Merits and Demerits of Direct Tax are explained below:
Merits of Direct Tax:
1. Direct taxes ensure certainty. The government and the tax payer both know fairly definitely what amounts are to be paid.
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2. Direct taxes are elastic. Whenever the government needs more revenue it may raise the rate of direct taxes. In case, the government desires to give relief to the tax payers, it may reduce the rate of taxes.
3. Direct taxes are progressive in nature. It increases with the increase in money income. In other words, those who have large income have to pay more taxes and others who have smaller income have to pay very small amount of tax. This also helps in equitable distribution of wealth.
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4. Direct Taxes are supposed to have an educative effect. The tax payer is conscious that he provides funds to the government, and is interested in seeing that they are properly used.
5. Direct taxes are economical, these taxes are paid by the tax payers to the state authorities, therefore, the collection charges are very nominal.
Demerits of Direct Taxes:
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1. Tax evasion is possible in case of direct taxes. People can evade a direct tax by preparing dubious and false accounts and furnishing wrong statements and information’s about their income and wealth.
2. It has a narrow base or limited area of functioning. Only a very few tax payers fall in the net of direct taxes. These are imposed on persons having income and wealth beyond a certain limit.
3. Direct taxes are often inconvenient, partly because numerous accounting and other formalities have to be observed and partly because large lump sum tax payments have to be made.
Indirect taxes like sales tax, custom and excise duties, service tax etc are those in which burden of tax can be shifted; here the impact and incidence of tax are on different persons.