Merits and Demerits of Direct Taxes

There are different types of direct taxes such as Income Tax, Corporate Tax, Inheritance Tax, Property Tax, Wealth Tax (abolished now in India), Capital Gains Tax etc.

Merits

The key merits of the direct taxes are as follows:

Progressive Tax

The direct taxes follow the principle of ‘ability to pay’ because they are levied on the basis of individual’s income and wealth. Since ability to pay can be measured, the direct taxes are imposed at progressive rate whereby richer persons pay higher taxes in comparison to the poor persons.

Reduction in Inequality

Due to their progressive nature, the direct taxes help in reduction of the inequalities because the revenues collected from the rich man can be used for the good of poor man.

Economical in collection

In comparison to indirect taxes, the direct taxes are easy to collect because a tax payer makes his own payments.

Elasticity

Direct taxes can be manipulated / altered as per requirements of the government, change in the income of the people and economic status of the nation as a whole.

Taxpayer Consciousness

The taxpayers are conscious of their payments and are aware or make efforts to be aware where their money is being spent. It develops a national and civic consciousness among themselves. The role of RTI in recent years has become much more important in recent times towards increased awareness among tax payers.

Demerits

There are several demerits of the direct taxes. Since the burden of tax payment is on individuals, it is most disliked tax. It is generally paid as large amount and sometimes involves too much personal information, direct tax gets unpopular. Further, tax burden of one person cannot be transferred to another person; so direct tax does not differentiate between ways of earning. One might be working hard while another might be earning without hard labour; but direct tax liability of both are similar so sounds unjust.  Further, since there is no scientific principle of defining the degree of progression, the direct taxes are fixed arbitrarily. Since, large number of taxpayers make self declaration, the honest tax payers end up paying more than those who involve in tax evasion by falsifying the accounts.