Page 8 - DCOM308_DCOM502_INDIRECT_TAX_LAWS

Unit 1: Introduction to Indirect Taxes

6. Influence on Pattern of Production: By imposing taxes on certain commodities or sectors, Notes
the government can achieve better allocation of resources. For example by imposing taxes
on luxury goods and making them more expensive, government can divert resources
from these sectors to sector producing necessary goods.
7. May not affect motivation to work and save: The indirect taxes may not affect the
motivation to work and to save. Since, most of the indirect taxes are not progressive in
nature, individuals may not mind to pay them. In other words, indirect taxes are generally
regressive in nature. Therefore, individuals would not be demotivated to work and to
save, which may increase investment.

8. Social Welfare: The indirect taxes promote social welfare. The amount collected by way of
taxes is utilized by the government for social welfare activities, including education,
health and family welfare. Secondly, very high taxes are imposed on the consumption of
harmful products such as alcoholic products, tobacco products, and such other products. So
it is not only to check their consumption but also enables the state to collect substantial
revenue in this manner.
9. Flexibility and Buoyancy: The indirect taxes are more flexible and buoyant. Flexibility is
the ability of the tax system to generate proportionately higher tax revenue with a change
in tax base, and buoyancy is a wider concept, as it involves the ability of the tax system to
generate proportionately higher tax revenue with a change in tax base, as well as tax rates.

1.1.2 Disadvantages/Demerits of Indirect Taxes

Although indirect taxes have become quite popular in both developed and underdeveloped
countries alike, they suffer from various demerits, of which the following are important:
1. High Cost of Collection: Indirect tax fails to satisfy the principle of economy. The
government has to set up elaborate machinery to administer indirect taxes. Therefore,
cost of tax collection per unit of revenue raised is generally higher in the case of most of
the indirect taxes.
2. Increase income inequalities: Generally, the indirect taxes are regressive in nature. The
rich and the poor have to pay the same rate of indirect taxes on certain commodities of
mass consumption. This may further increase income disparities among the rich and the
poor.

3. Affects Consumption: Indirect taxes affects consumption of certain products. For instance,
a high rate of duty on certain products such as consumer durables may restrict the use of
such products. Consumers belonging to the middle class group may delay their purchases,
or they may not buy at all. The reduction in consumption affects the investment and
production activities, which in turn hampers economic growth.
4. Lack of Social Consciousness: Indirect taxes do not create any social consciousness as the
taxpayers do not feel the burden of the taxes they pay.
5. Uncertainty: Indirect taxes are often rather uncertain. Taxes on commodities with elastic
demand are particularly uncertain, since quantity demanded will greatly affect as prices
go up due to the imposition of tax. In fact a higher rate of tax on a particular commodity
may not bring in more revenue.
6. Inflationary: The indirect taxes are inflationary in nature. The tax charged on goods and
services increase their prices. Therefore, to reduce inflationary pressure, the government
may reduce the tax rates, especially, on essential items.

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