## Meaning of Tax

A tax is a compulsory contribution levied by the government. Taxes are classified by who ultimately bears the burden into two broad categories.

### Direct Taxes

Imposed directly on a person's income or wealth.
The burden cannot be shifted to anyone else — the person who is charged is the person who pays.
Example: Income Tax.

### Indirect Taxes

Levied on the price of goods or services.
The person who initially pays the tax can pass (shift) the burden to another person (usually the final consumer).
Examples: GST, Customs Duty.

### The Key Distinguishing Test

Ask: "Can the person legally liable pass the burden on to someone else?"

> Income Tax is a direct tax because it is charged on a person's income and the liability stays with that person.

Worked example

### Example 1

Q: Mr. A earns salary income and pays income tax on it. Can he recover this tax from his employer or customers?

A: No. Income tax is a direct tax — the burden cannot be shifted. Mr. A himself bears the tax on his own income.

### Example 2

Q: A trader pays GST when selling goods but adds it to the invoice charged to the customer. What type of tax is this?

A: GST is an indirect tax — the trader shifts the burden to the customer, who ultimately bears it.

⚠️ Common exam mistakes

Thinking the incidence (who pays to government) and burden (who ultimately bears it) are always the same — for indirect taxes they differ.
Classifying GST or Customs as direct taxes — they are indirect taxes because the burden is shifted.
Assuming any tax collected by a business is indirect — the test is whether the burden can be shifted, not who collects it.

Reference:

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Meaning and Types of Tax (Direct vs Indirect)

Worked example