Direct & Indirect Direct & Indirect

Tax …….means charge “A tax is a compulsory payment from a

person to the govt to defray the expenses incurred in the common interest of all without reference to special benefits conferred”

The main purpose is revenue: taxes raise money to spend on roads, schools and hospitals, and on more.

indirect government functions like market regulation or justice systems.

What are Direct Taxes?

• informal sense

A direct tax is one paid directly to the government by the person on whom it is imposed.

Direct taxes include Income and Property taxes etc.

Direct TaxesDirect Taxes

Who pays direct taxes?

A direct tax is borne entirely by the entity that pays it.

It can not passed on to another entity.

Unlike taxes on consumer spending items.

Why impose direct taxes?

To raise tax revenue to support government activities.

It influences on foreign direct investment (FDI).

Its burden is not transfer to common people.

Argument against direct taxes?

Higher direct taxes have regressive effects on investment.

High rate of income tax reduce the real income of a person.

It influences on living standard of people.

Loss of economic welfare.

What are indirect Taxes?

• Indirect taxes are takes on

Supplier in the market which effect their cost of production and therefore effect market supply at

each price.

Taxes on specific items on consumers spending.

Indirect TaxesIndirect Taxes

Who pays indirect taxes?

The burden of all indirect taxes can be passed on by the

producer to the consumer.

This depends on the price elasticity of demand and supply.

Why impose indirect taxes?

To raise tax revenue to fund government spending.

To change the level and pattern of demand for different goods and services.

Indirect taxes are flexible – easy to change.

Also hard to avoid.

Argument against indirect taxes?

Many indirect taxes have regressive effects on low-income consumers.

Higher indirect taxes can cause inflation.

Harmful for economic activities because of higher prices and reduced output.

Equality or Equity Certainty Productivity Simplicity Elasticity Diversity

It should be balanced combination. It should ensure maximum social

advantage It should be an efficient instrument for

the reduction of economic inequalities ……an effective instrument of

economic growth ……..socially advantageous

Progressive ,proportional ,regressive,degressive tax

Merits and demerits of taxes Difference between public and private

finance