Economists have classified taxes from different angles. The various taxes may be classified under the following major heads:
1. Direct and Indirect Taxes
2. Proportional, Progressive and Regressive Taxes
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3. Specific and Ad Valorem Taxes
4. Single and Multiple Taxes
5. Value-Added Tax (VAT) Direct and Indirect Taxes
A direct tax is paid by the person on whom it is legally imposed, while an indirect tax is imposed on one person, but paid partly or wholly by another, owing to a consequential change in the terms of some contract or bargain between them.
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An income tax, an inheritance tax and so are other taxes on property generally regarded as direct taxes. On the other hand, taxes on commodities and transactions are generally regarded as indirect. A sales tax, a customs duty or an excise duty would be indirect taxes.
According to A.R. Prest, “the distinction between direct and indirect taxes is more commonly drawn by reference to the basis of assessment rather than the point of assessment. Those taxes which are based on the receipt of income are termed direct whereas those levied on expenditure are termed indirect”.
The classification of direct and indirect taxes based on the criterion of shifting of the incidence of tax is relatively scientific and thought worthy. Thus, a direct tax is that tax whose burden is borne by the person on whom it is levied.
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He cannot transfer the burden of the tax to some other person. In other words, in the case of a direct tax both the impact and incidence of a tax fall on the same person. For example, income tax is a direct tax as its burden falls on the person who pays it to the government.
On the other hand, an indirect tax is that tax which is initially paid by one individual but the burden of which is ultimately borne by another individual. In the case of indirect tax, the impact and incidence of tax fall on different persons. For example, an excise duty is levied on the manufacturer; he passes it on to the ultimate consumers by raising the price of the commodity.