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18 Advantages and disadvantages of indirect taxes

What is an indirect tax?

An indirect tax is a type of tax that is levied by the government at the time of purchase of products and paid by the consumer.

An indirect tax is placed on goods, services, or transactions. When an indirect tax is placed on goods or services, the market price includes this charge; therefore, the consumer does not notice an increase in the price at the time of purchase. If a company exports products to you from India and another company imports them into your country, these companies pay indirect taxes to both your country and India.

These taxes are not collected from the income, profits, or revenue of the taxpayers

Indirect taxes, like sales tax, are collected when people buy goods. The seller collects the tax and the buyer pays the seller; this means that indirect taxes can be passed on from one individual to another.

Now that we have learnt about the features of indirect tax let’s take a look at why it is good and why it is not exactly perfect:

Advantages of indirect tax:

1. No Evasion

The incidence of indirect taxation does not fall on a single person but it falls on many people who are involved in selling the final product. Thus, there is no scope for evasion by any single person in an indirect tax regime.

2. Less Burden on Government

Since indirect taxes are collected by private parties at every stage of production, no additional administrative cost is required by the government to collect such taxes. Hence it is significantly easy to collect. It is convenient for the consumers also as unlike direct taxes where you need to know about various rates and thus need to keep looking up things like tds chart, in case of indirect tax everything is printed on the product package. See more.

3. Helps in Maintaining Financial Balance

The government needs revenue from taxpayers to maintain services and infrastructure, especially during times when revenue from direct taxes drops due to economic downturns or recessions. Since indirect taxes are based on consumption, they help governments maintain financial balance.

Disadvantages of indirect taxes:

1. Regressive in nature

indirect taxes are said to be regressive because they take a fixed percent of income regardless of the taxpayer’s ability to pay. Whether the person buying is rich or poor they need to pay the same amount of indirect tax on a good or service. This might make the product expensive for the poor person thereby affecting their finances.

2. Unfavourable for Internal Trade

Another demerit of indirect tax is that it affects the internal trade sector. The internal trade sector suffers due to two reasons:

The first reason is that domestic manufacturers are incapable of exporting their products out of the country because of high indirect taxes imposed on them by the government. Their cost remains very high and they cannot compete in the international market. This leads to a decrease in their export orders and revenue generation.

The second reason is that import-export businessmen also suffer as they have to pay duty on importing and exporting raw materials as well as finished products. This leads to reduction in their profit margin and discourages them from continuing their business operations.

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3. May lead to inflation

The other disadvantage of indirect taxes is that it leads to inflationary pressure on the economy. When intermediaries charge high for raw material due to an increase in customs or excise duties, this brings an increase in the cost of production. This results in higher prices for final goods and services which ultimately increases inflation in the economy.

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