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Impact & Incidence

CA Pramod Kulkarni (Practicing Chartered Accountant) (80 Points)

07 January 2010

Can any one help me to understand the word Impact & incidence of Tax related to Indirect Taxes. If possible explain with an example.

Thank You

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Amir (Learner) (4016 Points)
Replied 07 January 2010

Dear Pramod,

INCIDENCE

Incidence of taxes means "Burden of Tax" i:e ULTIMATELY WHO WILL MAKE THE PAYMENT or Who will bear the burden

Now in Indirect Taxes(like Sales Tax, Vat, Excise Duty, Service Tax,etc) this Burden is shifted to the consumer by recovering the amount of tax as a part of Sale price but in case of Direct taxes(like Income tax, Wealth Tax, Property Tax,etc) the burden remains on the person on whom tax is levid/imposed

IMPACT

Impact means "Result" or "Consequenses" or "Outcome"

Now Impact of Indirect taxes as explained above is"INCREASE IN THE PRICES OF GOODS & SERVICES" since Manufacturer/service provider makes the consumer to bear the burden of taxes by shifting the incidence..(Remember it also leads to revenue to Government)