Direct Taxes Meaning, Merits and Demerits [GST Law & Practice B.Com 6th Sem CBCS Pattern Notes]

Direct Taxes Meaning, Merits and Demerits

GST Law & Practice

B.Com 6th Sem CBCS Pattern Notes 

Direct taxes Meaning

Direct taxes are those which are paid directly to the government by the person to whom taxes are levied. These taxes are charged on incomes and profits. Burden of direct taxes are borne by the person to whom it is levied. He cannot transfer the burden of tax to some other parties. Example of direct taxes: income tax.

According to Dalton,” A direct tax is really paid by the person on whom it is legally imposed.”

According to J.S. Mill,” A direct tax is one which is demanded from the persons who intended or desired to pay.”

Features of Direct-taxes:

1. Major source of revenue for government: Direct taxes are now an important source of tax revenues for the Governments and continue to grow as more per capita income of increasing. In India, direct taxes contribute more than 50% of the total tax revenues of Central Government.

2. Imposed on income: It is levied on various direct income of the assesses such as income from salary, profits and gains from business & profession, capital gains etc.

3. Progressive in nature: Indirect taxes are progressive in nature.

4. Different tax rate: Rate of direct taxes are different from person to person depending on their earnings.

5. Major source of revenue of central government: Entire revenue generated from direct taxes goes to Central Government of India.

Merits and Demerits of Direct Taxes

Merits of Direct Taxes

1.   Economy: Direct taxes are economical in the sense that the cost of collecting these taxes for the government is relatively low as these taxes are usually collected at source.

2.    Equity: Direct taxes can be determined according to the ability to pay and the minimum aggregate sacrifice i.e. it is based on justice and equity. These taxes fall more heavily on the richer persons than on the poor.

3.   Reduction in inequality: As direct taxes are progressive in nature, the persons belonging to higher income groups are imposed higher rate of taxation. On the other hand, the low income groups are ever exempted of some taxes. In this manner, it removes the inequality among sections of the society to a greater extent.

4.   Certainty: Direct taxes also satisfy the canon of certainty because of its certain effects on the tax-payer. The government collects certain amount through direct taxes. Thus, it enables the public authority to calculate the yield of taxation and hence, plan outlay can be well prepared with great certainty.

5.   Elasticity: Direct taxes also satisfy the cannon of elasticity because the income from these taxes can be increased by increasing the rate of taxation in an appropriate way in the hour of crisis.

6.   Educative Value: Direct taxes have also the educative value among the common masses. People are aware about the amount collected from them and can check the wastage in public expenditure.

Demerits of Direct Taxes

1.   Inconvenience: The main drawback of the direct taxes is inconvenience because it required numerous accounting and other formalities to be observed. Sometimes, the tax-payers have to pay a large amount taxation in lump sum which causes inconvenience to the tax payers.

2.   Unpopular: These taxes are directly imposed on an individual. So it appears quite painful to the tax-payers. This type of taxation is unpopular among the tax-payers and they resist it.

3.   Possibility of Evasion: A direct tax is calculated on the basis of honesty of tax-payers. So, there is always a possibility of tax evasion.

4.   Narrow in Scope: Generally, direct tax is levied only on certain group of persons which restricts to raise the civic consciousness among all the people of the society. In this way, its applicability is limited.

5.   Not Suitable to underdeveloped economies: Direct tax is not much suitable to underdeveloped economies or backward economies as most of the people are illiterate and do not understand the spirit of such a tax.

6.   Obstacle to capital formation: It is claimed that if the rate of direct tax is heavy, then it adversely affects the people’s desire, ability to work, save and investment. Therefore, it hampers the growth of capital formation. 

Difference between Direct Taxes and Indirect Taxes: