Direct taxes are those which are paid by the individuals directly on whom such taxes are levied and hence it is paid by the individual from his or her income to the government. Hence in simple words in direct taxation, there is no intermediary involved as there are only two parties involved which is taxpayer and government which is the case with indirect taxation. In order to understand more about this concept, one should look at the advantages and disadvantages of direct taxes –
Advantages of Direct Taxes
One Pays According to the earning
The biggest advantage as far as direct tax is concerned is that in this form of tax structure an individual pays according to his or her earnings, hence higher the earnings higher will be the tax incidence on an individual unlike indirect taxation where everyone is taxed whether its rich or poor as indirect taxation is levied on goods and goods are purchased by all people resulting in burden on poor and needy people.
Certainty of Collection
One of the advantages of direct tax is that government has certainty of collection of taxes because government has all the data related to how many people are in service and what is their income and that is the reason why direct tax is deducted at source implying that employees receive salary after deduction of tax if they fall under income tax bracket.
Anti-Inflationary
Another benefit of having direct taxation system in place is that it is anti-inflationary unlike indirect taxation which is inflationary as it leads to increase in price of goods and services and hence if country has had high inflation rate than direct taxation is the preferred option as it does not put undue pressure on inflation rate of the country.
Disadvantages of Direct Taxes
Burden on Small Working Population
The biggest disadvantage of having direct taxes is that it puts tremendous pressure on the small working population of the country because business people find ways to adjust their incomes so that they do not come under tax bracket but as far salaried people are concerned since the tax is deducted at the source they have to pay taxes. Hence in this regard, indirect taxation is better as all have to pay taxes under this structure.
Hurts Saving and Investment
Another disadvantage of this taxation system is that it hurts saving and investment because a substantial chunk of disposable income goes into paying direct taxes. Hence if the government wants a conducive environment for increasing saving and investment in the country than it should try to reduce direct tax rates prevalent in the country.
Counter-Productive
Another limitation of direct taxation is that it can be counterproductive because if individuals know that earning more income will result in paying more taxes than they will not do hard work and if all people start thinking on similar lines that productivity of nation as a whole will drop which is not a good thing if nation wants to compete globally with other countries.
As one can see from the pros and cons of direct taxes that they are very important as far government is concerned and they cannot be done away with it but at the same time government should try to lower the tax rates and make it as simple so that people do not hesitate to pay their taxes on time.