Advantages and Disadvantages of Direct Taxes

Taxes are important for Govt to collect, as they are running the country. They need funds to improve the nation. These funds are collected in different forms of taxes including direct taxes & indirect taxes. Each tax type has various advantages & disadvantages for nationals & Govt. Lets come to the Direct Taxes Advantages & Disadvantages

Direct Tax Advantages

1. Equitable

Direct taxes are in accordance with the canon of equity. They are progressive in nature as their burden is equally distributed among rich and poor. Rich pay more whereas poor pay less. Thus, burden is according to their income.

2. Certain

Direct taxes are in accordance with the canon of certainty as these are fixed at a certain rate and cannot be avoided.

3. Economical

These are in accordance with the canon of economy as their cost of collection is low and maximum revenues can be collected with minimum cost.

4. Elastic

These are in accordance with the canon of elasticity. These are flexible in the sense that Govt. can increase or decrease their rates according to the requirements of an economy.

5. Simple

These are in accordance with the canon of simplicity as there is no confusion or complication to understand them.

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6. Desirable

These are desirable in nature and are imposed only on those persons who can afford them.

7. Reduce inequalities

Direct taxes lead to an equitable distribution of wealth as these are progressive in nature. Rich are taxed heavily and vice versa.

8. Productive

These are productive in the sense that the revenue collected is mainly used by the Govt. in the public interest i.e. buildings, roads, hospitals, schools, etc.

9. Automatic stabilizers

Direct taxes, especially the income tax is automatic stabilizers. During the boom phase of an economy, these taxes the maximum individuals and vice versa.

10. Civic sense

Direct taxes produce a civic sense among the people of a country. Tax payers begin to recognize their civic responsibilities and start to take a keen interest in the activities of the state.

Disadvantages of Direct Tax

Along with the above mentioned merits, direct taxes also have some demerits as well. A brief list of these demerits is as under.

1. Painful

Direct taxes are very painful for the people in the sense that they face many hardships to earn their incomes but a big share of this income is paid in the form of tax. They get nothing from Government against such taxes.

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2. Dishonesty promotes

To avoid the pain of the burden of direct taxes, the tax-payers conceal the facts which reflect their dishonesty.

3. Arbitrary nature

There is an element of arbitrariness in the direct taxes. These taxes leave much to the discretion of the taxation authorities.

4. Inconvenient

Due to certain unavoidable formalities, the payment of direct taxes is not so easy. Thus, direct taxes are inconvenient for the tax-payers.

5. Discourage saving and investment

Direct taxes adversely affect the saving and investment. It is because, the people know that if they invest more, they will have to pay more taxes. Direct taxes even discourage those industries and firms which produce essential goods.

6. Narrow based

These taxes are imposed only on the a selected group while the majority of the people remains untaxed.

7. Non-labour income

It is desirable to impose tax only on earned income. It should also be imposed on non-labour income.

8. Uneconomical

Generally the collection of direct taxes is very expensive and real collection remains very low.

9. Discourage foreign investors

These taxes discourage inflow of foreign investment.

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