Discuss the relative merits and demerits of direct and indirect tax.
Merits of direct tax:
- Equity: Direct tax is imposed on the income of a person based on the principle of ability to pay. The income tax burden is equitably distributed on different people and institutions. Thereby the tax burden falls more on the rich than on the poor.
- Certainty: An individual knows how much of tax is due and when to pay. The Government knows with certainty how tax revenue is to be collected from direct tax. Accordingly, the Government can adjust its income and expenditure.
Merits of indirect taxes:
- Broad coverage: In the tax on commodity, all the buyers of the commodity have to pay the indirect tax irrespective of the income level whether they belong to the high income group or low income group. By widening the tax net, the Government can yield more revenue for public expenditure.
- Convenient: Indirect taxes are paid in small portion at regular intervals. It is not a burden to the taxpayer as it is included in the price of the commodity.