Indirect tax

Difference between Direct Tax and Indirect Tax:

There are different implications of direct and indirect taxes on the country. However, both types of taxes are important for the government as taxes include the major part of revenue for the government.

Key differences between Direct and Indirect Tax are:

1. Direct tax is levied and paid for by individuals, Hindu undivided Families (HUF), firms, companies etc. whereas indirect tax is ultimately paid for by the end-consumer of goods and services.
2. The burden of tax cannot be shifted in case of direct taxes while burden can be shifted for indirect taxes.
3. Lack of administration in collection of direct taxes can make tax evasion possible, while indirect taxes cannot be evaded as the taxes are charged on goods and services.
4. Direct tax can help in reducing inflation, whereas indirect tax may enhance inflation.
5. Direct taxes have better allocative effects than indirect taxes as direct taxes put lesser burden over the collection of amount than indirect taxes, where collection is scattered across parties and consumers’ preferences of goods is distorted from the price variations due to indirect taxes.
6. Direct taxes help in reducing inequalities and are considered to be progressive while indirect taxes enhance inequalities and are considered to be regressive.
7. Indirect taxes involve lesser administrative costs due to convenient and stable collections, while direct taxes have many exemptions and involve higher administrative costs.
8. Indirect taxes are oriented more towards growth as they discourage consumption and help enhance savings. Direct taxes, on the other hand, reduce savings and discourage investments.
9. Indirect taxes have a wider coverage as all members of the society are taxed through the sale of goods and services, while direct taxes are collected only from people in respective tax brackets.
10. Additional indirect taxes levied on harmful commodities such as cigarettes, alcohol etc. dissuades over-consumption, thereby helping the country in a social context.

Direct and indirect taxes are defined according to the ability of the end taxpayer to shift the burden of taxes to someone else. Direct taxes allow the government to collect taxes directly from consumers and is a progressive type of tax, which also allows for cooling down of inflationary pressure on the economy. Indirect taxes allow the government to expect stable and assured returns and brings into its fold almost every member of the society – something which the direct tax has been unable to do.

Both direct and indirect taxes are important for the country as they are intricately linked with the overall economy. As such, collection of these taxes is important for the government as well as the well-being of the country. Both direct taxes and indirect taxes are collected by the central and respective state governments according to the type of tax levied.



ADVANTAGES AND DISADVANTAGES OF DIRECT TAX


Advantages of Direct tax:




(i) Equitable: 

The burden of direct taxes cannot be shifted. Hence equality of 

sacrifice can be attained through progression. Of course, the very 

low incomes can be exempted. This cannot be achieved- by taxes 

on commodities which fall with equal force on the rich and the 

poor. The tax raises the price of the commodity, and the price of a 

commodity is the same for every person, rich or poor.


(ii) Economical:

The cost of collection of direct taxes is low. They are mostly 

collected “at the source”. For instance,-the income tax is deducted 

from an officer’s pay every month. This saves expense. The 

employer acts as an honorary tax collector. This means great 

economy.


(iii) Certain:

In the case of a direct tax, the payers know how much 

is due from them and when. The authorities also know the amount 

of revenue they can expect. There is certainty on both sides. This 

minimises corruption on the part of collecting officials.

(iv) Elastic:

If the State suddenly stands in need of more funds in an 

emergency, direct taxes can well serve the purpose. The yield from 

income tax or death duties can be easily increased by raising their 

rate. People cannot stop dying for fear of paying death duties.

(v) Productive:

Another virtue of direct taxes is that they are very productive. As a 

community grows in numbers and prosperity, the return from 

direct taxes expands automatically. The direct taxes yield a large 

revenue to the State.

(vi) A means of developing civic sense.

In the case of a direct tax, a person knows that he is paying a tax, 

he feels conscious of his rights. He claims the right to know how 

the Government uses his money and approves or criticizes it. Civic 

sense is thus developed. He behaves as a responsible citizen.

Disadvantages of Direct Taxes:

(i) Inconvenient:

The great disadvantage of a direct tax is that it pinches the payer. 

He ‘squeaks’ when a lump sum is taken out of his pocket. The 

direct- taxes are thus very inconvenient to pay. Nobody can help 

feeling the pinch.


(ii) Evadable:

The assessee can submit a false return of income and thus evade 

the tax. That is why a direct-tax is “a tax on honesty.” There is a lot 

of evasion. Many of those who should be paying taxes go scot-free 

by concealing their incomes.

(iii) Arbitrary:


If taxes are progressive, the late of progression has to be fixed 

arbitrarily; and if proportional, they fall more heavily on the poor. 

Thus, both are bad. The rate of taxes depends upon the whim of 

the  Finance Minister. This is arbitrary.

(iv) Disincentive:

If the taxes are too heavy, they discourage saving-sand investment. 

In that case the country will suffer economically. A high level of 

taxation discourages investment and enterprise in the country. It 

inflicts a lot of damage, on business and industry.

(V) Lack of Popularity:

Such taxes are not very popular, because the people have to 

bear the burden of such taxes directly. That is why, when the rate 

of  a direct tax is raised, most people express their resentment 

against the government. For instance, when the rate of personal 

income tax or corporate profit tax is raised, criticism from those 

affected becomes very strong.