Direct tax is the tax whose liability to pay and incidence lies on the same person on whom it is levied. Indirect tax is the tax whose liability to pay and incidence lies on different persons. The Government can influence allocation of resources for production of different goods and services through its budget. When the government wants that more resources be used in the production of some goods, it provides incentives to the producers in the form of tax concessions and subsidies.
Detailed Answer:
Direct Tax-A tax which is paid by the same person on whom it has been levied is termed as Direct Tax. In case of direct tax, burden can not be shifted on other party e.g. Income Tax.
Indirect Tax-It is a tax which is paid by one person and levied on other person. In case of indirect tax, burden is generally shifted on other party. e.g., Excise Duty.
The government does the allocation of resources in such a manner that there is a balance between the goods of profit maximization and social welfare in an economy. This allocation is done with the help of government budgetary policy. The government allocates the resources in accordance with the social and economic priorities in the country. Government encourages the production of certain commodities by giving tax concessions and providing necessary infrastructural requirements. On the other hand, it discourages production of hazardous and harmful goods by imposing heavy taxes, such as liquor and cigarettes.
