Critically compare the Direct and Indirect Taxes.

Model Answer:
Firstly, Direct taxes being progressive in nature results in more equitable distribution of income and wealth, though it might not be always true. Secondly, direct taxes are narrow based so their collection is easier; but indirect taxes are broad based, so administration costs to collect them is comparatively higher. Thirdly, in comparison to direct taxes, the indirect taxes affect the purchasing power of the people more. In other words, direct taxes only remove the enhanced purchasing power of the tax payers. On the other hand, the indirect taxes affect poor people more brutally. Fourthly, in terms of the economic growth, indirect taxes are more growth oriented in comparison to direct taxes. Fifthly, since indirect taxes inflate the price of the goods, they lead to inflation. To reduce inflationary pressure, government reduces indirect taxes from time to time on concerned commodities. Sixthly, being regressive in nature, the indirect taxes impose heavier burden on poorer sections of society. (148 words)

Topics: GS-III: Indian Economy Issues Relating to Planning