IGCSE Economics Paper-2: Specimen Questions with Answers 65 - 65 of 100

Passage

“In developing countries, in contrast, inflation is not purely a monetary phenomenon. Factors typically related to fiscal imbalances, driving higher money growth and exchange rate depreciation, dominate the inflation process in developing countries.”

Question 65 (4 of 5 Based on Passage)

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What are the types of direct and indirect tax?

Explanation

Direct and Indirect Taxes

Direct tax is a tax where the incidence and impact of taxation burden is on the same entity or person. In direct tax the burden of taxation cannot be shifted by the person liable to someone else. These are charged on income or wealth of a person or entity.

Types of Direct Tax Are the Following

  • Income Tax: It is levied on and paid by the same person.
  • Corporate Tax: Such type of tax is paid by companies and corporations on their profits.
  • Wealth Tax: It is a tax levied on the value of property that a person owns or holds.
  • Gift Tax: Gifts received by an individual are taxable to the government.
  • Fringe Benefit Tax: Benefits paid by an employer in the form of fringe benefits to employees collected by the state government.

In contrast to direct tax indirect tax, include those types of taxes where the liability to pay the tax lies on a person who shifts the tax burden to another individual.

Types of Indirect Taxes Are the Following

  • Excise Duty: It is paid by the manufacturer who then shifts the tax burden to wholesalers and retailers.
  • Sales Tax: Sales tax is paid by a shopkeeper or retailer, who transfers the tax burden to customers by imposing sales tax on goods and services.
  • Custom Duty: Duties levied on goods imported from foreign country, taxes on which is ultimately paid by the consumers and retailers.
  • Entertainment Tax: Tax liability is on the cinema owners, who shift the burden to cinemagoers.
  • Service Tax: Taxes charged on services provided to consumers. Example- food bill in a restaurant.

Therefore, the fundamental difference between direct tax and indirect tax is the ability of the taxpayer to shift the burden of tax to others.

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