One of the very important subject of
taxation is the problem of incidence of a tax. By incidence of
taxation is meant final money burden of a tax or final resting place of a tax.
It is the desire of every government that it should secure justice in taxation,
but if it does not know as to who ultimately bears money burden of a tax or out
of whose packet money is received, it cannot achieve equality in taxation. If government knows who pays tax, it can evolve an
equitable tax system. It can easily tap important sources of taxation and thus
can collect large amount of money without adversely affecting economic and
social life of the citizens of the country.
Definition of Impact
Impact of a tax is on person from whom government collects money in first instance. While incidence of a tax is on person who finally bears burden of a
To make it more clear, we take an example. Suppose government
levies a tax on electric goods in USA. Tax will be paid to Government in
first instance by manufacturers of electric goods. Impact of tax is, therefore,
on them. If manufacturers of electric goods industries add tax to price and
succeed in selling goods at higher prices of electric goods to consumers, burden
of tax is thus shifted on to consumers.
Incidence is Different
Incidence is final resting place of
a tax while shifting is process of transferring money burden of tax to
someone else. Shifting finally ends in incidence. When a person on whom tax is
levied tries to shift tax on to the other, he may succeed in shifting tax
completely, partly, or may not succeed at all. Shifting of tax can take place in
two directions, forward and backward. If tax is shifted, from
seller to consumer, it is a case of forwarding shifting.
shifting takes place when consumers do not purchase commodities at increased
prices. Sellers are! then forced to cut down prices and bear burden of tax
themselves. Backward shifting is thus performed by buyers.
Incidence and Effect of a Tax:
Before we proceed further it seems necessary that we should distinguish the
concept of incidence from effect. As stated earlier incidence is direct money
burden of a tax. Effect of taxation is repercussions or consequences! of
imposition of a tax on individuals and on community in general.