Distinguish between Direct and Indirect taxes.
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What is the basis of classifying taxes into direct tax and indirect tax? Give an example of each. 

Distinction between Direct Tax and Indirect Tax:
Basis of Classification. The basis of classifying taxes into direct tax and indirect tax is 'whether the burden of the tax is shiftable to other or not.' If it is not shiftable, it is a direct tax. If burden is shiftable to others, it is an indirect tax.
(i) Direct tax. When (i) liability to pay a tax, and (ii) the burden of that tax falls on the same person, the tax is called a direct tax. Thus a direct tax is the tax which is paid by the same person on whom it has been levied, i.e., its burden cannot be shifted to others. For example (i) income tax is a direct tax because the person whose income is taxed is liable to pay the tax directly to the government and bear its burden himself. Other examples of direct tax are: (ii) Corporate tax — It is levied on the profit of corporations and companies.(iii) Wealth tax — It is imposed on property of individuals depending upon the value of property. (iv) Gift tax - It is paid to the government by the recipient of gift depending upon the value of gift. (v) Estate duty — It is charged from successor of inherited property. Similarly, (vi) Expenditure tax, (vii) Fringe benefit tax are other examples of direct taxes. In short, direct tax are levied on the income and the property of persons and are paid directly to the state.
Merits (i) Direct taxes help in reducing disparities in income and wealth of people. (ii) They are economical because cost of collection for government is relatively low. (iii) Social and economic justice is achieved to some extent because direct taxes are based on 'ability to pay'.
Direct taxes are generally considered progressive taxes because they are based on the ability to pay. A progressive tax is one the rate of which increases with rise in income and decreases with fall in income.
(ii) Indirect tax. When (i) liability to pay a tax is on one person, and (ii) the burden of that tax falls on some other person, the tax is called an indirect tax. Thus it is a tax whose burden can be shifted to others. For example, (i) Sales tax is an indirect tax because liability to pay tax is that of shopkeeper who, in turn, realises the tax amount from the customer by including it in price of the commodity. Other examples of indirect tax are (ii) Excise duty — It is paid by the producer (manufacturer) of goods who recovers it from wholesalers and retailers. (iii) Custom duty — It is charged from the importer of goods from a foreign country which is recovered from retailers and customers. (iv) Entertainment tax — It is charged from cinema-owners who recover it from cinema-viewers. (v) Service tax — It is imposed on selling services (e.g., serving meals in hotels) to customers. Similarly, (vi) Octroi (chungi), and (vii) Value added tax are other examples of indirect taxes. In short, all taxes levied on goods and services in different forms (like on production, sale, transport, etc.) are called indirect tax.
Merits — (i) Indirect taxes are convenient to realise because they are included in the price of the commodity. (ii) They have wide coverage since every member (consumer) of the society is taxed through price of the commodity. (iii) Consumption of harmful commodities like wine, cigarettes, etc. is curtailed thus serving social purpose.