The Major Demerits of Direct Taxes are listed below:
1. Inconvenient:
Direct taxes are inconvenient on the part of the tax payers. The tax payer has to pay lump sum amount as tax at internals. He has to submit detailed accounts of income, wealth, property etc. The tax payer has to fill up the statements of taxes every year.
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Several supporting papers and certificates are to be submitted along with the statement. Tax laws are also very difficult to understand. Many people do not understand the complex system and laws of tax system.
So tax payers seek the help of tax professionals. Tax payers pay charges to the tax professionals for their service. So it is not only time consuming but also expensive.
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2. Tax on Honesty:
Usually it is told that direct tax is a tax on honesty. It is a defect associated with direct taxes. Dishonest people may evade and avoid tax. Many people submit false statement and they pay less tax. Many people are temptated to avoid tax payment by submitting false accounts.
But some people who are true to their duty will submit correct accounts. Such honest people will pay more taxes compared to their counterparts those who suppress their wealth, income, property etc and pay less tax and evade the tax burden. So direct taxes act as a cost on honesty.
3. Large Scale Evasion:
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Direct taxes are evaded through filing of false statement of incomes and wealth. It is widely practised. It is not possible on the part of the tax authorities to detect all these false cases.
Some people knowingly submit the false statement of income, wealth, property etc and evade tax payment. Some people also do not submit the statement and avoid tax payment. In fact, the process of tax payment is so complex that many honest tax payers, getting afraid of the task, become involuntary tax evaders.
4. Arbitrary:
The general principle of direct tax is that it is based on ability to pay of the tax payer. But it is difficult to measure ability to pay. The tax authority has framed different tax rates for people of different income groups.
Sometimes such rates are whimsically and arbitrarily fixed by the government in power. Progressivity which is generally applied in case of direct taxes can not be scientifically structured and very often we find no definite principle in the formulation of tax policy. Therefore, taxable capacity is either overestimated or underestimated. So taxes are either more or less than the justified amount.
5. Unpopular:
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Direct taxes cannot be popular. A tax payer knows the exact amount he is going to pay as tax. As we know, direct taxes impose a money burden on the tax payer and the tax payer cannot shift this money burden to someone else.
The tax payer becomes sensitive and the tax payer also resists. When tax rates are revised upward or some new taxes are introduced, the tax payers become violent.
6. Limited Scope:
Poor people are exempted from payment of direct taxes. In countries like India where masses are poor, direct taxes can reach only a few rich people. So collection of revenue through direct taxes becomes marginal and therefore, collection of revenue from direct taxes is not adequate for mobilisation of resources.
7. Disincentive Effect on Work Effort and Saving:
A part of income, wealth or property is taken away from the tax payer through direct taxes. Tax payer may feel disheartened as his earnings are shared by the tax authority. So his interest to work more may be hurt.
He may feel like work less and may enjoy more leisure. So willingness to work more is being arrested. On the other hand, a part of his earnings is reduced. His willingness as well as his ability to save is reduced.