Question

Bring out the merits of indirect taxes over direct taxes.

Answer 1

Merits of Direct Taxes:

(1) Equity:

• Direct taxes are progressive i.e. rate of tax varies according to the tax base.
• For example, income tax satisfies the canon of equity.

(2) Certainty:

• 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 taxpayers pay the tax directly to the state.

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 a higher tax is imposed on luxuries used by rich people.

(3) Economical:

• The cost of collection is less as producers and retailers collect taxes and pay to the Government.
• The traders act as honorary tax collectors.

(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 a purchase, they pay tax along with the price.
• They do not feel the pinch of paying tax.