The government of Sarvenna raises revenue from residents in two ways. - It charges an annual tax on the assessed value of any land a resident owns. Landowners pay this tax directly to the government's tax office each year. - It charges a general sales tax of 8% on the price of m…

Answer: ((a)) The land tax is a direct tax. The sales tax is an indirect tax. ((b)) A direct tax, such as the land tax, is charged on what someone owns (or earns) and is paid straight to the government by that same person, so its burden falls on them directly and cannot easily be passed on to anyone else. An indirect tax, such as the sales tax, is charged on sp… ((c)) Because the sales tax applies to every individual purchase, it is far more efficient for the seller, who is already handling the transaction, to add the tax to the price and forward the revenue on, rather than the tax office trying to collect small amounts directly from every bu…. Part (a): Classifying the two taxes The land tax is charged directly on something a resident owns (their land) and is paid straight to the tax office by that resident, so it is a direct tax. The sales tax is charged on spending, not on own…

IGCSE Economics 0455: Direct Tax vs Indirect Tax

The government of Sarvenna raises revenue from residents in two ways.

It charges an annual tax on the assessed value of any land a resident owns. Landowners pay this tax directly to the government's tax office each year.
It charges a general sales tax of 8% on the price of most goods sold in shops. Shopkeepers add this tax to the price at the till, collect it from customers, and forward the money to the government.

(a) State which of these two taxes is a direct tax and which is an indirect tax. [2]

(b) Explain one difference between a direct tax and an indirect tax, using these two taxes as your examples. [2]

Part (a): Classifying the two taxes

The land tax is charged directly on something a resident owns (their land) and is paid straight to the tax office by that resident, so it is a direct tax.

The sales tax is charged on spending, not on ownership or income, and it is collected by a third party (the shopkeeper) rather than paid straight to the government by the person who ultimately bears it, so it is an indirect tax.

Part (b): The key difference between the two taxes

The defining difference is who pays the tax straight to the government, and whether the burden of the tax can be shifted onto someone else:

With the land tax, the landowner is both the person the tax is aimed at and the person who physically pays it to the tax office. The burden stays with them.
With the sales tax, the government’s target is really the spending of the customer, but the money is collected and passed on by the shopkeeper. The tax is built into the price the customer pays, so its burden is shifted from the shopkeeper onto the customer.

Part (c): Why the shopkeeper collects the sales tax

Many small sales happen across Sarvenna’s shops every day, each generating a small amount of tax. It would be hugely impractical for the tax office to identify every buyer and collect that small amount directly from each of them. Shopkeepers are already recording every sale and taking payment, so requiring them to add the tax to the price and forward it to the government makes collection simple, cheap and hard to avoid, since the tax is built into a transaction that is already taking place.

Final answers

(a) Land tax = direct tax; sales tax = indirect tax.
(b) A direct tax is paid straight to the government by the person it targets and cannot be shifted onto someone else; an indirect tax is collected by a seller and its burden can be passed on to the buyer.
(c) Collecting the tax at the point of sale, through the shopkeeper who is already handling the transaction, is far more efficient than the tax office collecting small sums directly from every individual buyer.