Taxes In India And The Advantages And Disadvantages Of Direct Taxes And Indirect Taxes
The article provides a complete detail on the of an ideal tax system. It also list the different types of taxes in India. It also states the advantages of direct taxes as well as the disadvantages of indirect taxes. It states the canons or the principles of good taxes. It also states the objectives of taxes.
Objectives of taxes The following are the main objectives of taxes:
- Raising revenue: The primary purpose of taxes is to raise the revenue for the government. The modern government has to perform several functions for the welfare of the public. The performance of these functions involves substantial amount of public expenditure.
- Regulation of consumption and production: Taxes are sometimes used to discourage the consumption ad production of unnecessary or harmful goods like liquor, tobacco etc. This also results in the diversion of production form luxury goods to necessities.
- Encouraging domestic industries: Taxes in the form of custom duties are used to reduce the import of certain goods that are domestically available and thereby the domestic industries for the production of these goods. For example, high customs duties on goods like TV, AC etc switch over th demand for the foreign brands.
- Stimulating investments: The instrument of taxation can also be used in the stimulating investment of the private sector. This can be done by providing various tax-incentives in the form of tax-holidays, investment allowance and lower profits.
- Reducing income inequalities : Taxation policy of the government is often used in reducing the income inequalities of incomes and assets. Inequality of income can be reduced by the system of progressive taxation under which the rich people are required to pay much more taxes than poor. The taxes collected form the rich can further be utilized for providing social services which benefit the low income groups.
- Promoting economic growth: Taxation policy can also be used for promoting economic development of the country. The revenue collected by the government can be used in promoting development of industries and agriculture. The government ca also use these funds in building a better infrastructure like transport and communication, power etc.
- Development of backward regions: Tax system can be used in ensuring the development of backward regions. Entrepreneurs can be motivated to set up their industries in the backward regions by providing tax concessions to them.
- Ensuring price stability : Direct taxes like income tax can be used to ensure price stability. These taxes reduce the disposable income of individuals and thereby reduce their purchasing power. This results in the fall in aggregate demand in the economy and thereby reducing demand-pull inflation.
Characteristics of good tax system A good tax system should adhere to certain principle that becomes the characteristics of good tax system. These principles are called canons of taxation.
- Canons of equality : Canon of equality states that persons should be allowed to pay their taxes as per their ability to pay. Equality, however does not mean equal amount of tax but the burden of tax should be fair and just. Equality of tax burden can be achieved if the rich people are taxed more than the poor people not only in terms of tax but also in the terms of tax rate. This canon tries to achieve the objectives of economic justice.
- Canon of certainty: Many a times, it is seen that the rates of taxes keep on fluctuating and the tax-payers are absolutely uninformed about it. They pay the regular rates and then, the government officials keep on harassing them. They have to spend most of their time in the public offices explaining the reasons why did they pay less. Some are even unaware of the place where tey need to pay the taxes that results in the delay in the payments. They have to submit several documents of which most of the tax-payers are uninformed. They need to visit their house again and again to get those documents. Thus, the canon of certainty implies that the tax-payer should be informed about every detail relating to the payment of each and every kind of taxes.
- Canon of economy: Every tax has a system of cost of collection which is the administrative cost of collection. The canon of economy should be such that the cost o0f collection should be minimum. It will be useless to impose a tax that involves huge expenditure in its collection.
- Canon of productivity: All taxes should be productive. The canon of productivity implies two things. In the first place, the tax system should be able to generate enough revenue to meet the required expenditure. If a tax yields poor revenue, it cannot be considered as productive revenue. Secondly, taxes should be imposed in such a way as not to obstruct and discourage production.
- Canon of elasticity: The canon of elasticity implies that the taxes should be levied that the yields of the taxes can be easily increased or decreased as per the need of the government.
- Canon of diversity: The canon of diversity requires that the tax system should be such that the government depends on the number of the taxes so that every class of citizen may be called upon to contribute something towards the state revenue.
- Canon of simplicity: The tax system should be easy and simple so that the tax payer can easily understand its implication, the basis and the method of calculation etc. without the costly help of the experts. A complex and complicated method of taxation will make it costly for the tax payers since he will have to seek the help of the experts in order to understand its implications.
Direct taxes Direct tax is one that is imposed on the income and property of a person. Thus, income tax, corporation tax, property tax, death tax, capital gains tax etc. are all the direct taxes.
Merits of direct taxes
The following are the merits of direct taxes:
- Economical:Direct taxes are very economical in the sense that the cost of collecting these taxes are relatively less as they are usually collected at the source an they are paid to the government directly.
- Certainty : Direct taxes satisfy the canon of certainty.The tax payers know that how much they have to pay and on what basis they have to pay.The government also knows fairly the amount of tax it is going to collect.
- Equity: Direct taxes can be made to conform to the principle of ability to pay by choosing the most appropriate rate schedules. By making the rate structure possible and progressive their burden can be put more on rich than poor.
- Reducing inequalities: Direct taxes are progressive in nature.Rich people are subjected to higher taxes on the basis of their higher income and hence reduces the inequalities of income and wealth.
- Civic consciousness: When one knows that his taxes shall be well utilized for the benefit of the public such as the developmental and defense projects,infrastructural development, establishment of government schools, hospitals, maternity homes etc., they take active part in the process of payment of taxes. They pay their dues on time and pay it will honesty. On the other hand, the in direct taxes go in the hands of the traders and the citizens do not have any account whatsoever in the utilization of these taxes. Hence, it acts an disincentive for them.
Demerits of direct taxes
- Unpopular:Direct taxes are directly imposed on the person.They cannot be shifted. Tax payers feel their pinch directly.
- Possibility of tax evasion: Direct taxes encourage tax evasion. People conceal their income from the tax official so as to evade taxes. In (India, there is a large scale tax evasion on the part of the businessman.
- Inconvenience: The main drawback of the direct taxes is that they cause a lot of inconvenience to the tax payers. Sometimes, the tax payers are required to pay the entire tax in one installment. Besides, the tax payers have to give an elaborate documents on their income and expenditure.
- Adverse effects on the will to work and save: Direct taxes may have an adverse impact on the will to work and save. Higher rates of income tax may discourage people to work hard or work overtime. Similarly, the direct taxes may reduce their willingness to save.
Merits of indirect taxes
- Convenience: Indirect taxes have the great advantage if being convenient. They are paid in small amounts and in installments instead of lump sum payment. Moreover, the amount of the taxis included in the price of the commodity and hence the burden of these are not felt much by the tax payers.
- Elastic: Indirect taxes can be made elastic and productive, particularly when they are imposed on the essential goods and services like edible oils, flour etc. whose demand is inelastic. The government can get adequate revenue by increasing the tax rate of these commodities.
- Less chances of tax evasion: Another merit of indirect taxes is that with proper administration, the chance of tax evasion in these are very less. They are difficult to be evaded as they are included in the price of the commodity.
- Wide coverage: Indirect taxes can be imposed on a large variety of goods so that most of the persons contribute something to the revenue of the government.
- Equity: Indirect taxes can be made equitable to the people by imposing high taxes on luxury items and low taxes in the essential goods.
- Promote production and investment: Indirect taxes can be used to allocate resources in accordance with the requirements of the economy. The government can shift the production and investment from low priority industries to high priority industries. There has been various provisions for this in the budgets passed by the government of India.
Demerits of indirect taxes
- Regressive and unjust: The main drawback of indirect taxes is that they feed inflationary forces. Indirect taxes are generally imposed on the consumption of the goods. They are unjust in the sense that poor people have to pay as much as rich people. They negate the principle of ability to pay and therefore their burden is more on poor people.
- Inflationary impact: Another weakness of indirect taxes is that they feed inflationary forces. The imposition of indirect taxes on a commodity increase its price. This may lead to rise in the cost of production as a result of which the workers union demands more of wages that again increases the price of the commodity and this spiral go on.
- uneconomical: The administrative cost of collecting indirect taxes is generally heavy as they have to be collected from a large number of persons. Moreover, the traders more than the actual amount of commodity tax levied by increasing the prices of the taxed goods and services.
- Uncertain : The revenue form indirect taxes cannot be estimated accurately. An indirect tax leads to the rise in the price of the commodity. Consequently, its demand falls and it is difficult to know the extent to which the demand of the commodity has fallen.
- No civic consciousness : Indirect taxes are collected through traders and manufacturers. Besides, they are collected in small amount indirectly through market prices. Consumers, hence, do not feel the extra burden of the tax. The tax payers become indifferent towards their responsibility of the society.This is the primary reason why corruption in India is taking a toll. Let us hope that Jan Lokpal bill can provide some relief in this regard.
There are various types of taxes in India that is currently aimed at reducing and reforming the flaws of the existing taxation policy.