Types of Direct Tax

Types of Direct Tax

Types of direct tax include progressive tax, regressive tax, Digressive tax, proportional Tax.

1.    Progressive Tax

Tax which increases with the increase of income are regarded as progressive tax. It is based on the principal equality. Under progressive taxation system income is divided into different slabs and there is different tax rate for each slab.

2.    Regressive Taxation

Regressive taxation the tax rate falls with increase of income. It means this taxation system put more burdens on the poor and has more relief for the rich people.

3.    Digressive Taxation

Under digressive taxation system the tax rate does not increase proportional to the income increase , in this tax system , tax rate increase up to certain income level and then it become fixed .

4.    Proportional Taxation

Under proportional taxation everyone will pay tax proportional to its income. It means there is little relief for poor people and everyone in the society will pay the tax with same rate. It is kind of fixed rate of tax for all income group.

Types of Indict Taxes

Types of Indict Taxes

Types of indirect tax include Specific tax, Ad valorem Tax and value added tax.

1.    Specific Tax

Under specific tax system tax is imposed on the bases of measurement or weight. For example excise duty on cement is imposed on per ton production of cement. Specific tax is easy to understand and impose.

2.    Ad Valorem Tax

Ad valorem tax is such tax which is imposed on the value of good, for example custom duty normally imposed on the value of goods. This tax system is bit difficult to implement because of difficulties in determining the value.

3.    Value Added Tax

Value added tax is imposed on value addition i.e. input tax is deducted from the output tax. it is important that input tax is imposed on purchase while output tax is imposed on sales. Therefore tax is paid only on net value addition.

Effect of Taxes

Effect of Taxes

1.    Reduces Purchasing Power

Income tax on personal income reduces the purchasing power of the individual, because some of the income was eaten up by the taxes, and individual now has low amount for expenditure.

2.    Reduces overall Demand

As explained above that taxes will reduce purchasing power, which would ultimately have negative impact on the overall demand i.e. overall demand in the economy will shrink.

3.    Reduces incentive to work

If there is progressive taxation system i.e. high income will be taxed at high rate, then there will be little incentive for more work, because more work will not be generate more proportional income.

4.    Low Saving & Reduced investment

Taxation will lower the saving level and therefore investment will also reduce in the economy.

5.    Income Distribution

Taxation will lower the difference between unequal distributions in the economy. This target can be achieved by progressive taxation i.e. high income high tax rate.

6.    Unemployment

Taxation will create unemployment in the economy due to reduced demand, saving and investment. These all factor will adversely affect the employment level in the economy.