Sunday, 22 May 2011

Difference between Direct and Indirect Tax and Merits and Demerits of Taxation

When the impact and incidence of a tax are on the one and the same person, it is said to be the direct tax. For example, as the income of the people increases, the rate of taxes also increases and it lowers the purchasing power and prices. Income Tax is direct tax.

Disadvantages of Direct Tax

1. Chances of Dishonesty :-
To avoid from direct tax, the tax payer submits false statements of his income and revenue of state reduces.

2. Inconvenient :-
The tax payer has to prepare lengthy statements of his income and expenditure. It is very laborious for the tax payer to prepare and keep these records.

3. Painful for the Tax Payer :-
It pinches the tax payer that hid hard earning money is being taken by the government.

4. Lump sum Payment :-
Direct tax is to be paid in lump sum every year so it becomes very difficult for the tax payer to pay large amount in one installment.

5. Reduction in Savings :-
Direct tax discourages the rate of saving because the major portion of the income is paid to the government.

6. Protest and Procession :-
When the prices level rises, the tax payer protests against the rise in taxes.

If the impact of the tax falls on one person and the incidence on another, the tax is called indirect tax. For example the sales tax and custom duty is paid obviously by the trader but it is included in price and consumer bears the burden of this tax.

Advantages of Indirect Taxes

1. Convenient in Payment :-
It is very easy to pay because they are included in prices. The consumer often does not know that he is paying the tax.

2. No One can Evade the Tax :-
Any one who will purchase the taxed commodity, will pay the tax. So it is not possible to evade indirect tax.

3. Contribution from Every Citizen :-
Indirect tax is very useful because every member of the society contributes something towards the revenue of the state.

4. Elastic :-
Indirect tax is also elastic to a certain extent. The state can increase its revenue within limits by increasing the rate of taxes.

5. Control on Harmful Goods :-
If the state wishes to discourage the consumption of harmful drugs, it can raise their prices by increasing the taxes on them.

6. Tax on Luxury Items :-
The indirect tax satisfied the canon of equality. If it is imposed on luxury goods, then rich people will pay more taxes and poor will not pay because they do not purchase it.

Demerits of Indirect Tax

1. Unfair Profit :-
The traders increase the prices more than the rate of taxes and they earn abnormal profits. A consumer suffers a loss.

2. Not an Economical :-
Indirect tax is uneconomical. The government spends a large amount of money on the collection of taxes.

3. Uncertain :-
The revenue from indirect tax is uncertain. The government can not correctly estimate as how much money will it receive from this tax.

4. Civic Consciousness can not Create :-
It does not create the civic consciousness because the tax is wrapped up in prices.

5. Does not Satisfy the Canon of Equality :-
This tax is imposed on all the classes according the same ratio. The burden of tax falls more on poor people than on the rich.

6. Low Standard of Living :-
When the tax is imposed on the consumption of goods, it increases the prices and lowers the standard of living in the country.

7. Cause of Unemployment :-
If the goods are taxed at higher rates, it lowers the effective demand, production of goods and employment.

Keeping in view the merits and demerits of both taxes, we can say a country should employ both these forms of taxes in a proper manner.


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