There are two types of taxes
- Direct Tax
- Indirect Tax
| Direct taxes | Indirect taxes |
|---|---|
| Direct taxes refer to taxes that are really paid by those on whom they are legally imposed. | Indirect taxes refer to taxes that are imposed on an individual but are paid by another person either partly or wholly. |
| The tax burden cannot be shifted to any other individual or firm by the taxpayer. | The tax burden can be shifted by the taxpayer. |
| It is progressive because the tax rate increases with an increase in income slabs. | It is regressive because the common people bear this tax burden. |
| The impact and incidence of tax fall on the same person. | The producer bears the impact and incidence of tax on the consumer. |
Other types of taxes
- Progressive Tax – Rate of tax increases as the taxpayer’s income increases
- Proportional Tax – The rate of tax remains the same
- Regressive Tax – Rates of tax decrease as income increases
- Degressive Tax – Rate of tax increases up to a certain limit, later uniform rate is charged
Progressive tax
When the percentage of income collected as tax increases with an increase in the income, it is called progressive income tax.
| Income per month | Rs 2000 | Rs 4000 |
| Tax rate | 10% | 5% |
| Tax collection | Rs 200 | Rs 200 |
Proportional tax
In proportional tax, the tax rate is constant irrespective of an increase in income. All taxpayers pay an equal proportion of their income in the form of taxes.
| Income per month | Rs 2000 | Rs 4000 |
| Tax rate | 10% | 10% |
| Tax collection | Rs 200 | Rs 400 |
Regressive tax
In regressive tax, the average tax rate decreases with an increase in the income of an individual. The absolute amount of tax collection increases with an increase in income.
| Income per month | Rs 2000 | Rs 4000 |
| Tax rate | 10% | 7.5% |
| Tax collection | Rs 200 | Rs 300 |
Degressive tax
Degressive tax is the rate of tax that increases up to a certain limit after which a uniform rate is charged. This system is a mixture of proportional tax and progressive tax. The absolute amount of tax collection falls with an increase in income.
| Income per month | Rs 2000 | Rs 4000 |
| Tax rate | 10% | 2.5% |
| Tax collection | Rs 200 | Rs 100 |
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