Indirect Taxes Meaning, Features, Merits and Demerits
GST Law & Practice
B.Com 6th Sem CBCS Pattern Notes
Indirect Taxes Meaning
Indirect taxes are those which are imposed on all the goods and services, and not on incomes and profits. Such taxes are collected by the sellers or service provider from their customers. Since consumers are not paying taxes directly to the government, that is why it is called indirect taxes. Example of indirect taxes: Goods and services tax.
According to Hartley,” Taxes which are shifted quickly through commercial competition between consumers are indirect taxes.”
According to Prof. Shirras,” Indirect taxes are those which affect the income and property of persons through their consumption.”
Indirect taxes Features
1. Major source of revenue for government: Indirect taxes are an important source of tax revenues for Governments all over the world and continue to grow as more and more countries are moving to consumption oriented tax regimes. In India, indirect taxes contribute more than 50% of the total tax revenues of Central and State Governments.
2. Imposed on commodities and services: It is levied on commodities at the time of manufacture or purchase or sale or import/export thereof.
3. Impossible to escape from Indirect taxes: Since indirect taxes are included in the prices of goods and services, it is difficult for anyone to escape from indirect taxes.
4. Regressive in nature: Indirect taxes are regressive in nature because it imposed a significant burden on a tax payer’s income. But after introduction of GST Act, it turned in progressive because the end consumer are tax bearer.
5. Shifting of tax burden: In the indirect taxes the tax burden is shifted by the tax payer to the end consumer. Price of goods and services serves as vehicle for indirect taxes. For example, GST paid by the supplier of the goods is recovered from the buyer by including the tax in the cost of the commodity.
6. Inflationary: As indirect taxation directly affects the prices of commodities and services a rise in indirect taxes leads to inflationary trend.
7. Uniform tax rate: Rate of indirect taxes are not differing from person to person or state to state.
8. Wider tax base: Unlike direct taxes, the indirect taxes have a wide tax base. Majority of the products or services are subject to indirect taxes. Hence every person in a nation is indirect tax-payee.
9. Promotes social welfare: High taxes are imposed on the consumption of alcoholic products, tobacco products etc. This not only curtails their consumption but also enables the State to collect substantial revenue. Thus indirect taxes indirectly promote social welfare.
Merits and Demerits of Indirect Taxes
Merits of Indirect Taxes
1. Convenience: The indirect taxes are less inconvenient than direct taxes. Indirect taxes are paid in small installments instead of lump-sum. They are, generally, included in the price of the commodity.
2. Elastic: Indirect taxes can be elastic i.e. the revenue from them can be increased whenever the government may desire to do so provided that these taxes are imposed on those articles for which the demand is inelastic.
3. No Possibility of Evasion: It is impossible for an individual to evade the payment of indirect taxes because they are already included in the price of the commodity. Thus, there is very little possibility for the evasion of such taxes.
4. Higher Production and Investment: Indirect taxation serves as a powerful tool in moulding the production and investment activities in an economy. Because the government can shift the production and investment from lower priority industries to higher priority industries by imposing higher rate of taxation on low priority products and giving relief to high priority products.
5. Social Welfare: Heavy indirect taxation on articles like wine, opium etc. serves a great social purpose by curtailing the consumption of such harmful commodities which is in the interest of the commodity as a whole.
6. Suitable to Developing Economies: Indirect taxes are most suitable to developing countries as there are large numbers of small producers who are illiterate and incapable to maintain proper accounts. Therefore, they pay in the shape of higher prices of the commodities.
7. Easy to collect: Indirect taxes are easy to collect from every member of the community. Generally, they are added in the price of the goods and every individual who is liable to purchase the commodity pays for it. Thus, it is easy to collect at the behest of the public authority.
Demerits of Indirect Taxes
1. Regressive in Nature: Indirect taxes are generally regressive in nature because they fall on all persons indiscriminately, irrespective of their ability to pay. The poor fellows feel heavier burden than rich people, when mass consumption goods are heavily taxed by the government.
2. Uncertainty: The revenue collected by the government is very difficult to anticipate. As soon as the commodity is taxed, the market price rises which results in the fall in demand depending upon elasticity of the demand. So, it is quite difficult to anticipate the fall in demand with the imposition of tax.
3. No Civic Consciousness: As indirect tax are levied on the commodities, the consumer does not fell the burden of tax which makes him less conscious about the public expenditure system.
4. Discourage Savings: Indirect taxes discourage savings because these taxes are included in the price and, therefore, people have to spend more on the purchase of the goods. On the other hand, government promotes saving to avoid the indirect taxes.
5. More Uneconomical: Indirect taxes are uneconomical as they involve more cost of collection than actual amount of the taxes. In most of the cases, traders charge more prices than the actually tax levied by the public authority.
6. Inequitable: Another weakness of indirect taxes is that these are inequitable and unfair because poor section of the society has to pay more than the risk.
7. No Direct Link with the Government: Indirect tax being invisible loses direct link between the tax payers and the public authority.