Define a tax. Explain briefly two merits and two demerits of direct taxes.

The taxation system is an important concept in the economy of a country. In order to run the government and manage the affairs of a state, money is required. So the government imposes taxes in many forms on the incomes of individuals and companies.

Classification of Taxes

Broadly taxes are classified into two classes:

1. Direct Taxes

2. Indirect Taxes

Direct tax

A direct tax can be defined as a tax that is paid directly by an individual or organization to the imposing entity (generally government). A direct tax cannot be shifted to another individual or entity. The individual or organization upon which the tax is levied is responsible for the fulfilment of the tax payment.

The Central Board of Direct Taxes deals with matters related to levying and collecting Direct Taxes and formulation of various policies related to direct taxes.

A taxpayer pays a direct tax to a government for different purposes, including real property tax, personal property tax, income tax or taxes on assets, FBT, Gift Tax, Capital Gains Tax, etc.

Merits

Following are the merits of direct tax

  • Equity: A direct tax is an equitable tax to all the citizens.
  • Certainty: A direct tax satisfies the strength of certainty.
  • Elasticity: A direct tax has elasticity.
  • Productivity: Direct taxes constitute an essential source of government revenue.
  • People’s Consciousness: A direct tax raises the civic sense of the people. When the people are fully aware of the payment of taxes, they are also conscious of the way the government spends the money.

Demerits

Following are the demerits of direct tax

  • Lack of Popularity: Such taxes are not very popular, because the people have to bear the burden of such taxes directly.
  • Evasion: It is liable to be evaded. By proposing false returns, many people try to evade income tax.
  • People’s Indifference: It does not amplify the civic sense of those who do not pay such taxes.
  • Disincentive to Work and Save: They decrease the desire to work and save. The rate of direct taxes are usually high.

Indirect tax definition

The term indirect tax has more than one meaning. In the colloquial sense, an indirect tax such as sales tax, a specific tax, value-added tax (VAT), or goods and services tax (GST) is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the consumer).

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