Which of the following is an example of direct tax?
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1 mark, −0.333Public EconomicsTaxation: incidence and efficiencyDirect and indirect taxes and how taxes are classifiedEasyabout 1 min
GATE 2023 Question 35: Taxation: incidence and efficiency
Answer and worked solution
Answer: (C)
A direct tax is levied directly on an individual or entity's income or wealth, and its burden cannot be shifted to someone else — individual income tax is the textbook example.
Sales tax, customs duty, and excise tax are all indirect taxes: they are levied on transactions (goods/services) and their burden can be shifted through prices to the end consumer, rather than being borne directly by the legally taxed entity.
Therefore the answer is (C) Individual income tax.
The trap: (D) Excise tax
Excise tax is sometimes confused with direct taxation because it targets specific goods at the point of production (feeling more 'targeted' than a broad sales tax), but its burden is still passed through to consumers via prices, making it an indirect tax like the others.
Taxation: incidence and efficiency has come up 79 times in 7 exams since 2009.
What this question tests
This question is on Direct and indirect taxes and how taxes are classified, part of Taxation: incidence and efficiency in Public Economics.
The main ways to classify taxes and what each class implies.
TestStop has 8 past-paper questions on this subtopic.
Question from the GATE 2023 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.