What is Direct Tax?
Direct taxes are those taxes whose burden cannot be shifted to the others. Tax on individual income and profits of business enterprises are examples of direct tax. After the reforms, there were reductions in the tax rates of individual income.
Differences between direct taxes and indirect taxes:
| Direct taxes | Indirect taxes |
|---|---|
| Direct taxes refer to taxes that are really paid by those on whom they are legally imposed. | Indirect taxes refer to taxes that are imposed on an individual but are paid by another person either partly or wholly. |
| The tax burden cannot be shifted to any other individual or firm by the taxpayer. | The tax burden can be shifted by the taxpayer. |
| It is progressive because the tax rate increases with an increase in income slabs. | It is regressive because the common people bear this tax burden. |
| The impact and incidence of tax fall on the same person. | The producer bears the impact and incidence of tax on the consumer. |
Merits of Direct Tax
- Equity: It is imposed on the income of a person based on the principle of ability to pay. The income tax burden is equitably distributed on different people and institutions, thereby the tax burden falls more on the rich than on the poor.
- Certainty: An individual knows how much tax is due and when it is due. The government knows with certainty how much tax revenue is to be collected from direct tax. Accordingly, the government can adjust its income and expenditure.
- Elasticity: Direct tax is more elastic. During the period of crisis, the government can yield more revenue by increasing the tax rates.
Demerits of Direct Tax
- Tax evasion: There is a greater possibility of tax evasion of direct taxes as these taxes are collected based on honesty of the taxpayers. Business groups try to evade direct tax by misrepresenting their income statements to the income tax authorities.
- Narrow in scope: Direct taxes are imposed heavily on the rich. The government cannot approach the low income group through these taxes. So, they have limited scope in collecting tax.
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