A direct tax is referred to as a tax levied on person’s income and wealth and is paid directly to the government; the burden of such tax cannot be shifted.The tax is progressive in nature. It is levied according to the paying capacity of the person, i.e. the tax is collected more from the rich and less from the poor people.The plans and policies of the Direct Taxes are being recommended by the
Central Board of Direct Taxes (CBDT) which is under the Ministry of Finance,Government of India.
Merits of Direct Taxes:
1.Equity:Direct taxes are progressive i.e. rate
of tax varies according to tax base. For example, income tax satisfies the Canon of equity.
2.Certainity:Canon of certainty can be ensured by direct taxes. For example, an income tax payer knows when and at what rate he has to pay income tax.
3. Elasticity:Direct taxes also satisfy the canon of elasticity. Income tax is income elastic in
nature. As income level increases, the tax
revenue to the Government also increases automatically.
4. Economy:The cost of collection of direct taxes is relatively low. The tax payers pay the tax directly to the state.
Demerits of Direct Taxes:
1.Unpopular:Direct taxes are generally unpopular.It is inconvenient and less flexible.
2. Productivity affected:According to many economists direct tax may adversely affect productivity.Citizens are not willing to earn more income because in that case they have to pay more taxes.
3. Inconvenient:The tax payers find it inconvenient to maintain accounts, submit returns and pay tax in lump sum.
4. Tax Evasion:The burden of direct tax is so heavy that tax-payers always try to evade taxes.
This ultimately leads to the generation of black money, which is harmful to the conomy.
Indirect Tax is referred to as a tax
charged on a person who purchases the goods and services and it is paid indirectly to the government. The burden of tax can be easily shifted to the another person. It is levied on all persons equally whether rich or poor.
There are several types of Indirect Taxes,
1.Excise Duty: Payable by the manufacturer
who shifts the tax burden to retailers and
2.Sales Tax: Paid by a shopkeeper or retailer, who then shifts the tax burden to customers by charging sales tax on goods and services.
3.Custom Duty: Import duties levied on goods from outside the country, ultimately paid for by consumers and retailers.
4.Entertainment Tax: Liability is on the cinema theatre owners, who transfer the burden to cenima gore’s 5.Service Tax: Charged on services like
telephone bill, insurance premium such as,food bill in a restaurant etc.
Merits of Indirect Taxes:
(1) Wider Coverage:All the consumers, whether they are rich or poor, have to pay indirect taxes.For this reason, it is said that indirect taxes can cover more people than direct taxes. For example, in India everybody
pays indirect tax as against just 2 percent
paying income tax.
(2) Equitable:The indirect tax satisfies the Canon of equity when higher tax is imposed on luxuries used by rich people.
(3) Economical:Cost of collection is less as producers and retailers collect tax and pay to the Government. The traders act as honorary
(4) Checks harmful consumption:The Government imposes Indirect taxes on those commodities which are harmful to health e.g. tobacco, liquor etc.They are known as sin taxes.
(5) Convenient:Indirect taxes are levied on
commodities and services. Whenever consumers make purchase, they pay tax
along with the price. They do not feel the pinchofpayingtaxes.
Demerits of Indirect Taxes:
(1) Higher Cost of Collection:The cost of collection of Indirect taxes is higher than the direct taxes.The Government has to spend huge money to collect indirect taxes.
(2) Inelastic:Indirect taxes are less elastic
compared to direct taxes. As indirect taxes are generally proportional.
(3) Regressive:Indirect taxes are sometimes unjust and regressive in nature since both rich
and poor persons have to pay same amount
as taxes irrespective of their income level.
(4) Uncertainity:The rise in indirect taxes increase the price and reduces the demand for goods.Therefore, the Government is uncertain
about the expected revenue collection. So
Dalton says under indirect taxes 2+2 is not 4 but 3 or even less than 3.
(5) No civic Consciousness:As the tax is hidden in price, the consumers are not aware of paying tax.