There are two main types of taxes (1)
direct tax and (2) indirect tax.
Explanation of Direct Tax:
A tax is said to be direct tax
impact and Incidence of a tax are on one and same person, i.e., when a
person on whom tax is levied is the same who finally bears the! burden of tax.
For Instance, income tax is a direct
tax because impact and incidence falls on the same person.
If impact of tax falls on one persons and incidence on the another,
the tax is called indirect.
For example, tax on saleable articles is
usually an indirect tax because it can be shifted on to the consumers.
Merits of Direct Tax:
(i) Direct taxes afford a greater degree of progression. They are, therefore,
(ii) They entail less expenses on collection and as such are economical.
(iii) They satisfy canons of
certainty, elasticity, productivity and simplicity.
(iv) Another advantage of direct taxes is
that they create civic consciousness in people. When a person has to bear burden
of tax, he takes active interest in affairs of state.
Demerits of Direct
(i) It is easy to evade a direct tax than an indirect tax. Taxpayer is seldom
happy when he pays tax. It pinches him that his hard-earned money is being taken
by government. So he often submits false statements of his income and thus tries
to evade tax. Direct tax is in fact a tax of honesty.
(ii) Direct tax is very inconvenience because taxpayer has to prepare lengthy
statements of his income and expenditure. He has to keep a record of his income
up-to-date throughout the year. It is very laborious for taxpayer to prepare and
keep these records.
(iii) Direct tax is to be paid in
lump some every year while income which a person earns is received in small
amounts. It often becomes difficult by taxpayers to pay large amounts in one
Indirect taxes are those taxes which are paid in the first instance by one
person and then are shifted on to some other persons. The impact is one person
but the incidence is on the other.
Merits of Indirect Tax:
(i) It is not possible to evade indirect tax. The only way to avoid this tax
is not to buy taxed commodities.
(ii) They are more convenient because they
are wrapped in prices. Consumer
often does not know that he is paying tax.
(iii) Another advantage of tax is that every member of society contributes
something towards revenue of state.
(iv) Indirect tax is also elastic to a certain extent. State can increase its
revenue within limits by increasing rates of taxes.
(v) If state wishes to discourage consumption of intoxicants and harmful
drugs, it can raise their prices by taxing them. This is a great social
advantage which a community can achieve from tax.
Demerits of Indirect Tax:
(i) A very serious objection leveled against indirect taxation is that it is
regressive in character. It is inequitable. Burden of tax falls more on poor
people than on rich.
(ii) Indirect tax is also uneconomical. State has to spend large amounts of
money on collection of taxes.
(iii) Revenue from indirect tax is uncertain. State cannot correctly estimate as
to how much money will it receive from this tax.
(iv) As lax is wrapped up in prices; therefore, it does not create civic
(v) If goods produced by manufacturers are taxed at higher rates, it hampers
trade and industry and causes widespread unemployment in the country.
After discussing merits and demerits of two types of taxes, we come to
conclusion that for reducing inequality of income and raising sufficient funds
for state, both these taxes are essential, A country should not place exclusive
reliance on any one type, but should employ both these forms of taxation.
agree here with Galdston when he says:
"Direct and Indirect taxes
are like two equally fair sisters to whom as Chancellor of Exchequer, he had to
pay equal addresses".
In recent times, however, there has
been a slight change in utilization of both these types of taxes. Every state,
in order to reduce inequality of income, is trying to raise major portion of its
income from direct taxes.