1. Define a tax. State two differences between income tax and commodit

1. Define a tax. State two differences between income tax and commodity tax. 2. Explain how tax can be used as an instrument to regulate consumption and production in any economy.

Answer»

1. A tax may be defined as a compulsory payment made by the citizens to the Govt, to defray the common expenses incurred for all, without reference to special benefit conferred.

Two differences between income tax and commodity taxes:

Income tax	Commodity tax
1. It is a direct tax. Its impact and incidence is on the same person.	It is an indirect tax. Its impact falls on the producer and incidence falls on the consumer.
2. It can be evaded by filing false returns.	It cannot be evaded. One has to give up the consumption of the commodity in order to evade the tax.

2. Taxes can be used as an instrument to regulate consumption and production in an economy in the following manner:

Consumption—Taxes are sometimes used to discourage the consumption of harmful goods like liquors, tobacco etc. Government imposes high rates of taxes on such commodities thus causing their prices to increase and their consumption to fall.

Production—A decrease in the consumption of commodities due to imposition of higher rates of indirect taxes also discourages their production. Thus resources are diverted from the production of non-essential goods to essential goods. Resources are diverted from the production of luxury goods to the production of necessity goods which are consumed by the masses.

1. Define a tax. State two differences between income tax and commodity tax. 2. Explain how tax can be used as an instrument to regulate consumption and production in any economy.

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