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With reference to the indirect taxes, consider the following statements:
1. Indirect taxes have the same point of tax incidence and tax impact.
2. Increasing indirect tax rates may enhance inflation.
3. Progressive taxation involves higher collection of indirect taxes in comparison to direct taxes.
Which of the statements given above is/are correct?
  • a)
    1 and 2 only
  • b)
    2 only
  • c)
    1 and 3 only
  • d)
    2 and 3 only
Correct answer is option 'B'. Can you explain this answer?
Verified Answer
With reference to the indirect taxes, consider the following statement...
Statement 1 is not correct: The tax which has incidence and impact at different points is called as the indirect tax. For example, Value Added Taxes are imposed on producers or traders, but it is the general consumers who bear the burden of the tax. In contrast, for direct taxes, tax incidence and impact are at the same point.
Statement 2 is correct: Enhancing tax rates increase the prices and hence lead to inflation.
Statement 3 is not correct: Progressive taxation has increasing rates of tax for increasing income of the individual on whom the tax is being imposed. In indirect taxes, the tax rates are imposed irrespective of the income of the individual being taxed. Thus, it is an regressive tax or opposite of Progressive Taxation. In contrast, in direct taxes, the tax rates are progressive. Hence, progressive taxation involves higher collection of direct taxes in comparison to indirect taxes.
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Most Upvoted Answer
With reference to the indirect taxes, consider the following statement...
Explanation:
Indirect taxes are imposed on goods and services rather than on individuals or businesses. They are collected by intermediaries such as manufacturers, wholesalers, and retailers who pass on the burden of the tax to the final consumers in the form of higher prices. Indirect taxes have the following characteristics:

1. Tax incidence and tax impact:
- Tax incidence refers to the burden of the tax and who ultimately bears it.
- Tax impact refers to the effect of the tax on the price of goods and services.
- The statement that indirect taxes have the same point of tax incidence and tax impact is incorrect.
- The burden of indirect taxes can be shifted from one party to another through changes in prices.
- For example, if the government increases the tax on cigarettes, the burden of the tax can be shifted to consumers in the form of higher cigarette prices.
- Therefore, the point of tax incidence and tax impact can be different in the case of indirect taxes.

2. Inflation and indirect tax rates:
- Increasing indirect tax rates can lead to an increase in inflation.
- Indirect taxes are added to the prices of goods and services, which increases their cost.
- This can lead to higher prices for consumers, which in turn can lead to an increase in overall price levels in the economy.
- Therefore, the statement that increasing indirect tax rates may enhance inflation is correct.

3. Progressive taxation and collection of indirect taxes:
- Progressive taxation refers to a tax system where the tax rate increases as the income or wealth of an individual or business increases.
- Direct taxes, such as income tax, are generally considered progressive because the tax rates are higher for higher income earners.
- Indirect taxes, on the other hand, are regressive as they tend to have a greater impact on lower-income individuals who spend a larger proportion of their income on goods and services.
- Therefore, the statement that progressive taxation involves higher collection of indirect taxes in comparison to direct taxes is incorrect.

Conclusion:
- Based on the explanation above, the correct statements are:
- Statement 2: Increasing indirect tax rates may enhance inflation.
- Therefore, the correct option is B) 2 only.
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With reference to the indirect taxes, consider the following statements:1. Indirect taxes have the same point of tax incidence and tax impact.2. Increasing indirect tax rates may enhance inflation.3. Progressive taxation involves higher collection of indirect taxes in comparison to direct taxes.Which of the statements given above is/are correct?a)1 and 2 onlyb)2 onlyc)1 and 3 onlyd)2 and 3 onlyCorrect answer is option 'B'. Can you explain this answer?
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