Merits and Demerits of Indirect Tax

An indirect tax is a tax you pay when you buy goods or services without realising that you are being taxed, you know? You see, when you buy a product at the store, a part of what you pay goes to the government as tax. This tax is collected by the seller and then passed on to the government. The best part is that actually, you are not paying this tax separately, it is already in the price of what you are buying. Things like customs duty on imported goods and Goods and Services Tax (GST) are common examples of this type of tax. Let’s explore the pros and cons of Indirect Taxes:

Merits of Indirect Tax

Here are some advantages of Indirect Tax:

1. Super Convenient for Everyone

The convenience factor of indirect taxes is one of its most important benefits. How? Well, this is done right when someone purchases the product or service, so customers are not burdened by the necessity of making a separate tax payment. Instead, the cost of the item already includes all taxes, you know? This is a highly consumer-friendly procedure, that’s for sure. Let’s say there’s an item selling for 100 rupees, with 18 rupees taxes. When a consumer pays for this item, they already have paid taxes (tax=18 rupees) with no hassle, hence, it is all simple and easy for them.

2. Effortless Collection

On another hand, indirect taxes require much less effort in their collection compared to direct taxes. This is primarily because these taxes are included in the cost of goods and services, which means that the government does not have to put extra effort into collecting them. The government makes automatic deductions while the time of sale or provision of a good is the only one needed.

3. Wider Taxpayer Base

The inclusion of indirect taxes, which in fact cover people from all kinds of income levels is one more benefit. How exactly? Well, while direct taxes only affect people whose earned amount surpasses a limit like income tax does, indirect taxes are applicable to all consumer goods and services. That means people who don’t pay income tax still contribute to the economy through the money they spend on various purchases left for taxation.

4. Fair Share Based on Spending

Simply put, consumers who purchase more expensive or luxurious items generally tend to pay a larger tax responsibility while those who only purchase basic necessities tend to be left with a lesser tax burden with indirect tax. This system guarantees proportionate representation of a person’s spending in tax contribution, which many people see to be a fair way of distributing the tax burden.

5. Discouraging Bad Habits

The use of indirect taxes to discourage people’s consumption of harmful products is also possible. Like, hefty taxation on tobacco and alcohol done by the government usually leads to higher prices of these products thus restricting their use.

6. Promotes Saving and Investment

Last but not least, indirect taxes are a great way of encouraging individuals to save and invest their hard-earned money. You know, they are often charged on the portion of income spent rather than the part of income saved thus, it can be much easier for people to save or invest their earnings in untaxed ways.

Demerits of Indirect Tax

Now let’s talk about the disadvantages of Indirect Tax:

1. They Can Hit the Poor Harder

One of the biggest issues with indirect taxes is that they are kinda regressive. As a result, those who earn less suffer more. For example, when a tax is levied on essential items like food or clothing, it is not different for the rich and the poor, you know?

2. The Cumulative Effect, Prices Keep Going Up

Another point is the cumulative effect of indirect taxes that cause the price of the product to increase at every stage of its production and distribution. For example, a tax may be charged at the time of purchasing raw materials, again at the time of manufacturing the product, and last but not least, at the time of selling it to the consumer. It kinda seems unfair.

3. Increased Cost of Production

Due to the application of indirect taxes mainly to raw materials and other products involved in the production of goods, the total production cost may rise. Businesses might then have to raise their prices in order to keep up their profit margins because production costs are on the uptick, and it for sure results in higher prices for the end consumers.

4. Revenue Can Be Unpredictable

Also, indirect taxes are less predictable so they can also be a problem. You see when the economy is thriving and thus people are spending more, the government is able to collect more taxes. However, when the economy is in recession and people are spending less, tax revenues can fall suddenly, and stay like that for a while.

5. People Don’t Notice They’re Paying

See, when a customer is buying something in the market, most of the time, he/she doesn’t even realize that they are also paying tax on that item or product. This invisibility can very well create a situation where people do not understand their role in the government’s function thus becoming less active in the civil society.

6. Can Be Costly and Inefficient

Finally, the collection of indirect taxes can be very costly and inefficient. Because the government must use a large administrative team to manage the process of indirect tax collection and check that all the taxes are collected correctly, there is a lot of money used in this activity. This amount of money and resources could have very well been used to provide some other types of public services, but that’s how it is.

Comparison Table for Merits And Demerits of Indirect Tax