What is Indirect Tax?
Indirect taxes are those taxes whose burden can be shifted to the others, e.g. tax on commodities. Many reforms are initiated to encourage the taxpayers by lowering the tax rate.
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 Indirect Tax
- Broad coverage: In the tax on commodity, all the buyers of the commodity have to pay the indirect tax irrespective of the income level—whether they belong to the high income group or low income group. By widening the tax net, the government can yield more revenue for public expenditure.
- Convenient: Indirect taxes are paid in small portion at regular intervals. It is not a burden to the taxpayer as it is included in the price of the commodity.
Demerits of Indirect Tax
- Uncertain: Taxes on goods with elastic demands are very uncertain. When the commodity is taxed, the price of the commodity increases, which reduces the demand for the commodity in the market. Hence, the revenue from indirect tax is uncertain.
- Discourage savings: Most of the income is spent on consumption of goods where the price of goods includes indirect tax, thus making savings impossible.
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