Direct and Indirect Taxes - Meaning, Merits and Demerits.pptx

Direct and Indirect Taxes - Meaning, Merits and Demerits

1. Direct and Indirect Taxes: Meaning, Merits and Demerits Dr. Raghavendra Hajgolkar

2. Introduction and meaning The taxation is classified into two types on the basis of the Incidence (final Burden) of tax, that is Direct tax and Indirect tax. Direct taxes refer to the type of tax which is directly imposed on a person. A direct tax has to be paid by the person on whom the tax was legally imposed on in the first place . The burden of tax cannot be shifted to anyone else. The person on whom the tax is imposed has to pay the tax.

3. According to Prof. Dalton “ A direct tax is really paid by a person on whom it is legally imposed, while an Indirect tax is imposed on one person, but paid another, owing to consequential change in the terms of some contracting or bargaining between them.” In Direct tax in Impact(Initial burden of tax) and Incidence(Final burden) of taxation is on the same person. The taxes cannot be shifted in direct tax. The examples of direct tax are Income tax, wealth tax, capital gain tax etc.

4. Direct taxes  are those that a person pays to the government upfront. In India, direct taxes are implemented by an apex body called as Central Board of Direct Taxes. Typically, direct taxes are proportional to an entity’s income.

5. Economical : Cost of collecting direct tax is relatively low. It follows canon of economy. Equity/canono of equity: direct taxes are thoughtfully determined on the bases of ability to pay which ensures equal sacrifice of the tax or equal tax burden. It will help in achieving justice and equity. Civic conscious /awareness : tax payers will be conscious about how their tax money is spend by government. Merits of Direct Tax

6. Reduction in the Inequality: Direct tax are progressive in nature, person with higher income will pay more and person with less income will pay less or zero amount of tax. Certainity : direct tax are certain in nature about amount and timing of tax payment Elasticity : direct taxes can be changed according to the need of hour Easy to understand :

7. Inconvenient : Numers accounting and formalities to be observed, some times tax payer has to pay lump sum amount of money. Unpopular : direct taxes are quite painful. Possibility of evasion: people do not show their real income to escape from paying taxes. Uneconomical : if the administration cost is more and amount of tax collected is small in quantity. Demerits of Direct tax

8. Norrow scope: direct taxes are levied on certain group of population not every one is paying tax. Not suitable for develping country Obstacle to capital formation: Because paying more tax reduces disposable income thereby savings Only political decision:

9. Indirect taxes are defined by contrasting them with direct tax . Indirect taxes can be defined a s taxation  on an individual or entity, which is ultimately paid for by another person.  An indirect tax is collected by one entity in the supply chain (usually a producer or retailer) and paid to the government, but it is passed on to the consumer as part of the purchase price of a good or service. The consumer is ultimately paying the tax by paying more for the product. Indirect Tax

10. Indirect taxes are those which are legally imposed on one person by the government but actually paid by another person by shifting the tax. In Indirect tax the Impact(initial burden) of tax is on one person and Incidence(final burden) is on another person. GST, Customs Duty, sales tax, excise duty etc can be given as example of indirect tax. Excise duties on fuel, liquor, and cigarettes are all considered examples of indirect taxes.

11. Indirect taxes are commonly used and imposed by the government in order to genera t e revenue. They are essentially fees that are levied equally upon taxpayer  , no matter their income, so rich or poor, everyone has to pay them. But many consider them to be regressive taxes as they can bear a heavy burden on people with lower incomes who end up paying the same amount of tax as those who make a higher income. Regressive Nature of an Indirect Tax

12. Convenient : Indirect tax are convenient because tax payers are paying small amount instead of lump sum amount as in direct tax. Burden is not felt by tax payers. Relatively Elstic: Revenue can be increased by changing the Indirect tax rates on the goods which have inelastic demand. No possiblity of tax evasion : since the taxes are included in the price, there is little possible to evade the tax Merits of Indirect tax

13. Equity : the tax on commodities are imposed on the basis of nature, like luxury items, comforting goods and necessity goods which are determined on the basis on ability to pay. High Production and Investment : Indirect taxes moulds the production and investment. Govt taxes more on the low priority industries and less on high priority industries. Social welfare: By taxing on harmful Goods.

14. Wider Coverage: Indirect taxes are levied on every member of the country. Because goods and services are purchased by everyone. Suitable for developing countries. Easy to collect: Included in the price.

15. Regressive in nature: Indirect tax fall on every person irrespective of the ability to pay. Uncertainity in demand: taxing can change the price it becomes difficult to anticipate demand of Elastic demand goods. Discourages savings : spend more save less No civic Consciousness: tax payers are not aware of paying the taxes, so he will no be interested in govt affairs. Demerits of Indirect Tax

16. Inequitable : Poor have more burden than rich No direct link between tax payer and government: paid indirecty by customers. ….Demerits