Rameshwar's IAS

Demerits of Direct Tax

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Due to the fact that individuals are required to pay directly for direct taxes, direct taxes are not very well received. Because of this, most people express their resentment toward the government whenever the rate of a direct tax is increased. For example, when the rate of the corporate profit tax or personal income tax is increased, the people who will be affected voice their disapproval loud and clear. The disadvantages of direct tax are:

1. Pinching- The fact that direct taxes must be paid in one lump sum puts even more pressure on taxpayers. As a result, taxpayers' resentment is always a result of a direct tax's announcement effect.

2. Inconvenient- Convenience does not apply to direct taxes like income tax returns or wealth taxes. They are required to be submitted on time, and each taxpayer is responsible for keeping accurate records. Additionally, paying these taxes in one lump sum is very inconvenient.

3. Corruption and Evasion- Since the voluntary declaration by the taxpayer of their income, wealth, etc. is required for the assessment of direct taxes: by hiding real income, there is a lot of room for tax evasion. As a result, direct taxation actually penalizes dishonesty while taxing honesty. Corruption is also a result of tax evasion.

4. Uneconomical- Direct Taxes aren't as cost-effective as they claim to be. When the tax base is small, they are uneconomic. Additionally, since each assesse must be contacted individually and properly checked to prevent tax evasion, sophisticated machinery is required for their collection. However, it must be acknowledged that direct taxes typically generate more revenue than indirect taxes. In addition, indirect taxes are uneconomic in this regard.

5. Narrow based- Most direct taxes have a narrow base; As a result, a significant portion of the populace remains unaffected, and as a result, they fail to achieve their goal of fostering civic awareness among citizens. Particularly, the unfortunate segment of the local area stays immaculate under direct Charges.

6. Arbitrary- The exchequer has total discretion over direct taxes' nature and basis. When determining the tax payer's potential to pay taxes, the Finance Minister makes use of his own value judgments. The evolution of direct taxation's gradation and progression has no scientific basis or formula.

7. Disincentiveness- Because they are based on wealth and income, direct taxes that are too high may make it hard to work hard and save money.

However, if we look at all of these drawbacks, we might discover that they are not the result of any economic principle but rather of administrative difficulties and inefficiencies. So, the Irish economist, Charles Francis Bastable is right when he says that direct taxation should be a part of every modern financial system, despite its flaws and benefits. However, how much it can be used will obviously depend on the country's economic situation. Direct taxation is more permissible in a wealthy country than in a poor one.

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