Disadvantages of Indirect Taxes
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 affect 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.
7. Possibility of Tax Evasion: There is a possibility of evasion of indirect taxes as
some customers may not pay indirect taxes with the support of sellers.
Ref:
1. Balachandran V - Indirect Taxes
2. ICAI - Indirect Taxes
3. ICSI - Indirect Taxes
4. ICMAI - Indirect Taxes
5. LPU - Indirect Taxes
No comments