Merits and Demerits of Indirect Taxes

Indirect taxes are levied on the production or consumption of goods and services or on transaction, including imports and exports. In case of indirect taxes, it is said that the person who is hit does not bleed; someone else bleeds. Still, there are key merits of Indirect taxes as follows:

Elasticity

Akin to direct taxes, the indirect taxes are elastic because they can be adjusted to the changing economic environment. Further, the burden of the tax is on to the consumers of goods and services, so any change in the rates increases the revenue of the government in bulk. For example, the recent change in service tax rates from 12.5% to 14% has increased government revenue to great extent.

Broad-based

Indirect taxes are charged on a large number of goods and services so they are broad based. Due to wider coverage and broad base, the governments end up collecting more revenues as the taxes cover almost every goods.

Progressive

To some extent, the indirect taxes can be made progressive, for example imposing such taxes on items of luxury while exempting the essential commodities.

Leveller

Indirect taxes spare none. Rich or poor, all have to pay indirect taxes. This makes the lower income groups share the burden of the government while not paying the direct taxes.

Low Tax evasion

Since the indirect taxes are collected on sundry items and are a part of the price of commodities; these taxes are not evadable generally. However, they can be evaded by falsifying accounts or smuggling activities.

Sin Tax to promote social welfare

Sin Tax refers to a tax levied on all products and consumer goods known as vices or unhealthy for social growth and consumption of which may cause negative externalities. Sin Tax is thus a subtle way to discourage people from participating in such activities without implementing as complete ban on them. The tax forms a huge source of revenue to the government.

Easy to Pay

The indirect taxes are paid in small amounts while purchasing the goods and services and due to this, it’s easier to pay them.

Environment Protection

This is relatively new concept. The governments would use indirect taxes to modify the behaviour of the individuals to achieve goals related to environment protection. For example, increased taxation on goods produced via polluting industries can modify the demand. Similarly, increase cost of fossil fuel may promote public transport.

Demerits

There are several demerits of the indirect taxes. Firstly, the cost of collection is very high. The government needs to establish network throughout the territory to enable indirect tax collection. Secondly, since the taxes are on expenditure, they affect only the consumers, the revenue generation is uncertain and is subject to price elasticity of demand / supply of the goods. Thirdly, indirect taxes need to be paid by all whether rich or poor, they are termed regressive, though they can be artificially made progressive to some extent. Fourthly, since the indirect prices are paid concealed in the price, they don’t bring on civic awareness among the taxpayers in contrast to the 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.