Family Economics And Consumer Education 3 (2+1)

Lesson 13 : Taxation

Classification Of Taxes

Taxes are classified in various ways on the basis of form, nature, aim and method of taxation.

Important classification of taxes is discussed here.

1. Direct and indirect taxes
2. .Proportional, Progressive, Regressive and Degressive taxes

1. Direct and Indirect taxes: It is based on the nature and incidence of taxes. This is a conventional classification of taxes.

Direct tax is a tax which is paid to the government by person and money burden of such tax is also borne by the same person, i.e direct tax is paid by the person on whom it is legally imposed and the burden of which cannot be shifted to any other person. The initial or the first burden and the incidence of the tax is on the same person. The very person on whom the tax is levied has to pay it.
The tax payer is the tax bearer. Income tax for example is a direct tax.
An indirect tax is a tax which is paid to the government by one person in the first instance but the money burden of which finally borne by another person.
i.e An indirect tax is the tax the burden of which can be shifted to others. The impact and incidence of indirect tax is on different person. The tax payer is not the tax bearer in case of indirect taxes. Commodity taxes are indirect taxes. They are imposed on producers or sellers but their incidence falls upon the consumers as such taxes are included in the prices.
Direct taxes are –income tax, wealth tax, property tax, estate duties, capital gains tax etc.
Indirect taxes are –sales tax, exercise duties customs duties etc.

2. Proportional, Progressive, Regressive and Degressive taxes:

These four taxes are classified considering the relation between the tax rate and the tax base (income) Proportional taxes: These are taxes in which the rate of tax remains constant though the tax base changes. Here tax base may be income, money value of property, wealth or goods etc.
In proportional tax system taxes vary in direct proportion in the change in income. The following illustration provides an example of proportional and progressive tax.

Schedule of proportional and progressive tax ratesk

Tax base ( y ) (Rs)	Proportional		progressive
	Tax rate (R) Per cent	Amount of tax(T) (Rs)	Tax rate(R)	Amount of tax(T)
1000	10	100	10	100
2000	10	200	15	300
3000	10	300	25	750

Progressive taxes:
The rate of tax increase as the tax base increases under progressive taxes. Thus in a progressive tax the amount of tax paid will increase at a higher rate than the increase in tax base or income. Thus a progressive tax extracts an increasing proportion of rising income. More burden falls on rich people . In case of India income tax is progressive tax.
Regressive tax: The taxes are called regressive taxes when the rate of tax decreases as the tax base increases. The following illustration provides the schedule of regressive tax.

Schedule of regressive and degressive tax rates

Tax base ( y ) (Rs)	Regressive tax		Degressive
	Tax rate (R) Per cent	Amount of tax(T) (Rs)	Tax rate(R) Per cent	Amount of tax(T)
1000	10	100	5	50
2000	8	160	6	120
3000	6	180	7	210
4000	5	200	7	280

In regressive taxation though total amount of tax increases on a higher income in the absolute sense the tax rate declines on higher income in relative sense.
Thus a regressive tax extracts a declining amount. A heavier burden falls upon poor than on the rich. Taxes on necessary goods are generally regressive. Thus regressive taxation is unjust and inequitable. it does not comply with cannon of equity.
Degressive taxes : In degressive taxation a tax may be progressive up to certain limit, after that it may be charged at a flat rate. Thus high income earners do not make a due sacrifice on the basis of equity under degressive taxes.
Tax based on Method of Assessment
Taxes on commodities are levied on the basis of the method of assessment. They are specific taxes and Ad-valorem taxes
Specific Taxes :
Taxes which are levied on specific qualities are attributes of goods are called specific taxes. Specific taxes are assessed on the basis of weight, number or volume of commodities. Specific tax on cloth for instance may be assessed on a particular length of cloth like meter at a specific rate like say 20 paisa.
Ad-valorem taxes: Taxes which are levied entirely on the basis of money value of goods taxed are known as Ad-valorem taxes. Sales tax for instance on a commodity may be levied as some percent on its selling price.
Specific taxes are easy to calculate and administer.
Ad-valorem tax involves calculation of the value of goods. Hence they are difficult. But Ad-valorem taxes are equitable in terms of incidence as they are based on the value of goods and the cannon of ability to pay is fulfilled. They generally fall heavily on the richer consumer since they are in proportion to the prices.
Specific taxes are regressive on character since the same tax rate is levied on different qualities of goods. Relatively higher burden falls on low quality cheap goods which are consumed by poor people.