The Most Important Merits of Direct Taxes are listed below:
1. Equity:
Direct taxes are imposed on individuals or companies in accordance with the principle of ability to pay.
The money burden of direct taxes cannot be shifted from one person to another. In case of direct taxes, the tax rate is different for different income groups.
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The rate of tax is less for lower income group and the rate of tax gradually increases with the increase in income. Lower income groups are also exempted from paying tax. It means larger amount of tax for the rich than for the poor. This is called progressive taxation.
Direct taxes are imposed with a purpose of bringing equitable distribution of wealth, income and property and to reduce the gap between rich and poor. So, there is element of equity or justice in direct taxes.
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2. Certainty:
Direct taxes satisfy the canon of certainty. A tax should not cause hardship to the tax payer. In case of direct taxes, the tax payer is certain about the amount, time and manner of payment of the tax. So Adam Smith says, “The tax which each individual is bound to pay ought to be certain and not arbitrary.
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The time of payment, the manner of payment and the amount to be paid, ought all to be clear and plain to the contributor and to every other person:” The government is also certain about the amount of revenue it would receive from direct taxes.
3. Economy:
Adam Smith says, “Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.”
This principle shows that a good tax system will require the least possible expenditure on collection of taxes. Direct taxes satisfy the canon of economy as it is collected at source for which the cost of collection is minimum.
4. Elasticity:
The yield (or collection of revenue) from direct taxes grows along with the increase in income and level of living. There is an automatic link between the need of the state and means of the people.
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Collection of revenue from direct taxes increases with every increase in wealth, income and standard of living. The state can also collect larger revenues by raising the rate of the tax.
5. Productivity:
A good tax must satisfy the canon of productivity. Direct taxes are productive because such taxes bring sufficient revenues to the state exchequer. Productivity implies more revenue returns and regularity and stability of revenue quantity.
On such grounds, direct taxes are productive as they bring not only more revenues to the state but also satisfy the qualities like regularity, stability and adequacy.
6. Consciousness:
Direct taxes tend to improve the civic consciousness of the tax payer. The tax payer becomes conscious of his rights and duties as he carries the burden of paying the tax directly to the public authority.
The tax payer tries to know the way the government spends money collected through taxation. He becomes vigilant and realises his responsibilities in knowing things. So direct taxes have a great educative value.