• … 1. It is a sound principle that every individual should pay something, however little, to the State. Direct taxes have the following advantages in their favour: ADVERTISEMENTS: (i) Equitable: The burden of direct taxes cannot be shifted. This therefore hits the poor very hard since the poor have to use a much greater percentage of their money to pay the tax. In fact, it is a multi-stage indirect tax imposed on the value added at different stage starting from production to distribution process. This is the reason why indirect tax is considered a huge source of revenue for governments all over the world. What Is Third-Party Risk and Why Is It So Important? Direct taxes have some merits and so have the indirect taxes. The article provides a complete detail on the of an ideal tax system. Value Added tax refers to the tax applied to value-added as per prescribed rate. It has no practical importance. INDIRECT TAXES. It is like a sugar-coated quinine pill. In the case of goods, with an elastic demand, the tax might not bring in much revenue. For instance, salt tax in India fell more heavily on the poor than on the rich, as it had to be paid at the same rate by all. Since the indirect tax raises the prices of taxed commodities, it can prevent people from consuming the taxed commodities. And of course as we might all know, it can be quite difficult to determine the strength of demand for certain commodities. Advantages of direct taxes 1- Direct taxes are equitable because they are levied accord… That is why tobacco, wine and other intoxicants are taxed. In India revenue from indirect taxes has been continuously increasing. Indirect taxes are classified as regressive, because they are not based on income levels, and, generally, lower-income households pay more in indirect taxes as a … Constant taxes. Indirect tax fails to satisfy the principle of economy. • They satisfy the canon of diversity in such that they can be levied on a variety of commodities and services. The end result is that local industries are protected and the dumping of certain commodities in the country is mitigated. Indirect taxes are very difficult to avoid. Large administrative staff is required to administer such taxes. An indirect tax is charged on producers of goods and services and is paid by the consumer indirectly. The disadvantages of Direct Taxes over indirect taxes are : They are irksome partly because numerous accounting and other formalities are to be observed. Indirect taxes have some disadvantages too, which are as follows: Indirect taxes are not equitable. They are convenient to both the tax-prayer and the State. 5. Indirect Taxes do not constitute a disincentive to work 5. I he tax-payers do not feel the burden much partly because an indirect tax is paid in small amounts and partly because it is paid only when making purchases. This website includes study notes, research papers, essays, articles and other allied information submitted by visitors like YOU. Hence equality of sacrifice can be attained through progression. What is a Mentor and How Can You Benefit From Having One? Unless indirect taxes are imposed on necessaries, we cannot be sure of the revenue yield. Indirect taxes may have a stabilizing effect on the level of income 6. Direct taxes are taxes which are levied on income. For example, when the government wants to discourage the consumption of a harmful good such as cigarettes, all the government does is to raise the duties (indirect tax) on cigarettes in order to increase the price. However, the tax came with its share of downsides despite the above GST benefits. With an indirect tax, the government need only charge the third party, such as a business in the case of sales taxes. The disadvantages of Indirect Taxes are: Indirect tax lead to inflationary pressures as the incidence of the taxes are passed on the consumers in the form of higher prices. Share Your PPT File. Indirect Taxes are variable and specific (5 marks) Disadvantages 1. For example, a smoker who pays £1,000 a year in smoking duties. These taxes tend to take a higher percentage of income from those on a low income. Of […] Disclaimer Copyright, Share Your Knowledge This means that in a point-based transaction system, middlemen involved are likely to charge their own service tax which may result in the overall price of the product increasing. They Increase Prices of Goods This is because the amount paid as taxes is shifted to the consumers in form of high prices of goods. It also list the different types of taxes in India. Barring essential things for human consumption, all things are covered under the indirect tax, which is when consumed /used by industry or consumers, the tax has been levied. The tax will raise the price and contract the demand. For more information on Indirect Tax, read this article, “Direct and Indirect Tax”. It can be defined as any tax that is not levied directly on the income of an individual, but on the goods and services that the individual consumes. There are certain disadvantages of GST that make this tax … One of the biggest disadvantages of direct tax is that it encourages people not to work hard since direct taxes are normally progressive in nature, meaning the more income you make, the more tax that one pays. So is an import duty. Contribution by the poor: The poor folk’s square measure exempt from indirect taxes and this is often the sole manner of reaching this section of the society.This meets the fundamental principle of constructing all and sundry pay towards the expansion of the country through the state governments. Some examples of indirect taxes are excise duties, sales tax, tariffs, value added tax (VAT), etc. The tax is actually paid by the end consumer, by way of a higher retail price. Disadvantages of indirect tax. Content Guidelines 2. Every source o production has to be guarded. Indirect taxes tend to take a higher percentage of income from those on low income. When the price is massively increased, consumers can’t afford to buy it like before and this therefore reduces the consumption of cigarettes. Never … The tax is concealed in the price. Usually, income tax is filed annually although deductions from one’s salary can be done on a monthly basis. Neither the direct nor the indirect taxes alone can raise adequate revenue. The government therefore generates a lot of revenue from indirect taxes. Unlike the direct tax which is limited to only income earners, indirect tax does not limit itself to only a specific group of people. Whether a rich man buys a commodity or a poor man, the price in the market is the same for all. Indirect taxes on necessaries yield a large revenue, because people must buy these things. Advantages of Indirect Tax. Hence, rich and poor pay the same amount, which is obviously unfair. An indirect tax is imposed on producers (suppliers) by the government. A dealer collects the tax when he charges a price. Indirect Read more → Advantages. Regressive nature of indirect taxes. Thus, a tobacco tax is not felt when it is included in the price of every cigarette bought. The government does this by placing very high tariffs, which is an example of an indirect tax on imported goods. Advantages of Indirect Taxes. When imposed on luxury or goods consumed by the rich, they are equitable. It is harder to evade indirect tax, bcz as soon as anyone takes the bill, he is paying indirect taxes. Share Your PDF File This is even worse for the poor or low income workers. Outline the Advantages And Disadvantages of Direct and Indirect Taxes. Indirect Ta… Another advantage associated with indirect tax is the fact that it i easy to collect. The impact and incidence of a direct tax is on the same person, that is intended to bear the burden cannot shift it to another person. It can also be said that they are levied on earnings. Briefly speaking they are as under:— 1. This will raise the cost of production and impair their competitive capacity. Their relative importance depends on a number of factors, such as distribution of income, nature of the economic system, the stage of economic development, etc. Paying indirect tax is not as inconvenient to the tax payer as direct tax is. Some of the most common disadvantages of indirect taxes are as follow: Indirect tax is regressive in nature and this is considered one of the biggest disadvantages with it. This is considered one of the biggest advantages of indirect taxation. A fraction of the money unit cannot be calculated, so ever middleman tends to charge more than the tax. Since indirect taxes are placed on only goods and services, they are only paid for when a consumer buys such goods or services. The amount of indirect tax on basic products like milk, sugar, and tea is the same and both rich and poor people have to pay the same amount. Whether you are an income-earner or not, you pay indirect tax the moment you buy a taxed commodity. Before publishing your Articles on this site, please read the following pages: 1. Indirect tax constitutes a very huge source of revenue for government since the tax net covers a much wider area. The importance of this taxation regime lies in the fact that it covers under itself various other indirect taxes … deration the relative advantages and disadvantages of indirect, as compared with direct, taxation ; and to suggest a scheme of direct taxation, which would be equitable, would avoid the disadvantages, and combine the advantages of indirect taxation, without disturb-ing the present distribution of the burden. In another article we shall take a look at indirect taxes and the advantages and disadvantages of the indirect taxing system. This is what indirect taxation does to the poor. He is an honorary tax collector. A direct income tax, on the other hand, often means charging an entire populace, instead of just a percentage of them. This is another very big disadvantage of the indirect tax. Indirect taxes have advantages of their own. Indirect taxes are a form of government intervention in markets. Here are some of the types of indirect taxes. 2. Indirect Taxes Are Regressive in Nature This is in comparison with direct taxes. Directtaxesare taxes levied on income and wealth. 2. Collection takes place automatically when goods are bought and sold. They May Cause Scarcity of Goods This is because high tariffs may discourage people from important goods while the excise duties may also lead to stoppage of further production of certain goods. But the convenience is even greater due to the fact that the tax is “price-coated”. High Cost of Collection. 3. These taxes do not develop civic consciousness, because many times the tax-payer does not even know that he is paying tax. Hence in simple words in direct taxation, there is no intermediary involved as there are only two parties involved which is taxpayer and government which is the case with indirect taxation. Thus, GST subsumes a host of taxes. All the Right Colors: How to Add the Right Pop of Color to Your Room, 5 Camping Essentials You Need to Have On Your Next Trip, advantages and disadvantages of indirect tax, Advantages and Disadvantages of Direct Tax, 4 Warning Signs That Your Business Needs a Technology Upgrade, Compete with Online Stores: Strategies for Brick-and-Mortar Stores, A Restaurant Owner’s Guide on How to Dispose of Used Cooking Oil (The Right Way! Examples include duties on cigarettes, alcohol and fuel, the sugar levy (2018) and VAT. But it is safe to conclude that no country can do with one type only. They cannot be evaded, as they are a part of the price. Advantages and Disadvantages of Value Added Tax. The above rank among some of the major advantages and disadvantages of direct tax. The Goods and Services Tax (GST) system is a new system of indirect taxation system introduced by the Government of India on 1st July 2017. 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