- If tax rate increase with the increase in size of tax base, it is called progressive tax.
- Progressive taxation helps to ensure economic equality in the society.
- Indian income tax is a typical example of it. The idea here is less tax on the people who earn less and higher tax on the people who earn more—classifying income earners into different slabs.
- This tax is pro-poor.
- Regressive Taxation
- If tax rate decreases with the increase in the tax base it is called regressive tax.
- As for example, to promote the growth and development of small scale industries, India at one time had regressive excise duty on their productions—with increasing slabs of volume they produced, the burden of tax used to go on decreasing.
- It rewards higher producer or income-earners and punishes poor and low-producers.
- Used rarely and only for specific intended outcomes.
- Tax levied as a % of tax base irrespective of size of tax base, at a uniform rate is called as proportional tax.
- Here the % of tax rate remains the same but the absolute amount of tax increases with increase in size of tax base.
- Such taxes have fixed rates for every level of income or production, they are neutral from the poor or rich point view or from the point of view of the levels of production
Indirect taxes usually follow proportional taxation.
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