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Direct and Indirect Taxes—Merits and Demerits

Direct Taxes

All taxes paid directly to state authorities by the taxpayer are direct taxes, income tax, wealth tax, corporation taxes are the examples of direct taxes. These types of tax are calculated on directly on the individual’s earnings or wealth. 

Indirect Taxes

Sales tax, Value added tax, excise duties are examples of indirect taxes. The burdens of these taxes are passed on by the supplier to the final buyer. Mode of collection is indirect form the tax payer, and rightly called indirect taxes.

Merits of Indirect Taxes

Indirect taxes are easy to implement as these are not related directly to the taxpayer income and depends on levied if the purchase or that particular transaction take place for which tax will due. Tax payer feels comfortable to pay tax on individual transaction. Usually taxpayer even doesn’t know that if he is paying any type of tax. 

It is easy to make changing in the tax pattern and rates as compare to direct taxes. Policy makers normally balance their deficit budget through indirect taxes.

Collection of indirect tax is certain as when there will be a sale of finish product the government generates revenue. Indirect taxes are used to change the buying behavior of consumers. Like tobacco and liquor have the high tax rates. 

Demerits of Indirect Taxes

Fixed Income Class suffers from these taxes as prices of the products increase and their purchasing power shrinks. Prices of commodities increase with indirect taxes. The upward trend of prices of the product cause cost push inflation. This increasing inflation disturbs the economy and balance of payment.

There is always a fluctuation in people buying behavior which disturbs the government budgeted income. The government forecasted cash flow is not certain if there is recession in the economy or the people buying pattern will change.  

Difficulty in tax calculation and collection are the drawbacks of indirect taxes. As these taxes start form raw material and the burden keep passing on to the final consumer but if any intermediary manipulate his transaction statistics there will be loss of revenue. 

Merits of Direct Taxes

Direct taxes are the main income sources of government. These taxes are easy to calculate on income and wealth of individuals and businesses. Direct taxes finance government affairs to run smoothly. These taxes help government to start and continue public welfare operations.

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Demerits of Direct Tax

The implementation or direct tax is a tough job as people are resistant and show wrong assessment of their income and avoid tax payment.  Direct tax has the negative impact of individual income and decrease the amount of disposable income.  The collection is difficult as compare to indirect tax where consumer do not feel a direct burden of tax.  Cost of collection of direct tax is greater than indirect tax. Chang in the rate and pattern is also difficult for direct taxes as compare to indirect taxes.

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