Direct tax refers to the type of tax that is levied or imposed on salaries,
wages, profit, property etc. It is paid directly by the individuals (tax
payers) to the government. Income tax, property tax, capital gain tax, custom
duty, service tax etc. are some examples of direct taxes.
Advantages Of Direct Tax
The main advantages or merits of direct tax can be described as follows:
1. Simple And Easy
Tax payers know the actual amount of tax and deadlines for payment. It ensures
transparency and certainty. So, direct tax is simple to estimate and easy to
collect.
2. Fairness And Equality
Another advantage of direct tax is fairness and equality. Tax rates are
determined on the basis of income of the people. It means individuals with
higher income pay more tax and who earn less pay lower tax to the government.
3. Source Of Revenue
Direct tax is one of the major sources of government revenue. It plays a vital
role in the economic development of the country.
4. Flexibility
Direct tax is flexible in nature. Tax rate can be increased or decreased as
per the needs and economic condition of the country.
5. Inflation Control
Direct can be used as anti-inflationary tool to minimize disposable income
that helps to decrease the demand for products. Government can increase the
rate of direct tax to manage inflation.
6. Cost Efficient
Direct tax is more economic and time saving because taxes are collected at the
source.
Disadvantages Of Direct Tax
The major disadvantages of direct tax can be highlighted as follows:
1. Possibility Of Tax Evasion
One of the main drawbacks of direct tax is high chance of tax evasion.
Individuals and business firms may submit false report to lower the taxable
income. Especially, self-employed people can easily evade tax.
2. Discourage Saving And Investment
High tax rate leads to decreasing in the saving of the individuals. High
amount of direct tax reduces the disposable income that can have negative
impact on capital formation and investment.
3. Discourages Innovation
Higher tax rate demotivates entrepreneurship because it increases the cost of
production. It discourages innovation that negatively impact the economic
growth of the nation.
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4. Reduced Motivation
Another disadvantage of direct tax is that it may reduce motivation of people
to work. They are discouraged to make more money because of more tax. So, it
may decrease their performance and efficiency at work.
Pros And Cons Of Direct Tax In Brief
Pros
* It is easy to determine and understand
* It can be used to manage inflation
* It is progressive in nature
* It ensures fairness and equality
* It helps to maintain social and economic balance
* It is flexible
Cons
* There is high chance of tax evasion
* It discourages saving and investment
* It increases the cost of production
* It demotivates workers that decreases their efficiency
* It may reduce the consumption
