Direct Tax Example Explained

A direct tax is levied directly on the income, wealth, or profit of an individual or organization. The burden of this tax cannot be shifted to someone else.

An indirect tax is imposed on goods and services rather than income or profits. The burden of this tax can be shifted from the person initially paying the tax (like a retailer) to the final consumer.

Analyzing the Options

• Option 1: Custom duty - This is a tax imposed on goods when they are imported or exported. It's paid on specific goods and is generally considered an indirect tax as its cost is often included in the final price of the product.
• Option 2: Excise tax - This is a tax levied on the production or sale of specific goods manufactured within a country (e.g., alcohol, tobacco). It is an indirect tax because the manufacturer pays it, but typically passes the cost onto the consumer.
• Option 3: Personal income tax - This tax is levied directly on the income earned by individuals (salaries, wages, etc.). The individual earning the income pays this tax directly to the government. This is a classic example of a direct tax.
• Option 4: G.S.T. (Goods and Services Tax) - This is a broad consumption tax levied on the supply of goods and services. It is collected by businesses and paid to the government, but the ultimate financial burden falls on the final consumer. GST is an indirect tax.

Conclusion

Based on the definitions, Personal income tax is the tax levied directly on the earner's income, making it a direct tax.