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There are two main types of tax:

(1) Direct tax and (2) Indirect tax.

(1) Direct Tax:

Definition:

A tax is said to be direct tax when 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.

Example:

For example, income tax is a direct tax because impact and incidence falls on the same person.

Merits:

(i) Direct taxes afford a greater degree of progression. They are, therefore, more equitable.

(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:

(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 instalment.

(2) Indirect Tax:

Definition:

If impact of tax falls on one persons and incidence on the another, the tax is called indirect tax.

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.

Example:

For example, tax on saleable articles is usually an indirect tax because it can be shifted on to the consumers.

Merits:

(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:

(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 consciousness.

(v) If goods produced by manufacturers are taxed at higher rates, it hampers trade and industry and causes widespread unemployment in the country.

Conclusion:

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.

We 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.