Direct Tax: A tax is said to be direct when impact and incidence of a tax are on one and same person i.e. when a person on who 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.
Advantages of Direct Tax: Following are advantages of direct tax.
1. Direct taxes afford a greater degree of progression. They are therefore more equitable.
2. They entail less expense on collection and as such are economical.
3. They satisfy canons of certainty, elasticity productivity and simplicity.
4. They create civic consciousness in people. When a person has to bear burden of tax, he takes active interest in affairs of state.
Disadvantages of Direct Tax: Disadvantages of direct tax are as follows:
1. It is easy to evade a direct tax than an indirect tax. Tax payer 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.
2. Direct tax is very inconvenient because tax payer 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 tax payer to prepare and keep these records.
3. Direct tax is to be paid in lump sum every year while income which a person earns is received in small amounts. It often becomes difficult by tax payer to pay large amounts in one instalment.
Indirect Taxes: Indirect taxes are those taxes which are paid in the first instance by one person and then are shifted to some other persons. The impact is on one person but the incidence is on another person. For example sale tax on saleable articles is usually an indirect tax because it can be shifted onto the customers.
Advantages of Indirect Tax: Advantages of indirect taxes are as under.
1. It is not possible to evade indirect tax. The only way to avoid this tax is not to by taxed commodities.
2. They are more convenient because they are wrapped in prices. Customer does not know often that he is paying tax.
3. Every member of the society contributes something towards the revenue of the state.
4. Indirect tax is also elastic to a certain extent. State can increase its revenue with in limits by increasing rates of taxes.
5. 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.
Disadvantages of Indirect Tax: Disadvantages of indirect tax are as under.
1. A very serious objection levelled against indirect taxation is that it is regressive in character. It is inequitable. Burden of tax falls on poor people than rich.
2. Indirect tax is also uneconomical. State has to spend large amounts of money on collection of indirect taxes.
3. Revenue from indirect taxes is uncertain. State cannot correctly estimate as to how much money it will receive from this tax.
4. An indirect tax is wrapped in prices; therefore, it does not create civic consciousness.
5. If goods produced by manufacturers are taxed at higher rates, it hampers trade and industry and causes widespread unemployment in the country.
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