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 examples of direct tax.
Indirect Taxes
The taxes for which the money burden can be transferred to others are called indirect taxes. Sales tax, customs duty, excise duty, etc are 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 | Indirect Tax |
|---|---|
| The imposition is direct | The imposition is indirect |
| Imposed on personal income and revenues | Imposed on the sale and purchase of goods and services |
| The impact burden is just on one person | The incidence burden is on different persons |
| The burden cannot be transferred to someone else | The burden is transferred to some other persons |
| Charged by the taxpayer at certain intervals like a year. After the payment, the taxpayer is listed off | Neither is charged in intervals nor the taxpayer 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 levels of income and no difference is made between the high-income groups and low-income groups, it will be known as a 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 increase along with an increase in income. Any change in income leads to a change in the 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
Regressive Taxes
It is a tax rate that falls along with an increase in the 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 a taxation system, the poor have to scarify more than the rich. A general sales tax is an example of a regressive tax.
Digressive Taxes
This is a soft type of progressive tax where the tax rate does not increase in the same proportion as an increase in income. The tax rate increases up to a specific level of income and beyond that level, the tax rate remains constant. Therefore, it can be said that it is a combination of proportional and progressive taxes.
Types 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 a specific tax
For example $5/- per meter of 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
In such tax, we do not consider the weight or size of the product we just consider its value. It is beneficial in the sense that it lies the burden just on rich people. 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 to 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 the revenues of the firm and the 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 the tax nature.
These collected amounts are further invested in different mega-level projects including infrastructure, national trade, providing a subsidy, and generating employment opportunities.
What is direct Tax? Direct taxes is a form of tax imposed by a 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 perspectives.
Merits and Demerits of Indirect Taxes
| Merits of Indirect Taxes | Demerits of Indirect Taxes |
|---|---|
| Imperceptible | Against Cannon of Equality |
| Convenient | Against Cannon of Economy |
| Wide Converge | Inflationary in Nature |
| Elastic | Lack of Civic Sense |
| Less Dishonesty | Uncertain Revenue |
| Diversity | Bad Effect of Production and Employment |
| Promotes National Interest | |
| Check Consumption of Harmful Commodities | |
| Highest Tax Collection | |
| Powerful Tool of Eco-Policies |
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 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 everyone is 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., cigarettes, 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.
A powerful tool of eco-policies
Indirect taxes are used as a very powerful tool for economic policies.
Demerits of Indirect Taxes
Against Cannon of Equality
Indirect taxes are against the cannon of equity in the sense that the rich and poor have to pay the same rate of tax.
Against Cannon of Economy
These are uneconomical because the cost of tax collection is higher than its revenue. The taxed goods pass through a number of middlemen. Moreover, Govt. has to appoint highly paid staff.
Inflationary in Nature
These are inflationary in nature because the 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. The majority of consumers do not know that they are paying taxes 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, the quantity demanded shrinks and the economy moves toward depression.
Merits and Demerits of Direct Taxes
| Pros of Direct Taxes | Cons of Direct Taxes |
|---|---|
| Equitable | Painful |
| Certain | Promotes Dishonesty |
| Economical | Arbitrary in Nature |
| Elastic | Inconvenient |
| Simple | Discourages Investments & Savings |
| Desirable | Narrow in Nature |
| Reduce Inequality | Non Labor |
| Productive | Uneconomical |
| Automatic Stabilizers | Discourage Foreign Investment |
| Civil Sense |
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 the rich and poor. The rich pay more whereas the poor pay less. Thus, the 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 its 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 in 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 income tax automatic stabilizers. During the boom phase of an economy, these tax the maximum number of 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 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 the 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 taxpayers.
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 remain untaxed.
Non-labor Income
It is desirable to impose the tax only on earned income. It should also be imposed on non-labor income.
Uneconomical
Generally, the collection of direct taxes is very expensive and real collection remains very low.
Discourage Foreign Investors
These taxes discourage the inflow of foreign investment.
In the Conclusion
The above discussion reveals that both the pillars of the taxation system are unavoidable and the Government must maintain a proper balance between direct and indirect taxes.
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