Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which of the following is an example of a direct tax?

1. Sales tax

2. Value-added tax

3. Income tax

4. Excise duty

The correct answer is: Income tax

Income tax is considered a direct tax because it is levied directly on individuals or entities based on their income or profits. This tax represents a direct obligation to the government, as it requires taxpayers to pay a portion of their earnings. The burden of income tax cannot be shifted to another party; instead, the individual or business earning the income is responsible for its payment. The other options represent indirect taxes, which are typically included in the price of goods and services and can be transferred to consumers. Sales tax and value-added tax (VAT) are both added at the point of sale and ultimately borne by the consumer, not the business selling the product. Excise duty, similar to sales tax, is levied on specific goods and may also be passed along to consumers in the form of higher prices. Therefore, these taxes differ fundamentally in their structure and the way they are imposed and collected, reinforcing why income tax is categorized as a direct tax.