Theory question 106
Public Finance(a) Differentiate between direct and indirect taxation.
(b) Highlight any five advantages of indirect taxation to developing countries.
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(a) Direct taxation is imposed on the incomes and property of individuals and firms and paid directly to government by those who bear it (e.g. income tax, company tax). Indirect taxation is imposed on goods and services; it is paid to government by producers or importers but the burden can be shifted to consumers through higher prices (e.g. VAT, import duties, excise duties).
(b) Any five: difficult to evade because included in prices; convenient – paid in small amounts when buying; wide coverage – everyone who buys pays, including the informal sector; cheap and easy to collect; can discourage consumption of harmful goods; can protect infant industries (import duties); flexible – rates can be changed easily; yields large revenue.
Direct taxes fall on income; indirect taxes fall on spending.