Important Taxation Terms for Competitive Exams
(JKSSB Accounts Assistant, SSC, UPSC, UGC NET)
By Home Academy – Concept Explanation with Examples
Understanding taxation terminology is very important for competitive examinations. Many MCQs in accounts, economics, and finance exams are based on these concepts.
1. Tax Evasion
Tax evasion refers to the illegal method of avoiding tax by hiding income or providing false information to tax authorities.
It is a criminal offence and punishable under the **Income Tax Act 1961.
Example
A businessman earns ₹10,00,000 but reports only ₹5,00,000 to the tax department to reduce tax liability.
This is tax evasion because income is deliberately hidden.
Important Exam Point
Tax evasion is illegal and punishable with penalties and imprisonment.
2. Tax Avoidance
Tax avoidance means reducing tax liability through legal methods by taking advantage of tax deductions, exemptions, and incentives.
It is legal but sometimes considered unethical.
Example
A person invests money in Public Provident Fund (PPF) to claim deduction under Section 80C and reduce taxable income.
This is tax avoidance because it uses legal provisions.
Important Exam Point
Tax avoidance is legal, whereas tax evasion is illegal.
3. Tax Incidence
Tax incidence refers to the person who actually bears the burden of a tax.
Sometimes the person who pays the tax to the government is different from the person who actually bears the burden.
Example
A manufacturer pays GST to the government but includes it in the product price.
Thus the consumer ultimately bears the tax burden.
Important Exam Point
Tax incidence explains who finally bears the burden of tax.
4. Impact of Tax
Impact of tax refers to the person on whom the tax is initially imposed by the government.
Example
In GST, the manufacturer initially pays the tax to the government.
Thus the impact of tax falls on the manufacturer, while the incidence may fall on the consumer.
Important Exam Point
Impact of tax is the initial burden, whereas incidence is the final burden.
5. Shifting of Tax
Shifting of tax means transferring the burden of tax from one person to another.
Example
A seller increases the price of goods to recover GST from consumers.
Thus the tax burden is shifted from seller to buyer.
Important Exam Point
Shifting is common in indirect taxes.
6. Direct Tax
Direct tax is a tax in which the tax burden cannot be shifted to another person.
The person who pays the tax also bears the burden.
Example
Income tax, corporate tax.
These taxes are regulated by the **Central Board of Direct Taxes.
7. Indirect Tax
Indirect tax is a tax in which the burden can be shifted to another person.
Example
GST, customs duty, excise duty.
Indirect taxes are administered by the **Central Board of Indirect Taxes and Customs.
8. Ad Valorem Tax
Ad valorem tax is a tax that is charged as a percentage of the value of goods or services.
Example
GST charged at 18% on a product worth ₹1000.
Tax = ₹180.
Important Exam Point
Most modern taxes such as GST are ad valorem taxes.
9. Specific Tax
Specific tax is a tax imposed based on quantity rather than value.
Example
₹5 tax per litre of petrol.
Regardless of price, the tax per litre remains the same.
10. Double Taxation
Double taxation occurs when the same income is taxed twice in two different jurisdictions.
Example
A company earns income abroad and pays tax both in India and in the foreign country.
To avoid this problem India signs Double Taxation Avoidance Agreements (DTAA).
Quick Revision Table (Important for Exams)
| Term | Meaning | Example |
|---|---|---|
| Tax Evasion | Illegal avoidance of tax | Hiding income |
| Tax Avoidance | Legal reduction of tax | Using deductions |
| Tax Incidence | Final burden of tax | Consumer pays GST |
| Impact of Tax | Initial burden of tax | Manufacturer pays GST |
| Direct Tax | Cannot be shifted | Income tax |
| Indirect Tax | Can be shifted | GST |
| Ad Valorem Tax | Based on value | 18% GST |
| Specific Tax | Based on quantity | Petrol tax per litre |
| Double Taxation | Income taxed twice | International income |
MCQ for JKSSB Exams
Question
Which of the following is an illegal method of reducing tax liability?
A. Tax planning
B. Tax avoidance
C. Tax evasion
D. Tax deduction
Answer: C
Explanation: Tax evasion involves hiding income or giving false information to avoid tax and is punishable under the **Income Tax Act 1961.