What is Tax?

What is Tax?

A tax is the pecuniary burden which is laid upon the individuals, businessman, and property owner’s etc. to provide support to the government. It is not any voluntary contribution or donation but a mandatory payment exacted by government authorities. It is further classified as direct & indirect tax.


Tax is basically an amount of money that is payable to the government so that the government can spend such money for providing public services. More precisely, it is the percentage of amount which is paid by the individuals, businesses, companies etc. on the income earned by them or on the goods purchased/services received by them. In our day to day life we need to pay taxes on restaurant meals, movies, purchase of even grocery items and also it is deducted from your salary. These are the different day to day expenses and income on which different types of taxes are paid. The taxes on the incomes are referred as income taxes whereas the taxes payable on goods & services is known as Goods & service tax.

Types of Tax

Taxes are broadly classified into 2 categories. They are as follows:

  1. Direct Tax:
    It is a type of tax which is directly imposed on the taxpayer where the tax payer can be any natural person like individuals or artificial person like firms, company etc. these taxes are paid directly to the government and cannot be shifted to anyone else by the taxpayer. In India, significant direct tax is income tax.
  2. Indirect Tax:
    It is a type of tax whose incidence is passed on till it reaches the final consumer, who finally bears the brunt of it. In other words, the tax amount is finally borne by the consumer who is the ultimate user or consumer of such goods & services. In India, significant indirect tax is GST (Goods & Service Tax).

Difference between Direct Tax & Indirect Tax

S.No.Direct TaxIndirect Tax
1Direct tax is a tax which is directly payable to the government by the taxpayer.The incidence of indirect tax can be passed on to the another person and mostly an intermediary collects the indirect tax from the customer and then pay it to the government
2Direct Tax is levied on the incomes earned by individuals, corporates, HUFs etc.Indirect Tax is levied on the goods & services.
3Direct Tax is progressive in nature i.e. higher rate of tax for the people having higher income or higher paying capacity.  Indirect Tax is regressive in nature i.e. all the consumers of goods & services has to pay equal amount of tax applicable on a given product or service regardless of their paying capacity.  
4In case of Direct tax, the burden of taxes cannot be shifted to another personIn case of Indirect tax, the burden of taxes can be shifted to another person.
5Tax planning is possible by investing in various schemes. By investing in various approved schemes, the deduction in income can be claimed resulting in the ultimate reduction in tax liability.Tax planning in case of indirect tax is not possible.
6Various Direct taxes applicable in India are Income tax, Capital Gains tax, Corporate tax etc.Various Indirect taxes applicable in India are Goods & Service Tax, Taxes on petrol & Liquor, customs duty etc.

Final Thought:

Thus, tax is the basic source of revenue for the government. Taxes which imposed on income and directly given to the government is direct taxes and taxes that levied on goods & services and passed on to the government through intermediaries is indirect taxes. Both the taxes finally contribute towards the revenue of government which the government utilizes in public welfare and social upliftment.


Related Articles

Share this Knowledge Base

3 thoughts on “What is Tax?

Leave a Reply

Your email address will not be published. Required fields are marked *