Taxes are mainly classified into direct and indirect taxes:

Direct taxes

A Direct tax is a kind of charge, which is imposed directly on the taxpayer and paid directly to the government by the persons on whom it is imposed. A direct tax is one that cannot be shifted by the taxpayer to someone else. The person who pays them to the government has to bear it all.  Examples include: income taxes, corporation tax, wealth (property) taxes and gift taxes

Merits of Direct Taxes

• The larger burden of the direct taxes falls on the rich people who have capacity to bear them and the poor people with less ability to pay have to bear less burden.
• Direct taxes are important instrument of reducing inequalities of income and wealth.
• Unlike indirect taxes, direct taxes do not cause distortion in the allocation of resources. As a result these leave the consumers better off as compared to indirect taxes.
• Revenue elasticity of direct taxes, especially if they are of progressive type is quite high.
• As the national income increases, the revenue on these taxes also rises a great deal.

Demerits of Direct Taxes

• In the direct taxation, people are aware of their tax liability and therefore they would try to avoid or even evade the taxes. The practice and possibility of tax evasion is more in direct taxes than in case of indirect taxes.
• Direct taxes are generally payable in lump sum or even in advance and become quite inconvenient.
• Another demerit of direct taxes is their supposed effect on the will to work and save. It is assessed that work (given Income) and leisure are two alternatives before any taxpayer. If therefore, a tax is imposed say on income, the taxpayer will find that the return from work has decreased as compared with return from leisure. He therefore tries to substitute leisure for work.

Indirect taxes

• Indirect taxes are those whose burden can be shifted to others so that those who pay these taxes to the government do not bear the whole burden but pass it on wholly or partly to others.
• Indirect taxes are levied on production and sale of commodities and services and small or a large part of the burden of indirect taxes are passed on to the consumers.  

• Examples are: Excise duties on the production of commodities, sales tax, service tax, and customs duty are some examples of indirect taxes.

Merits of Indirect Taxes

• Indirect taxes are usually hidden in the prices of goods and services being transacted and, therefore their presence is not felt so much.
• If the indirect taxes are properly administered, the chances of tax evasion are less.
• Indirect taxes are a powerful tool in moulding the production and investment activities of the economy i.e. they can guide the economy in its resource allocation.

Demerits of Indirect taxes

• It is claimed and very rightly that these taxes negate the principle of ability- to-pay and are therefore unjust to the poor. Since one of the objectives is to collect enough revenue, they spread over to cover the items, which are purchased generally by the poor. This makes them regressive in effect.
• If indirect taxes are heavily imposed on the luxury items then this will only help partially because taxing the luxuries alone will not yield adequate revenue for the State.
• Direct taxes take away a part of the purchasing power of the taxpayer and that has the effect of reducing demand and prices. On the other hand, indirect taxes are added to the sale prices of the taxed goods without touching the purchasing power in the first place. The result is that in their case inflationary forces are fed through higher prices, higher costs and wages and again higher prices.

Categorization / Classification of taxes

Based on subject matter or object being taxed
A. personal, poll or capitation tax– tax of a fixed amount on individuals residing within a specified territory, without regard to their property, occupation or business.
B. property tax– imposed on property, real or personal, in proportion to its value, or in accordance with some reasonable method or apportionment. Example is Real estate Tax
C. Excise– imposed upon the performance of an act, the enjoyment of a privilege, or the engaging in an occupation, profession or business. Examples are taxes levied on producers and manufacturers for producing goods and services, Income tax, VAT, Estate Tax, Donor’s Tax

2. Based on who bears the burden of the tax

a. Direct– the tax is imposed on the person who also bears the burden thereof e.g. Income tax, community tax, estate tax
b. Indirect – imposed on the taxpayer who shifts the burden of the tax to another, Ex. VAT, customs duties.

3. Based on the determination of amount

a. specific – imposed and based on a physical unit of measurement as by head number, weight, length or volume. Examples, Tax on distilled spirits, fermented liquors, cigarettes

b. Ad Valorem of a fixed proportion of the value of the property with respect to which the tax is assessed. Ex. Real estate tax, excise tax on cars, non essential goods

4. Based on the purpose of the tax
a. general, fiscal, or revenue– imposed for the general purpose of supporting the government. E.g.. Income tax, percentage tax

b. special or regulatory– imposed for a special purpose, to achieve some social or economic objective. E.g. Protective tariffs or custom duties on imported goods intended to protect local industries.

5. Based on the scope or authority imposing the tax

a. national– imposed by the national government e.g. custom duties
b. municipal or local– imposed by municipal corporations or local governments e.g Real estate tax

6. On the basis of graduation of rates.

a. proportional– based on a fixed percentage of the amount of the property, receipts or on other basis to be taxed e.g. Real estate tax, VAT
b. progressive and graduated– the rate of the tax increases as the tax base or bracket increases e.g. Income tax, estate tax, donor’s tax

c. regressive– the rate of tax decreases as the tax base or bracket increases.

d. degressive– increase of rate is not proportionate to the increase of tax base.