DIRECT TAXES

June 2019, Paper-II
Question

A tax is said to be direct, when
a) Impact and incidence fall upon the same person
b) Only incidence fall upon the same person
c) The impact is shifted to another person
d) Person escapes from paying tax

Answer A
 The term impact is used to express the immediate result of or original imposition of the tax. The impact of a tax is on the person on whom it is imposed first. Thus, the person who is responsible to pay the tax to the government bears its impact. The impact of a tax, as such, denotes the act of impinging.

 The term incidence refers to the location of the ultimate or the direct money burden of the tax as such. It signifies the settlement of the tax burden on the ultimate taxpayer. Incidence emerges when the tax finally settles or comes to rest on the person who bears it. It, in fact, is the ultimate result of shifting. Hence, the incidence of a tax is upon that person who cannot shift the burden any further, so he has to himself bear the direct money burden of the tax.

 Direct tax is a type of tax where the incidence and impact of taxation fall on the same entity. In the case of direct tax, the burden can’t be shifted by the taxpayer to someone else. These are largely taxes on income or wealth.