Incidence of Tax - Residential Status and Scope of Total Income, Income Tax Laws | Income Tax Laws - B Com PDF Download

Meaning of Incidence:

The problem of the incidence of a tax is the problem of who pays it. Taxes are not always borne by the people who pay them in the first instance.

They are sometimes shifted on to other people. They are sometimes shifted on to other people.

Incidence means the final resting place of a tax. The incidence is on the man’ who ultimately bears the money burden of the tax.

Impact and Incidence Distinguished. We may distinguish between impact and incidence. The impact of the tax is on the person who pays it in the first instance and the incidence is on the one who finally bears it. If an excise duty is imposed on sugar, it is paid in the first instance by the sugar manufacturers; the impact is on them. But the duty will be added to the price of the sugar sold, which, through a series of transfers, will ultimately fall on the consumer of sugar. The incidence is, therefore, on the final consumer.

Incidence is not shifting:

Shifting means the process of transfer, i.e., the passing of the tax from the one who first pays it to the one who finally bears it. It is through this process of shifting that the incidence of a tax comes finally to rest somewhere. The process of shifting may be slow or may be only partially effective so that the burden of a tax may not fall entirely on the person, who is intended to bear it.

Incidence and Effects:

The effect of a tax refers to incidental results of the tax. There are several consequences of the imposition of tax which are quite distinct from the problem of incidence. The imposition of an excise duty on sugar, we have can is shifted ultimately to the consumer of sugar.

The incidence is on the consumer. But the effects of this duty may be far-reaching! A heavy excise duty may cripple the industry. The manufacturer’s profits will be reduced. Wages may be reduced. Labour and capital may have to leave the industry.

Thousands of middlemen engaged in the distribution of sugar may find their earnings reduced. Reshuffling of their family budgets may affect the demand for certain other goods. The consumption of sugar may decrease and that of its substitutes may increase. All these are the effects of the tax.

Importance of incidence:

The study of incidence is very-important. The tax system is not merely aimed at raising a certain amount of revenue, but the aim is to raise it from these sections of the people who can best bear the tax. The aim, in short, is to secure a just distribution of the tax burden.

This obviously cannot be done unless an effort is made to trace the incidence of each tax levied by the State. We must know who pays it ultimately in order to find out whether it is just to ask him to pay it, or whether the burden imposed on him is according to the ability of the tax-payer or not.