1.

With reference to the taxation policy:1. Mention three differences between direct taxes and indirect taxes. 2. Differenctiate between progressive and regressive taxes giving an example for each.

Answer»

Differences between a direct tax and an indirect tax:

Direct TaxIndirect Tax
1. They are directly paid to the Government by the people on whom they are imposed.They are paid to the Government by one person but their burden is borne by another person.
2. They cannot be shifted i.e. impact and incidence is on the same person.They can be shifted i.e. impact is on one person and incidence is on an another person.
3. Taxes imposed on production or income are direct taxes.Taxes imposed on consumption are indirect taxes.
4. These taxes are revised according to the ability of the tax payer.These are the taxes in which tax paying ability of the tax payer is assessed indirectly.
They generate social consciousness among people.They do not generate social consciousness as they are taxes in the dark.
Examples: Income Tax, Wealth tax.Examples: Sales Tax, Excise Duty.

2. Progressive taxes: A tax is called progressive when the rate of taxation increases as the taxpayer’s income increases, i.e. the higher the income, the higher is the rate of tax. 

For example: a person earning an income of? 5 lakh a year may be taxed at the rate of 20%.

Regressive taxes: A regressive tax is one in which the rate of taxation decreases as the taxpayer’s income increases. In this system the rate of tax falls with increase in income. 

For Ex., income of? 5 lakh a year may be tax at the rate of 20% and income of 10 lakh a year may be taxed at the rate of 20%.


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