# What is Tax?

Tax is considered to be the "cost of living" in society. Taxes are levied (charged) by the Government to meet the common welfare expenditure of society.

## Two Types of Taxes

Aspect	Direct Tax	Indirect Tax
Levied on	Income or wealth of a person	Price of a good or service
Burden shifting	Cannot be shifted to another person	Person paying the tax to the Government passes the incidence to another person
Simple Rule	Jo paise kamayega, usko tax dena padega	Sabko tax dena padega jab bhi koi goods ya services kharidenge

## Key Difference

Direct Tax → The person who earns income pays the tax directly (e.g., Income Tax). The burden stays with the same person.
Indirect Tax → The seller collects the tax from the buyer and deposits it with the Government (e.g., GST). The buyer ultimately bears the cost.

Worked example

### Example 1

Example 1 (Direct Tax): Mr. A earns a salary of Rs. 10,00,000. He pays Income Tax on this income himself. He cannot ask his employer or anyone else to bear his tax → This is a Direct Tax.

### Example 2

Example 2 (Indirect Tax): A shopkeeper sells a mobile phone for Rs. 11,800 (Rs. 10,000 + Rs. 1,800 GST). The shopkeeper collects Rs. 1,800 from the buyer and deposits it with the Government. The actual burden of tax falls on the buyer → This is an Indirect Tax.

⚠️ Common exam mistakes

Confusing 'who pays' with 'who bears the burden'. In indirect tax, the seller pays but the buyer bears the cost.
Thinking GST is a Direct Tax because the shopkeeper deposits it. The burden is on the consumer.
Assuming all taxes can be shifted. Income Tax burden cannot be passed to another person.

Reference:

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What is Tax & Types of Taxes

Worked example

⚠️ Common exam mistakes