Types of Taxes

Direct taxes
Taxes which are collected directly from income and wealth are known as direct taxes.

Types of Direct taxes

Income tax

Income tax is collected on all incomes received by private individuals after certain allowances are made.
In most of the economies Income tax is a major source of Government revenue.

Corporation tax

This tax is levied on profits earned by companies. It is a proportional tax which is levied at the constant
rate.

Petroleum revenue tax

Capital gains tax

Property Tax

Many countries have Property tax, or millage tax. It is the tax which the owner pays on the value of the
property being taxed.
The taxing authority requires and/or performs an appraisal of the monetary value of the property, and tax
is assessed in proportion to that value. Forms of property tax used vary between countries and
jurisdictions.

Stamp duty
Stamp duty is a form of tax that is levied on documents relating to immovable property, stocks and
shares. Apart from transfers of shares and securities, stamp duties are also charged on the issue of
bearer instruments and certain transactions involving partnerships.

Advantages:
 High revenue: as all people above a certain income level have to pay income taxes, the revenue
from this tax is very high.
 Can reduce inequalities in income and wealth: as they are progressive in nature- heavier taxes
on the rich than the poor- they help in reducing the difference between the income levels of the rich and
the poor.
Disadvantages:
 Reduce work incentives: people may rather stay unemployed (and receive govt. unemployment
benefits) rather than be employed if it means they would have to pay a high amount of tax. Those
already employed may not work productively, since any extra income they make, the more tax they will
have to pay.
 Reduce enterprise incentives: corporation taxes may demotivate entrepreneurs to set up new
firms, as a good part of the profits they make will have to be given as tax.
 Tax evasion: a lot of people  find legal loopholes and escape having to pay any tax. Thus tax
revenue falls and the govt. has to use more resources to catch those who evade the taxes.

Indirect Taxes
Indirect tax (such as sales tax, value added tax (VAT), or goods and services tax (GST)) is a tax
collected by an intermediary (such as a retail store) from the person who bears the ultimate economic
burden of the tax (such as the customer). The intermediary later files a tax return and forwards the tax
proceeds to government with the return.An indirect tax may increase the price of a good so that
consumers are actually paying the tax by paying more for the products.

Examples would be fuel, liquor, and cigarette taxes. An excise duty on motor cars is paid in the first
instance by the manufacturer of the cars; ultimately the manufacturer transfers the burden of this duty to
the buyer of the car in form of a higher price. Thus, an indirect tax is such which can be shifted or passed
on.

All Indirect Taxes are regressive in nature. The poor will feel the pinch more than the rich.

Advantages:
 Cost -effective : the cost of collecting indirect taxes are low compared to direct taxes.
 Expanded tax-base: directs taxes are paid by those who make a good income, but indirect taxes
are paid by all people (young,old,unemployed etc) who consume goods and services.
 Can achieve specific aims: for example, excise duty (tax on demerit goods) can discourage the
consumption of harmful goods; similarly, higher and lower taxes on  particular products can
influence their consumption.
 Flexible: indirect tax rates are easier to alter/change than direct tax rates. Thus their effects are
immediate in an economy.
Disadvantages:
 Inflationary: The prices of products will increase when indirect taxes are added to it, causing
inflation.
 Regressive: since all people pay the same amount of money, irrespective of their income levels,
the tax will fall heavily on the poor than the rich as it takes more proportion of their income.
 Tax evasion: high tariffs on imported goods or excise duty on demerit goods can encourage illegal
smuggling of the good.

Types of Indirect Taxes

Value added Tax

Value added tax (VAT), or goods and services tax (GST), is a consumption tax levied on value added. In
contrast to sales tax, VAT is neutral with respect to the number of passages that there are between the
producer and the final consumer; where sales tax is levied on total value at each stage, the result is a
cascade (downstream taxes levied on upstream taxes).
Exports are consumed abroad and are usually not subject to VAT; VAT charged under such
circumstances is usually refundable. This avoids downward pressure on exports and ultimately export
derived revenue.

A VAT is an indirect tax, in that the tax is collected from someone who does not bear the entire cost of the
tax.

Excise duties
Excise duty is a type of indirect tax charged on goods produced within the country. Lists of such goods
are readily provided by governments.