Distinction Between Impact and Incidence:
Meaning of Impact- The impact of a tax is on the person who pays the money in the first instance. In other words, the man who pays the tax to the government in the first instance bears its impact. The impact of a tax is, therefore, the immediate result of the imposition of a tax on the person who pays in the first instance. It corresponds to what is often but erroneously called the “original incidence” or the “primary incidence” of a tax. The impact of a tax as such denotes the act of impinging. The impact of a tax, therefore, refers to the immediate burden of the tax and not to the ultimate burden of the tax.
Meaning of Incidence- The incidence of a tax refers to the money burden of a tax on the person who ultimately bears it. In other words, when the money burden of a tax finally settles or comes to rest on the ultimate tax-payer, is called the incidence of a tax. The incidence of tax remains upon that person who cannot shift its burden to any other person, i.e., who ultimately bears it. Thus, there are three distinct conceptions- the impact, the shifting, and the incidence of a tax, which correspond respectively to the imposition, the transfer, and the settling or coming to rest of the tax. The impact is the initial phenomena, the shifting is the intermediate process, and the incidence is the result.
Mrs. Ursula Hicks, however, classified the incidence of taxation into two categories: formal incidence and effective incidence of taxation. The Taxation Enquiry Commission adopted the definition as given by Mrs. Hicks while studying the problem of the incidence of taxation in India. The Commission defined the formal and effective incidence of taxation as “Formal incidence is the money burden of taxes resting with the subject on whom the burden is intended by the taxing authority to fall, and the effective incidence is the real or final distribution of tax burden after its shifting in consequences of changing demand and supply condition of taxed commodity or services. In this sense, the formal incidence is what Dalton calls the direct money burden of tax and the effective incidence is the indirect money burden of a tax. Thus, the formal incidence is a part and parcel of the theory of incidence of taxation while effective incidence is a part of the study of the general effects of taxation. To be more clear, formal incidence refers to the concept of incidence of taxation and effective incidence to the effects of taxation.
Distinction Between Impact and Incidence-
The impact refers to the initial burden of the tax while incidence refers to the ultimate burden of the tax.
The impact is felt by the tax-payer at the point of imposition of the tax, while the incidence is felt by the taxpayer at the point of settlement or the rest of the tax.
The impact of the tax is felt by the person from whom the tax is collected, while the incidence is felt by the person who actually bears the burden of the tax.
The impact of a tax can be shifted, but the incidence of a tax can not be shifted.