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Definition of Incidence of Tax:

One of the very important subject of taxation is the problem of incidence of a tax. By incidence of taxation is meant final money burden of a tax or final resting place of a tax. It is the desire of every government that it should secure justice in taxation, but if it does not know as to who ultimately bears money burden of a tax or out of whose packet money is received, it cannot achieve equality in taxation. If government knows who pays tax, it can evolve an equitable tax system. It can easily tap important sources of taxation and thus can collect large amount of money without adversely affecting economic and social life of the citizens of the country.

Definition of Impact of Tax:

Impact of a tax is on person from whom government collects money in first instance. While incidence of a tax is on person who finally bears burden of a tax.

Explanation with Example:

To make it more clear, we take an example. Suppose government levies a tax on electric goods in USA. Tax will be paid to Government in first instance by manufacturers of electric goods. Impact of tax is, therefore, on them. If manufacturers of electric goods industries add tax to price and succeed in selling goods at higher prices of electric goods to consumers, burden of tax is thus shifted on to consumers.

Incidence is Different from Shifting:

Incidence is final resting place of a tax while shifting is process of transferring money burden of tax to someone else. Shifting finally ends in incidence. When a person on whom tax is levied tries to shift tax on to the other, he may succeed in shifting tax completely, partly, or may not succeed at all. Shifting of tax can take place in two directions, forward and backward. If tax is shifted, from seller to consumer, it is a case of forwarding shifting.

Backward shifting takes place when consumers do not purchase commodities at increased prices. Sellers are then forced to cut down prices and bear burden of tax themselves. Backward shifting is thus performed by buyers.

Difference between Incidence and Impact of Taxation:

Before we proceed further it seems necessary that we should distinguish the concept of incidence and impact. As stated earlier incidence of taxation is direct money burden of a tax.

Impact of taxation is repercussions or consequences of imposition of a tax on individuals and on community in general.