Taxes have been broadly categorized into direct taxes and indirect taxes. Dalton made a distinction between direct and indirect taxes as “that a direct tax is really paid by a person on whom it is legally imposed while an indirect tax is imposed on one person, but paid partly or wholly by another owing to a consequential charge in the terms of some contract or bargaining between them.
J.S Mill says,” Direct tax which is demanded from the persons who (it is interested or desired) should pay it. Indirect taxes are those which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another.”
The following are the basic difference between direct and indirect taxes:
- Reverting to the contrast between direct and indirect taxes it will be appreciated that it is not possible to introduce the principle of progressive tax incidence in indirect taxes whereas the progressive tax incidence is possible in direct taxes. It would be impracticable for the government to enforce a system of central excise tax on petrol whereby a higher rate be charged if it is purchased by a very rich man, and lower rates from a less rich and the poor. Hence, indirect taxes are necessarily proportional.
- Apart from this contrast, there is another one, namely, evasion of tax. There is possibility for evasion of income tax, whereas it is not possible to evade the excise duties and custom duties.
- The word ‘equity’ is the very life of direct taxes. The principle of equity is not observable in case of indirect taxes.
Merits of direct taxes:
- Economy: The administrative cost of collecting these taxes is low because the same officers who assess small income or properties can assess larger incomes and properties. Moreover, the tax payers make the payment of these taxes direct to the state and therefore, every rupee that it taken out of the pockets of the tax payers is deposited in the state treasury.
- Certainty: These taxes also satisfy the canon of certainty. The tax payer is certain as to how much he is expected to pay, and similarly, the state is certain as to how it has to receive income from direct taxes.
- Equity: Direct taxes are considered to be just and equitable because they are generally based on the principle of progression. Therefore, they fall more heavily on the rich than on the poor.
Merits of Indirect Taxes:
- Convenient: They are imposed at the time of purchase of a commodity or the enjoyment of a service so that the tax-payer does not feel the burden of the tax as it is hidden in the price of the commodity bought. They are also convenient because they are paid in small amounts and in intervals and not in one lump sum.
- Difficult to evade: Indirect taxes are generally included in the price of commodities purchased. Evasion of an indirect tax will mean giving up the satisfaction of a given want.
- Equitable: Indirect taxes enable everyone, even the poorest citizens to contribute something towards the expenses of the state. Since direct taxes leave lower income groups from their scope, indirect taxes make them share in the financial burden of the state.
