CIng the burden of taxation onthe people and impose tax upon saving and hoarding so that

activityandncouraged to spend more and thus help to create more demand for goods and more business
activity and
employment.
DIRECT VS INDIRECT
TAXES

Advantages Advantages
• Based on principle of
equity, certainty and
. Cost of collection is low
Types of Taxation (Economy)

. economy
Convenient
• Easier to extract from the

•
to
taxpayer
Acts as automatic
stabiliser
DIRECT INDIRECT . public (less sensitive)

Doesn'tdiscouragework
Acts as automaticstabiliser
Income Tax GST
Corporation Tax Custom Duties
Disadvantages Disadvantages
• As it rises, work is Capital Gains Tax
discouraged (absenteeism Capital •Inflationary/Deflationary
becomes a problem) •Not equitable
Acquisitions Tax
• Tax evasion rises • Hard to predict yield (based
• Can discourage investment on assumptions of
consumer spending)

Direct Taxes:Taxes which are directly levied on Income of the person and its burden can not be shifted;for
example IncomeTax.
Indirect Taxes: Indirect taxes are imposed on price ofgoods or services.Person paying the indirecttax can shift
the íncidence to another person; for example GST or Customs Duty.

To bave a better understanding of the Direct and IndirectTaxes, let us understand the differences between the two:
Differences between Direct and Indirect Taxes

Direct Tax IndirectTax

Point ofdifference
and incidenc
Incidence & Impact A tax is said to be direct when mpact and |Ifimpact of tax is on one person
incidence of atax areon one and sameperson.on the another, the tax is called "indirect'

Direct tax is imposed

on the individual Indirect tax is imposed on commodities and
Burden
organisation and burden of tax cannot be allows the tax burden to shit
shifted to others.
 Lesson 1• EP-TL

the consumers of

are borne by of
taxes Irrespective
Indirect
then Indirect and services taxes.
burden on commodities Includes all
Viability of payment Direct
taxes are
lesser
taxes
are based ability
asthe MRP less as
people as taxes is very
direct financial
to
taxes ofpeople. Indirect of
Income carning
ability
direct
Cost of collecting
Wrapped upin prices
cost of collecting taxes are
indirect cannot be evaded.
Administrative The administrative administration services and
more and Improper goods and
viability |taxesis
supplier of Goods
Services. &
may result in tax evasion.
It levied on
is

It is levied on the assessee.

Penalty

Merits of Direct Tax They are based on the

of income.
upon the volume
have equity of sacrifice, depend a person rises.
1 taxes of
Equity: Direct tax increase as the level of income
so rates of
when the governmentfaces some
principle, emergency,
progressive

2. Direct taxes have elasticity because problemsby direct tax.

Elasticity and productivity:
money for facing those
and famine the government can collect
Ike earthquake, floods
are aware
and 'government. The tax-payers
3.
Certainty: Directhave certainty on both sides 'tax-payer'
taxes and punishment from
have to pay and rate, time of payment,
manner of payment,
of the quantity of tax. They
total amount they are getting.
the side of government is also certain about the

4 Direct taxes follow progressive principles so it is taxing the rich people with higher level
Reduce inequality:
of taxation and the poor people with a lower level of taxation.

5 Good instrument in the case of inflation: Tax policy as fiscal instrument plays important role in the case of
inflation, so government can absorb the excess moneyby raising in the rate of existing taxes or imposition of
new taxes.

6.
Simplicity: Direct taxes are simple, while levy the rules, procedures, regulations of income tax are very clear
and simple.

Demeritsof Direct Taxes

1. Evasion: Direct tax is lump sum therefore tax payers try evasion.

2. Uneconomically: Expenses of collection are higher in the case of direct

spread staff for collection. taxes,because they require
widel -
3.
Unpopular: Direct tax is required to be paid in lump sum for the whole year,sothe tax
payment, these taxes are therefore unpopular. payers feel the painful
Littleincentive to work and
4
save: In direct taxes,
earning is taxed more, in rates are of progressive
turn he is left little with nature. A person with
save moneyafter reaching a certain level amount. So the tax payer higher
feels disincentive to
of income. work hard and
5 Not suitable fora poor
country: Direct taxes are not
enough to meetits
6 Arbitrary: Due to
expenditure,
absence of logical or
taxation, the scientific principle
direct taxes are arbitrary. to
determine the degree
of progression
in the
Merits of Direct Taxes

DemeritsofDirect
Equity
Taxes
Evasion
Elasticity and Productivity

Certainty Uneconomically

Reduce inequality Unpopular

Simplicity Arbitrary

Notsuitable
to poor
economy
 Ata Glance

Merits of
Indirect Taxes
1.
High
revenue
indirecttaxes production: Nature of indirect taxes is imposition on the commodities and services. Here
cover a large
both rich number of essential goodsand luxuriousgoods which are consumed by the mass
and poor
2. people,these help in collecting large revenue.
No evasion: Nature
of indirect evasion or tax
avoidance is tax isthat, it is included in the price of commodity, so tax
difficult.
3.
Convenient: Indirect
hence the taxesare smallamount and indirect taxes are hidden inthe price of goods and services,
burden of thesetaxes is
not felt very much by the tax-payers, and not lump sum like direct taxes.
4.
Economy: Indirecttaxes
are economicalin collection andthe administrative costs collection are verylow,
also the procedure of of
collection of these
taxes is very simple.
5.
Wide
coverage: Indirect taxes cover almost
harmful ones. all commodities like essential commodities, luxuries, and

6
Elasticity:Since a large number commodities and servicesare covered by indirecttaxation
of
there is great
SCope fror modifying of taxes, goods and tax rate, much depends on nature of
goods and on their demands.
Demerits of Indirect Taxes
1.
Regressive in effect: Essential commodities are used by all members of community. When taxing these
commodities the burden would be equal, and no distinction is made between the rich and poor people.
2. Uncertainty in collection:Discourage savingsand Increaseinflation.
Indirect taxes are payable when people
spend their income or when people buy goods and services, so tax
authoritiescannot accurately estimate the
total yield from different indirecttaxes.

3. Discourage savings - Increase inflation:Indirect taxes are included in

the price of commodity, so people
have to spend more money on essential commodities, when levied indirectly.
In this case that means the
customers cannot save someof their money.

4. Increase inflation:Indirecttaxes increasethe cost of input and output,

increase in production cost, push the
price of goods.These reflect in increase in the wages of the workers.

Merits of Indirect Tax Demerits of Indirect Tax

High Revenue Production Regressive in effect

No Evasion Uncertainty in collection

Convenient Discourage savings

Economy Increase inflation

Wide coverage

Elasticity