Basically, tax can be classified into two broad categories:
1. Direct Tax
2. Indirect Tax
1. Direct Tax
A direct tax is a tax paid by a person on whom it is legally imposed. In direct tax, the person paying and bearing tax is the same. It is the tax on income and property. Examples of direct taxes are:
* Income Tax
* Vehicle Tax
* Expenditure Tax
* property Tax
* Interest Tax
* Gift Tax etc.
Advantages Of Direct Tax
* Direct tax is equitable as it is imposed on person as per the property or income.
* Time, procedure and amount of tax paid to be paid is known with certainty.
* Direct tax is elastic. The government can change tax rate with the change in the level of property or income.
* Direct tax enhances the consciousness of the citizens. Taxpayers feel burden of tax and so they can insist the government to spend their contributions for the welfare of the community.
Disadvantages Of Direct Tax
* Direct tax gives mental pinch to the taxpayers as they have to curtail their income to pay to the government.
* Taxpayers feel inconvenience as the government impose tax progressively.
* Tendency to evade tax may increase to avoid tax burden.
* It is expensive for the government to collect tax individually.
2. Indirect Tax
An indirect tax is a tax imposed on one person but partly or wholly paid by another. In indirect tax, the person paying and bearing tax is different. It is the tax on consumption or expenditures. Examples of indirect taxes are:
* VAT
*Entertainment Tax
* Excise Duty
* Sales Tax
* Hotel Tax
* Import And Export Duty etc.
Advantages Of Indirect Tax
* Indirect tax is convenient as the taxpayer does not have to pay a lump sum amount for tax.
* There is mass participation. Each and every person getting goods or services has to pay tax.
* There is a less chance of tax evasion as the taxpayers pay the tax collected from consumers.
* The government can check on the consumption of harmful goods by imposing higher taxes.
Disadvantages Of Indirect Tax
* Indirect tax is uncertain. As demand fluctuates, tax will also fluctuate.
* It is regretful as the tax burden to the rich and poor is same.
* Indirect tax has bad effect on consumption, production and employment. Higher taxes will reduce all of them.
* Most of the taxes are included in the price of goods or services. As result, taxpayers do not know how much tax they are paying to the government.
