Merits of Direct Taxes:

A tax system is composed of both direct and indirect taxes. Each has certain merits and demerits as compared with the other.
The following are the merits of direct taxes.

(1) Economy- The administrative cost of collecting these taxes is low because the same officers who assess small incomes or
properties can assess larger incomes and properties. Moreover, the taxpayers make the payment of these taxes directly to the
State, and therefore, every money that is taken out of the pockets of the taxpayers is deposited in the State’s treasury.

(2) Certainty- These taxes also satisfy the canon of certainty. The Taxpayer is certain as to how much he is expected to pay, and
similarly, the State is certain as to how much it has to receive as income from direct taxes.

(3) Equity- Direct taxes are considered to be just and equitable because they are generally based on the principle of progression.
Therefore, they fall more heavily on the rich than on the poor.

(4) Reduce Inequalities- As stated above, direct taxes are progressive in nature, and therefore, rich people are subjected to
higher rates of taxation, while poor people are exempted from direct tax obligations. Hence, these taxes help to reduce
inequalities in income.

(5) Elasticity- The taxes also satisfy the canon of elasticity, as the government revenue may be increased simply by raising the
rates of taxation. Moreover, the income from direct taxes will also increase with the increase in income of the people.

(6) Civic Consciousness- It is said that direct taxes create civic consciousness among taxpayers. As the tax-payer may take an
intelligent and keen interest in the method of public expenditure, whether the revenue raised is properly utilized or not. In a
democratic country, this civic consciousness checks the wastage in public expenditure.

Demerits of Direct Taxes:

(1) Unpopular- Direct taxes are generally not shifted, and, therefore, they are painful to the taxpayer. Hence, such taxes are
unpopular in nature and are generally opposed by taxpayers.

(2) Inconvenience- These taxes are also inconvenient in nature because the taxpayer has to submit the statement of his total
income along with the sources of income from which it is derived., which is generally subject to complications. Moreover, the
payment of these taxes in lumpsum is not as convenient to the taxpayer as the frequent payment of small amounts of indirect
taxes. Hence, these taxes are said to be inconvenient to taxpayers.

(3) Possibility of Evasion- A direct tax is said to be a tax on honesty, it is not evaded only when the taxpayer is honest,
otherwise, it can be evaded through fraudulent practices. Hence, it found that it can wholly or partly be evaded if the taxpayer
decided to become dishonest.

(4) Possibility of Injustice- In practice, it is difficult to assess the income of all classes accurately. Hence, the direct taxes may not
fall with equal weight on all classes. Moreover, the rates of direct taxes are arbitrarily fixed by the government and they may not
be determined on the basis of the ability to pay.

(5) Exemption of Low-Income Group- If only direct taxation has resorted, the low-income group people cannot be approached
through direct taxes, as they are normally exempted from such taxes on the basis of ability to pay.

However, direct taxes are advantageous and these objections to them arise out of administrative procedure rather than on
grounds of fundamental principle. These objections can be gradually removed with experience.

Merits of Indirect Taxes:

(1) Convenient- Indirect taxes have the merit of being convenient. They are paid in small amounts and at intervals instead of in
one lump sum. They are generally included in the price of the commodity and hence the burden of these taxes is not felt very
much by the taxpayers. They are convenient from the point of view of the government also since the tax amount is generally
collected from the manufacturers or the importers.

(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 the demand for which is inelastic. However, the principle of
elasticity and the ability to pay generally conflict with each other. For instance, if heavy taxes are imposed on articles of common
consumption, i.e., the demand for which is inelastic, they will fall more heavily on the poor than on the rich. On the other hand,
the items of luxuries cannot be taxed heavily as their demand may be elastic.

(3) No Evasion- Indirect taxes are generally difficult to be evaded as they are included in the price of the commodity. A person
can evade an indirect tax only when if he decided not to purchase the taxed commodity. However, indirect taxes can sometimes
be evaded through smuggling and maintaining false accounts.

(4) Can be Progressive- Indirect taxes can be made progressive by imposing heavy taxes on luxuries and exempting articles of
common consumption.

(5) Wide Coverage- Through indirect taxes, every member of the community can be taxed, so that everyone may provide
something to the government to finance the services of public utilities. Hence, with the help of indirect taxes, the tax system
can thus be made broad-based.

(6) Productive- The income from indirect taxes can be made highly productive, by imposing a few taxes each yielding a
substantial amount of revenue. It may be easily possible if taxes are imposed only on those commodities the demand for which
is inelastic. But, it should be noted that it may have adverse distributive effects.

(7) Social Welfare- Heavy taxation on articles that are injurious to the health and efficiency of the people may restrict their
consumption. For instance, the heavy taxation on liquor and other intoxicants may restrict their use, which is obviously in the
interest of the community as a whole.

All these things emphasize, that indirect taxes are good taxes in a tax system when they are productive, convenient, and
approximately equitable. They are paid with less irritation than direct taxes. Revenue can be raised in multifarious ways by
means of indirect taxation and the basis of taxation is thus broad-based.

Demerits of Indirect Taxes:

(1) Regressive- The indirect taxes are generally regressive in nature as they fall more heavily upon the poor than upon the rich.

(2) Administrative Cost- The administrative cost of collecting such taxes is generally heavy because they have to be collected
from millions of individuals in small amounts. Therefore, they may be uneconomical.

(3) Discourage Savings- Indirect taxes discourage savings, because indirect taxes are included in the price, and therefore, people
have to spend more on essential commodities. Hence, they discourage savings.

(4) Uncertainty- The income from indirect taxes is said to be uncertain, because the taxing authority cannot accurately estimate
the total yield from different taxes, on account of the fact that the demand for different goods, subject to taxes, is influenced by
so many factors. If the demand for these goods is elastic, the income may be less and vice versa.

(5) No Civic Consciousness- Indirect taxes are collected through middlemen like traders, and hence they have no direct impact.
They are collected in small amounts, hence they are not felt very much by the tax-payer and do not arouse civic consciousness.