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 of taxes including direct taxes & indirect taxes. Each tax type has various Pros & Cons depending upon tax nature. These collected amounts are further invested in different mega level projects including infrastructure, national trade, providing subsidy, generating employment opportunities.
What is direct Tax? Direct taxes is form of tax imposed by regulatory authority i.e., Govt of a country. These taxes are directly paid to govt of payer. There are many advantages of direct taxes as well as disadvantages of taxes from different payer and receiver perspective.
Advantages and Disadvantages of Direct Taxes
Advantages of Direct Taxes
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.
Direct taxes are in accordance with the canon of certainty as these are fixed at a certain rate and cannot be avoided.
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.
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.
These are in accordance with the canon of simplicity as there is no confusion or complication to understand them.
These are desirable in nature and are imposed only on those persons who can afford them.
Direct taxes lead to an equitable distribution of wealth as these are progressive in nature. Rich are taxed heavily and vice versa.
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.
Direct taxes, especially the income tax is automatic stabilizers. During the boom phase of an economy, these taxes the maximum individuals and vice versa.
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.
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.
To avoid the pain of the burden of direct taxes, the tax-payers conceal the facts which reflect their dishonesty.
There is an element of arbitrariness in the direct taxes. These taxes leave much to the discretion of the taxation authorities.
Due to certain unavoidable formalities, the payment of direct taxes is not so easy. Thus, direct taxes are inconvenient for the tax-payers.
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.
These taxes are imposed only on the a selected group while the majority of the people remains untaxed.
It is desirable to impose tax only on earned income. It should also be imposed on non-labour income.
Generally the collection of direct taxes is very expensive and real collection remains very low.
Discourage Foreign Investors
These taxes discourage inflow of foreign investment.