Direct Taxes Vs. Indirect Taxes

Introduction

The objective of imposing taxes for any State is to raise revenue and to pay the necessary expenses of the Government such as promotion of the public welfare, protection of its citizens, and to finance its multifarious activities. The State shall always ensure judicious rising of funds and its spending. The below two important essentials shall be kept in view by the State, to promote the general welfare and protection of its citizens:

Ability to pay

One of the essential characteristics of our tax rising policy is ‘the ability to pay’. Indirect taxes are to be borne by the consumers of goods and services irrespective of their financial ability. On the other hand the direct taxes are lesser burden than the indirect taxes to the common people as they are payable on income or profits rather than on goods or services.

The indirect tax is also called regressive tax as the demand for products and services decreases proportionately as the amount of taxes increases. Excessive reliance on indirect taxes increases the rich and poor disparity. Direct taxes facilitate in more equitable distribution of income and wealth. Sometimes indirect taxes can facilitate equitable distribution by levying them on luxuries and exempting them on necessaries. Both direct and indirect taxes are alternative methods of achieving any particular redistribution of income and wealth.

Proper administration

The other main aspect of taxation is ‘proper administration’. The administrative cost of collecting direct taxes is more than that of indirect taxes. Indirect taxes are simple and its cost of collection is stable over a period.

From point of view of efficiency and productivity, indirect taxes are better. Indirect taxes are wrapped up in prices and hence they cannot be easily evaded. They are more productive as their cost of collection is the least.

However, improper administration of direct taxes leads to tax avoidance and tax evasion which is a loss to the exchequer and widens the gap between rich and poor.

Conclusion:

Direct taxes are superior from ‘ability to pay’ point of view and from the view of administration indirect taxes are more superior. However taxing of both direct and indirect is indispensable in modern public finance.

In countries like India having people with varied economic backgrounds, the Government should more focus on direct taxes rather than indirect taxes by ensuring proper administration of direct taxes to eradicate tax avoidance and tax evasion.