: When the tax is imposed on a commodity according to its value it is called ad valorem tax. Whatever may be the size or weight of the unit of the commodity, the tax is charged according to its value. The main advantage of ad valorem tax is that it imposes a greater burden on the richer section of the society.
Single and Multiple Taxes
a) Single Tax: A single tax means only one kind of tax. It implies a tax on one thing, that is, on one class of things or on one class of people. In this case, there is one tax which constitutes the source of public revenue. Such a tax is collected not only once but regularly every month or every year, at intervals of shorter or longer duration.
b) Multiple Tax: A multiple tax refers to the tax system in which there is the diversity of taxation, i.e., various types of taxes are levied. Modern economists have laid emphasis on the diversity of taxation. Multiple tax system simply implies that there should be different types of taxes so that everybody may be called upon to contribute something towards the state revenue. Hence, a multiple tax system is generally preferred to a single tax system. However, too great a multiplicity would be undesirable because it would involve a large cost of collection.
Also Read: GST Law & Practice Important Questions for Upcoming Exams
Unit 1: Concept and Features of Indirect Taxes
Q. Write a brief note on history and evolution of indirect taxes in India. 2022, 2023
Q. Write a brief note on various types of indirect taxes presently leviable in India. 2023
Difference between Direct Taxes and Indirect Taxes:
| Direct Taxes | Indirect Taxes |
| The burden of direct taxes is borne by the person on whom it is levied. | The burden of indirect taxes is transferred from the person who pays it, to another person. |
| Direct taxes income based taxes. | Indirect taxes are supply based taxes. |
| Rate of direct taxes are different from person to person depending on their earnings. | Rate of indirect taxes are not differ from person to person. |
| Entire revenue generated from direct taxes goes to Central Government of India. | Revenue generated from indirect taxes is divided between Central Government of India as well as State Governments (i.e. CGST and SGST) |
| Previous year income assessed in the assessment year. | There is no previous year and assessment year concept in case of indirect taxes. |
| Central Board of Direct Taxes (CBDT) is an important part of Department of Revenue. | Central Board of Indirect Taxes & Customs (CBIC) is an important part of Department of Revenue. |
| Direct taxes are progressive nature. | Indirect taxes are regressive nature. |
| Direct taxes are certain. | Indirect taxes are uncertain. |
| Direct taxes are based on taxable capacity. | Indirect taxes are not based on taxable capacity. |
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