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Types of Taxes

Basically there are two types of taxes i.e. direct taxes and indirect taxes. However, there are further types of direct and indirect taxes. A brief list of both the major taxes is as under:

Types of Direct Taxes

  • Proportional taxes
  • Progressive taxes
  • Regressive taxes
  • Digressive taxes

Types of Indirect Taxes

  • Specific taxes
  • Advalorem taxes
  • Value added taxes

Direct Taxes

The taxes for which the burden of taxes cannot be transferred, are called direct taxes. According to H.Dalton, “A direct tax is really paid by the person on whom it is legally imposed.” Income tax, wealth tax, property tax, etc are the examples of direct tax.

Indirect Taxes

The taxes for which the money burden can be transferred to others, are called indirect taxes. Sales tax, custom duty, excise duty etc are the examples of indirect tax.

We make a comparison of direct and indirect taxes as under:

“The direct and indirect taxes are like two attractive sisters between which a person is bound to remain indifferent.”

Professor Gladstone,

Difference Between Direct and Indirect Tax

Direct Tax
• The imposition is direct
• Imposed on personal income and revenues
• The impact burden is just on one person
• The burden cannot be transferred to someone else
• Charged by the taxpayer at certain intervals like a year. After the payment, the tax payer is listed off
Indirect Tax
• The imposition is indirect
• Imposed on the sale and purchase of goods and services
• The incidence burden is on different persons
• Burden is transferred to some other persons
• Neither charged in intervals, nor the tax payer is listed off. It is charged while acting certain acts that of purchase, etc

Types of Direct Taxes

Proportional Taxes

This taxation system is advocated by classical economists. If a uniform tax rate is imposed on all the levels of income and no difference is made between high income group and low income group, it will be known as proportional tax.

It is imposed on all the income groups with the same proportion. e.g: If in a country, the tax rate is 10% then all the persons have to pay 10% tax irrespective of their incomes.

Progressive Taxes

The progressive tax is one whose rate goes on to increases along with increase in income. Any change in income leads to a change in tax rate. There is a positive relationship between income and tax rate. The tax rate on higher income is higher and on lower income is lower.

In such a system, the individual income are divided into different slabs, and the rate of income tax is different for each slab. Along with increase in income the slab as well as tax rate change.

Regressive Taxes

It is a tax rate which falls along with increase in incomes of the people. Thus, it is opposite to progressive taxes and there is a negative relationship between income and the tax rate. Moreover, in such taxation system, the poor have to scarify more than the rich. General sales tax is an example of regressive tax.

Digressive Taxes

This is a soft type of progressive tax where tax rate does not increase in the same proportion to increase in income. Tax rate increases up to a specific level of income and beyond that level, tax rate remains constant. Therefore, it can be said that it is the combination of proportional and progressive taxes.

Tyes of Indirect Tax

Specific Taxes

When any good or service is taxed on the basis of its measure, size, and weight, such tax is given the name of specific tax.

For example $5/- per meter of a cotton cloth etc. The main advantage of specific taxes is that these can be easily imposed and charged.

Anyhow, these are not beneficial because they are burdensome for the poor.

Advalorem Taxes

When any commodity is taxed on the basis of its value, such tax is given the name of advalorem tax. I.e. A customs duty of 15% on a specific electronic product of value $50000 is an advalorem tax.

In such tax we do not consider weight or size of the product while we just consider its value. It is beneficial in the sense that it lies the burden just on rich persons. Anyhow, there is some difficulty to find the exact value of products as the producers do not show it in order to avoid taxes.

Value – Added taxes

Value – added tax is related with the family of sales tax. It is imposed on that value which is obtained by subtracting the purchase value of the product from the gross sale of the product.

In other words, the gap b/w revenues of the firm and cost of the firm which it has to face regarding inputs etc. are known as value-added. A tax imposed on this value added is called a value-added tax.

Merits and Demerits of Taxes

Taxes are important for the Govt to collect, as they are running the country. They need funds to improve the nation. These funds are collected in different 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 a subsidy, generating employment opportunities.

What is direct Tax? Direct taxes is a form of tax imposed by regulatory authority i.e., Govt of a country. These taxes are directly paid to govt of the payer. There are many advantages of direct taxes as well as disadvantages of taxes from the different payer and receiver perspective.

Merits and Demerits of Indirect Taxes

Merits of Indirect Taxes
• Impreceptible
• Convenient
• Wide Converage
• Elastic
• Less Dishonesty
• Diversity
• Promotes National Interest
• Check Consumption of Harmful Commodities
• Highest Tax Collection
• Powerful Tool of Eco-Policies
Demerits of Indirect Taxes
• Against Cannon of Equality
• Against Cannon of Economy
• Inflationary in Nature
• Lack of Civic Sense
• Uncertain Revenue
• Bad Effect of Production and Employement

Merits of Indirect Taxes

Imperceptible

Indirect taxes are imperceptible in the sense that these are paid frequently through consumption but these are not realized.

Convenient

These are convenient in the sense that we do not face any formality to pay them but these are paid by adding in the market value of the goods.

Wide Coverage

 These have a wide coverage because these are charged  by all the income groups i.e. low , middle and high. These are imposed on all the types of goods i.e. necessities , comforts and luxuries.

Elastic

These are elastic in the sense that these can be reduced on those goods whose consumption is to be increased and can be increased on those goods whose consumption is to be decreased by the government.

Less Dishonesty

There is no chance of dishonesty because indirect taxes are included in the prices of the commodities and no one can stop this consumption.

Diversity

There are in accordance with the canon of diversity because these are imposed on a variety of goods and services.

Promote National Interest

These taxes promote national interest because every one is the part of this network.

Check the Consumption of Harmful Commodities

The consumption of harmful commodities can be checked by this taxation system. The state imposes heavy duties on harmful goods i.e., cigarette, etc.

Higher Tax Collections

The tax revenue may easily be increased by imposing heavy duties on inelastic goods whose demand does not reduce, whatever so is the price.

Powerful tool of eco-policies

Indirect taxes are used as a very powerful tool of the economic policies.

Demerits of Indirect Taxes

Against Cannon of Equality

Indirect taxes are against the cannon of equity in the sense that rich and poor have to pay the same rate of tax.

Against Cannon of Economy

These are uneconomical because cost of tax collection is higher than its revenue. The taxed goods pass through a number of middle men. Moreover, Govt. has to appoint highly paid staff.

Inflationary in Nature

These are inflationary in nature because imposition of these taxes tends to raise the prices of commodities.

Lack of Civic Sense

The producers shift the burden of tax and the consumers ultimately bear the burden. Majority of the consumers do not know that they are paying tax and observing their national responsibility.

Uncertain Revenue

Revenue collection by indirect taxes is quite uncertain.

Bad Effect on Production and Employment

Sometimes, indirect taxes adversely affect the production of commodities and in turn employment. As with the increase in price, quantity demanded shrinks and the economy moves towards depression.

Merits and Demerits of Direct Taxes

Pros of Direct Taxes
• Equitable
• Certain
• Economical
• Elastic
• Simple
• Desirable
• Reduce Inequality
• Productive
• Automatic Stabilizers
• Civil Sense
Cons of Direct Taxes
• Painful
• Promotes Dishonesty
• Arbitrary in Nature
• Inconvenient
• Discourages Investments & Savings
• Narrow in Nature
• Non Labor
• Uneconomical
• Discourage Foreign Investment

Merits of Direct Taxes

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.

Certain

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

Economical

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

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.

Simple

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

Desirable

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

Reduce Inequalities

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

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.

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.

Civic Sense

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

Demerits 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.

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.

Dishonesty Promotes

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

Arbitrary Nature

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

Inconvenient

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 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.

Narrow-based

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

Non-Labour Income

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

Uneconomical

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.

In the Conclusion

The above discussion reveals that both the pillars of taxation system are unavoidable and Government must maintain a proper balance between direct and indirect taxes.

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