Define a tax. Explain briefly two merits and two demerits of direct taxes.
Tax - "A compulsory contribution from a person to the government to defray the expenses incurred in the common interest of all without reference to special benefits conferred." In other words, taxes are compulsory payments to government without any corresponding direct return of services or goods by the government to the taxpayers.
Merits of Direct Taxes:
(i) Economical - Direct taxes are economical in the sense that cost of collecting these taxes is relatively low as they are usually collected at source and they are paid to the government directly by the taxpayers.
(ii) Certainty - Direct taxes satisfy the canon of certainty. The taxpayers know how much they have to pay and on what basis they have to pay. The government also knows fairly, definitely the amount of tax revenue it will receive. Thus, the direct taxes satisfy the canon of certainty.
Demerits of Direct Taxes:
(i) Unpopular - Direct taxes are directly imposed on individuals. They cannot be shifted. Taxpayers feel their pinch directly. They are not popular among the people.
(ii) Possibility of Tax Evasion - Direct taxes encourages tax evasion. People conceal their income from the tax officials so as to pay less taxes. In India, there is large-scale evasion of income tax on the part of businessmen. They adopt fraudulent practices to save themselves from paying taxes.
Tax - "A compulsory contribution from a person to the government to defray the expenses incurred in the common interest of all without reference to special benefits conferred." In other words, taxes are compulsory payments to government without any corresponding direct return of services or goods by the government to the taxpayers.
Merits of Direct Taxes:
(i) Economical - Direct taxes are economical in the sense that cost of collecting these taxes is relatively low as they are usually collected at source and they are paid to the government directly by the taxpayers.
(ii) Certainty - Direct taxes satisfy the canon of certainty. The taxpayers know how much they have to pay and on what basis they have to pay. The government also knows fairly, definitely the amount of tax revenue it will receive. Thus, the direct taxes satisfy the canon of certainty.
Demerits of Direct Taxes:
(i) Unpopular - Direct taxes are directly imposed on individuals. They cannot be shifted. Taxpayers feel their pinch directly. They are not popular among the people.
(ii) Possibility of Tax Evasion - Direct taxes encourages tax evasion. People conceal their income from the tax officials so as to pay less taxes. In India, there is large-scale evasion of income tax on the part of businessmen. They adopt fraudulent practices to save themselves from paying taxes.
