Page 13 - DCOM308_DCOM502_INDIRECT_TAX_LAWS

Indirect Tax Laws

Notes 5. Growth Orientation: Indirect taxes are more growth oriented than direct taxes. Direct
taxes, being progressive, reduce savings. When savings and investments are discouraged,
economic growth is adversely effected.
Indirect taxes discourage consumption and increase savings. Indirect taxes on luxuries
reduce conspicuous consumption and channelise resources in to growth oriented
programmes.
Taxes are financial levies or burden imposed by governments upon its citizens to realize
money for various purposes. The main purpose is to carry out administration and welfare
activities for the population, and also to raise money for the defense of the country. Taxes
are not voluntary contributions, but rather enforced upon people. There are two types of
taxes called direct taxes and indirect taxes, and both are used in varying proportions by all
governments of the world. Though the purpose of revenue generation is served by both
direct as well as indirect taxes, they are different in nature. This article attempts to make
this distinction clear and remove all doubts from the minds of the readers.

The tax that is realized directly from the individual upon whom it is levied is called a direct tax
while the taxes that are collected from intermediaries rather than those who actually pay them
are called indirect taxes. The example of a direct tax would be income tax which is also called a
progressive kind of tax. On the other hand sales tax is an example of indirect tax as the tax is
collected from the merchants who in turn collect it from the end consumers. Indirect taxes are
also called regressive taxes as they lead to an increase in inequalities in the society. They can
however be made progressive if rich are made to pay them while poor are exempted from
paying these taxes.

Did u know? Taxes are financial levies or burden imposed by governments upon its citizens
to realize money for various purposes. The main purpose is to carry out administration
and welfare activities for the population, and also to raise money for the defense of the
country.

Self Assessment

State whether True or False:
6. Service tax is levied on services provided by the businessman, professional or any other
service provider.
7. An indirect tax is a tax collected by an intermediary from the person who bears the
ultimate economic burden of the tax.
8. The Customs Act was formulated in 1982 to prevent illegal imports and exports of goods.
9. The administrative costs of direct taxes are more than that of indirect taxes.
10. Direct taxes are more flexible than direct taxes.

11. Cost of collection is also less in case of direct taxes which is pretty low in direct taxes.

1.6 What is the difference between Direct Tax and Indirect Tax?

 Indirect tax changes the preference of a consumer towards goods because of price changes.
Thus indirect tax has an adverse effect on allocation of resources whereas there is no such
effect in case of direct taxes and hence realization is more.

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