The end of the financial year is synonymous with chaos as businesses and individuals rush to get their taxes filed. Last-minute adjustments to accounts, searching for receipts, tracking expenses, etc., are commonplace during this time. Amidst the hustle, you are also trying to save as much as you can through tax benefits.

 If that isn’t enough, there are also tax jargons to deal with. Have you ever come across technical taxation terms and found yourself lost? Let’s say the impact of tax, tax incidence, and tax shifting. Now, you might be wondering what the meaning of the incidence of tax is or what is the impact of taxation!

 

Since they sound complex, many avoid them or leave someone else to understand them. But getting to know these terms can be helpful in deciphering your tax burden and making the most of taxation time to improve savings. To help you out, here is a simple explanation for these terms.

 

Decoding Impact Incidence and Shifting of Taxation
 
  • Impact of Tax
    The impact of taxation, specifically the term impact, is used to define the point of the initial burden of the tax. It is common knowledge that tax is divided among parties to spread the burden of the amount. So, the party on whom the tax is originally imposed is signified by tax impact. For instance, when tax is imposed on a good, say coffee, the manufacturer bears the direct burden of that tax. Therefore, the ‘impact of tax’ is on the coffee manufacturer.

  • Tax Shifting
    As the name suggests, it refers to the act of passing on the burden of tax among involved parties. Shifting can either be done from person to person or among two or more persons. Leading on with the example mentioned above, when the coffee manufacturer shifts the tax burden to a coffee dealer/retailer by increasing the price, it represents the shifting of tax.

  • Tax Incidence
    The term incidence relates to the final resting point of the tax*. Simply put, it is about the one who eventually bears the tax burden. For example, if the process of tax shifting continues from the coffee dealer/retailer, the consumer will eventually bear the brunt of taxes by paying a raised price for the product. Thus, the incidence of tax is on the consumer.
     
Key Elements of Impact and Incidence of Taxes
 

Now that you know the meaning of these terminologies let us look at some of the critical elements that form them:
 

  • The impact of taxation occurs when the tax is imposed. It is on the person who pays the tax in the first instance.
  • Tax incidence, on the other hand, occurs at the cycle's end. It is on the person who finally bears the tax.
  • Shifting is the act of transfer of the tax burden. Considering this, you can shift the impact but not the incidence of tax.
     
Impact Incidence and Shifting of Taxation in Personal Income Tax
 

Excise and customs duty, sales tax, value-added taxes, etc., are some of the indirect taxes involving multiple parties. As we saw in the example above, in such cases, shifting of tax is possible. Plus, sometimes businesses may share the tax burden with you by offering discounts.
 

But what about direct taxes, like your personal income tax? How do the incidence and impact of tax work in the context of income tax?
 

When it comes to personal income tax, the tax is imposed on you, and you are the one who has to pay it. This means that the impact and incidence of taxes fall on one individual, which is you. Since the meaning of the incidence of tax is the final point of the tax burden, shifting is nowhere in play here.
 However, that does not mean that the weight of taxation will leave you with little to no savings.

 The tax system is designed to earn revenue and ensure a fair distribution of a load of taxes. Moreover, it also offers you tax benefits and deductions, which allow you to enhance your savings.

 

However, planning finances and taxes at the eleventh hour leaves hardly any room for the prospect of wealth creation. Today, multiple instruments and funds enable you to save towards your goals and retirement. Thorough financial planning will help you distribute your finances among relevant investment options to become financially secure. 
 

Tax Benefits of Life Insurance Plans

 Having your life insured is undoubtedly a critical aspect of financial planning. It not only offers financial protection to your family in the case of your unfortunate demise, but many policies also come with the benefit of savings attached. For instance, unit-linked insurance plans. This way, you can safeguard your family and also save for life’s milestones. In addition to all this, life insurance comes with tax benefits as mentioned below:

 

  • The premiums you pay toward life insurance plans are eligible for deductions under section 80C of the Indian Income Tax Act, 1961. You can claim deductions to a limit of ₹1,50,000. Note that this is applicable only if the premiums paid are 20% of the sum assured. For policies issued post 1st April 2012, these deductions are applicable to premiums that are 10% of the sum assured.

  • Payouts like Claims & Maturity, from your insurance are also eligible for deductions under section 10(10D). Death benefits and bonuses received for maturity or surrender of policy are tax-free. The section also enables you to deduct profits received from ULIPs.

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